Oklahoma lawyer John Heskett logged onto his computer one day in late June, 2005, to check out an inactive shell company owned by his clients who were considering using it in a business deal.
What he saw made no sense.
"I saw this wild trading going on, and I couldn't imagine why," he said. "I was in total disbelief. I knew there could not be that many shares in the market, not even close, not even 1/100th of those shares in the market ... I had to pinch myself and say, 'Am I crazy?' " After some online searching and a few phone calls to the company's transfer agent, Mr. Heskett contacted the U.S. Securities and Exchange Commission to report a bizarre crime: Someone, he said, had stolen his client's public company.
Sixteen months later, the SEC and the British Columbia Securities Commission announced they had reached settlements with two Canadian men who admitted to illegally taking control of Greyfield Capital Ltd. and arranging to have 600 million new shares issued using the company's ticker symbol.
Surprisingly, the unusual case is not the only one of its kind in Canada or the United States. Regulators say corporate identity theft has become another twist in the world of securities fraud, where criminals seem to find endlessly creative ways to dupe investors.
Martin Eady, director of corporate finance at the British Columbia Securities Commission, said criminals have traditionally started their own shell companies to conduct frauds. But, he said, it's far cheaper to steal a dormant shell company.
"It typically costs about $100,000 to start one of those companies," he said.
When buying a dormant shell, he added, investors want a "clean" shell with no liabilities and clear titles and assets. "So, it can be costly to rehabilitate an old shell company," he said.
While there are obvious dangers in assuming the identity of an inactive company - that the real owners will notice and complain - criminals reduce the risk by targeting virtually unknown companies that trade on the U.S. over-the-counter market and have been dormant for years, or are in default in their filings.
Earlier this year, the Ontario Securities Commission halted trading in 10 companies' shares while investigating an alleged scheme in which the companies assumed the identities of 10 dormant firms.
The dormant companies had previously traded on the U.S. over-the-counter market.
The OSC temporary order also alleged that Select American Transfer Co., acting as the transfer agent for the companies, may have participated in the scheme by issuing false share certificates.
But identity theft frauds can occur without the transfer agent knowing what's really going on.
In the Greyfield Capital case, Mervin Fiessel and Robert Doherty, both of Kamloops, B.C., admitted they forged the signature of a former company director on a letter to Greyfield's transfer agent announcing a change of directors. They also forged documents to get the transfer agent to issue new shares and allow them to trade publicly without restrictions.
The men admitted they issued a flurry of press releases, and also talked up the company on Internet bulletin boards for penny stock investors, claiming to be running a Kamloops-based car dealership. They touted it as the largest dealership in Western Canada, even though it was not even the largest dealership in Kamloops.
"We actually went to look at their operations," Mr. Eady says. "It was rather comical. Their news releases claimed [it] to be a very major going concern, and we turned up at the address and it was simply a good old-fashioned used car lot."
The scheme ended when the SEC launched its investigation following Mr. Heskett's phone call in July, 2005. The two men have been banned from trading securities in British Columbia, except in limited circumstances, and were required to make payments totalling about $325,000.
Mr. Heskett, meanwhile, says his clients were also victims, even though they did not buy the company's fake shares. Their shell company was essentially ruined for future use because so many fraudulent shares remain outstanding. His clients have abandoned plans to use the company.
"These guys trashed the shell," he said.
OSC enforcement director Mike Watson said that in some cases, criminals seem to steal shell companies to quickly flip them to other buyers, who think they are purchasing a legitimate public company.
More often, he said, they use them to conduct a pump-and-dump fraud. That means the crooks artificially inflate the value of the shares, sell their holdings at a significant profit, then disappear.
Mr. Watson said one difference with frauds conducted using a stolen company is the criminals typically arrange to get many millions of shares issued to themselves, and also arrange to have the shares issued without typical trading restrictions that accompany private placements, allowing them to trade the shares immediately.
"When it collapses, they simply pull another [shell] company off the shelf and start over again," he said.
He said brokerage firms can also become fraud victims. They are required to provide shares to complete trades, and if the shares prove fraudulent, the firms can be forced to compensate the buyer.
To target a brokerage firm, criminals set up a scheme to "sell" shares to accomplices who pose as ordinary investors. The so-called victims then pretend to "uncover" that the shares are fraudulent and insist the transaction be completed by the unsuspecting brokerage firm.
"The broker finds himself in a position where if they can't come up with the shares, they perhaps have to make cash compensation," Mr. Watson said. "What you've done is taken shares you've printed off your printer and sold them to a broker for $5-million."
Earlier this year, British Columbia regulators announced a multipronged plan to reduce the fraudulent abuse of corporate shell companies.
The new rules, which have been published for comment, would require companies trading on the pink sheets over-the-counter market to file financial statements, press releases and other disclosure documents just like other public companies trading on larger exchanges.
The BCSC will also require over-the-counter issuers to provide shareholder lists and other information. The commission has also proposed new resale restrictions on people who buy shares of an over-the-counter company before it goes public.
Mr. Eady said the new rules have been proposed because British Columbia has a disproportionate amount of fraud involving over-the-counter shares compared to other jurisdictions.
"I know the TSX Venture [Exchange] has been quite a lot more choosy about who they will list compared to the days of the old Vancouver Stock Exchange," Mr. Eady said. "But Vancouver is still a nice place to live, and we still have people well experienced in that market, so they've simply found another home."
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