In late February charges of fraud by the SEC against a broker-dealer and its transfer agent were the latest in a series of SEC enforcement actions against parties engaged in the formation and trading of “blank check” companies.
The Securities and Exchange Commission (SEC) has alleged that the defendants created and sold at least 19 public companies that were held up as legitimate but were revealed to be shams.
“Blank Check” Fraud: The Details
According to the complaint, the broker-dealer firm’s principals approved the filing of fraudulent applications with the Financial Industry Regulatory Authority (FINRA) to publicly list the common stock of the “blank check” companies, making the shares publicly available to retail investors.
The term “blank check” company refers to a developmental entity/company. They often do not have a specific business plan or purpose in place, or their business plan is garnered towards merger or acquisition by another firm or entity.
In addition, principal was alerted to a number of red flags raised by FINRA but failed to look into the matter.
The SEC also alleged that, through the bulk issuance and transfer of the securities, facilitated the public sale of the stock of no fewer than 12 of the sham companies.
The Necessity of Due Diligence
It is critical for firms to conduct thorough due diligence of investments on behalf of investors in order to avoid falling prey to “blank check” scams such as this one.
With multiple enforcement actions filed by the SEC between 2015 and 2018 against firms selling “blank check” companies, the risk of falling victim to fraud, or unwittingly participating in fraud, must be taken seriously.
One of the most effective ways to protect all interested parties is for firms to educate themselves regarding the red flags that can alert firms of potential illegal “blank check” trading activity.
Firms must take necessary precautions to detect and avoid such scams in order to better protect themselves and their clients.
The Necessity of Training and Monitoring
The duty to protect the investor through awareness and necessary precautions must be taken one step further.
Firms, including investment advisers and broker-dealers, also have a duty to supervise persons associated with the investment adviser, with respect to activities performed on the adviser’s behalf.
Firms must be sure that all those under their employ are also aware of and trained to detect such fraudulent activities, and adequate procedures, both Policies and Procedures and Written Supervisory Procedures (WSPs), must be in place to conduct thorough and adequate investment due diligence.
The actions of one, whether careless or malicious, could result in consequences for everyone involved.
Developing Accountability and Training Measures — We Can Help
The attorneys at Core Compliance Legal Services are available to help with the creation and revision of effective protocols, including training programs, internal monitoring, and investigative procedures that can help your firm avoid “blank check” scams and other potential instances of fraud — contact us for assistance with any related questions.