01 Jul The SEC just suspended my stock! Now what?
It happens to almost all penny players. One morning you wake up, grab some coffee, and start checking your stocks, especially that very volatile issue that's been running big. Pre-market Level II is looking good. If all goes well, perhaps today will be the day to take some profit. And then at 9:30, you see something like this:
Level II goes blank. Your heart sinks. If you've had this experience before, you know to go to the SEC website, where your fears are confirmed. Trading has been suspended.
If you're new to the penny arena, you may not have any idea what's going on, so instead you'll go to a message board and try to figure things out. There, you'll probably read conflicting opinions; some will even be reassuring. Pay no attention. Trading suspensions are very bad things. You need to understand what has occurred, and what will occur.
SEC trading suspensions
Suspensions are not to be confused with exchange halts. They are different actions, with different causes and outcomes. Suspensions are the end of the road for most targeted stocks; exchange halts can be survived, and in some cases are positive. The SEC offers an explanation here and here.
The SEC suspends trading in a stock for two basic reasons: the company is a delinquent filer, or fraud is suspected.
Delinquent filers are SEC-registered companies that have failed to submit required annual and quarterly financial reports. Usually the agency sends delinquency notices before taking action; if they are ignored, trading in the company's stock may be suspended without notice. At the same time, the SEC will initiate an administrative proceeding to revoke registration. The company will be served with a letter informing it that it has ten days in which to make some kind of case for its failure to file. If it does not do so, registration will be revoked by default.
What the company does only matters if it hopes to resume trading one day. Several recent cases suggest the SEC is now recommending that issuers who want to make things right should accept revocation, and then get two years of audited filings in order and file a new Form 10. That has the advantage of relieving the company from the obligation to catch up with dozens of old financial reports, which might prove an impossible task, but it has the disadvantage of leaving shareholders in the lurch for as long as it takes to get the filings in, find a sponsoring market maker, and get a Form 211 approved by FINRA. The company may have problems raising money in the interim as well. One issuer that chose this path was Superior Oil & Gas (SIOR), which was suspended on 25 January 2013. Though it initially announced the process could be completed quickly, to date it has filed no Form 10, and has ceased public communication with its investors.
Once registration has been revoked, the stock's ticker will be deleted. Shareholders will still be shareholders, but in a private company. Their stock will be extremely illiquid, and its value will be difficult to determine, as there is no public market for it.
The vast majority of suspended stocks are those of delinquent filers.
Suspensions ordered for suspected violations of the securities laws are more interesting that those ordered for delinquency. Many delinquent filers are entirely dead companies, often without any corporate existence. Companies suspended for suspected fraud have usually been quite active in the recent past, and perhaps are currently active. The three most recent suspensions for cause brought by the agency were of Polar Petroleum Corp (POLR), Biozoom, Inc. (BIZM), and Norstra Energy (NORX), all of which had been trading vigorously just before the SEC brought down the hammer.
An explanation of the action is offered in the form of a suspension notice that appears at the SEC website on a dedicated page. The explanations are unfortunately rather vague. They're usually phrased in the form of “questions about” things like possibly misleading press releases or other public statements, the company's operations, and business arrangements like mergers, acquisitions, or buyouts. Sketchy as the information provided is, it at least suggests to observers what the agency is looking at. With the BIZM suspension, the reasons were made a bit clearer: the SEC decided on the action “because of concern that certain Biozoom affiliates and shareholders may have unjustifiably relied upon Rule 144 of the Securities Act of 1933 ('Securities Act') and they, Biozoom, and others may be engaged in an unlawful distribution of securities through the OTCBB.”
That is very clear, and makes perfect sense, given that BIZM is still considered to be a shell company under SEC regulations. BIZM made a fatal error, and will not recover.
The suspension notice also informs market makers that the company has lost compliance with Rule 15c2-11, and so they may no longer make a market in the security, or publish quotations; in addition, it sets a time for the expiration of the suspension. The latter is invariably 11:59 p.m. on the tenth trading day following the announcement of the action. Once upon a time, the SEC was allowed to impose successive suspensions, but an issuer sued, and a Federal judge ruled against the agency. Now it can only suspend for a second time if it can find a different reason to do so.
What happens next
During the suspension, the stock will be delisted to the Grey Market as a result of its non-compliance with SEC Rule 15c2-11. Usually that happens a day or two after the action is taken; shareholders can see the change at OTCMarkets. As noted above, that means the MMs won't be able to publish quotations or make a market. They can facilitate trades for brokers, but they are not obliged to fill any orders they may receive. Trades will be matched, though several smaller orders may be set off against a single larger one.
Often hopeful shareholders caught in a suspension tell each other that trading may resume before the ten days have ended. That never happens. Sometimes they convince themselves that it was just a “mistake” on the part of the SEC. It was not. The agency is aware that suspensions are a death sentence, and does not invoke them lightly. Angry investors may rail against Shorty and “bashers,” but the truth is that although the SEC may have originally received tips about problems with the company, they always conduct their own investigation before taking any action.
Some companies issue a press release immediately, usually saying they're “cooperating fully” with the SEC, and are hoping to resolve the problem quickly. Others say nothing at all, or make an announcement when trading resumes. Either way, there is no quick resolution; most of the time there's resolution at all. The SEC will not comment, but warns shareholders that an investigation may be ongoing.
In order to resume trading normally, on the Pinks or OTCMarkets' OTCQB tier, the company must find a market maker willing to file a Form 211 to enable it to regain compliance with Rule 15c2-11. The form looks simple enough, but it is not. And there's a special section asking whether the issue has been subject to a trading suspension. When an MM files a 211, it assumes liability. For that reason, they are not generally willing to sponsor a company that's been suspended unless they have very good reason to believe the SEC will not be bringing a further enforcement action. Usually the agency is unwilling to offer such guarantees, and so the stock is left in limbo.
There is a case in which a formerly suspended stock did manage to claw its way back to the Pinks. The issuer was Emergent Health Corporation (EMGE), which explained in a Management's Discussion and Analysis what had happened.. It was suspended in September 2009 because of a pump-and-dump campaign. Management assured the SEC that it'd played no role in the promotion. Evidently they were believed. The SEC sued the perps, and in July 2010 sent a letter to EMGE's attorneys indicating they would not be recommending any further action against the company. In August 2010, a broker-dealer filed a Form 211. Several rounds of comments from FINRA ensued. The company finally returned to the Pinks in early 2011.
Unfortunately, its efforts were too little, too late. It currently trades at around $0.06, and is completely dark.
When trading resumes
Once the suspension expires, the formerly-suspended stock will reopen on the Grey Market. In most cases, it will trade on the first day, though issues that were illiquid before the action may not. In our initial scenario, I described a hot penny that had attracted a good deal of attention that resulted in heavy buying, the kind that would see interest right away.
Its first day on the Greys will not be heartening for anyone holding. Normally the first trade will be executed shortly after the bell, and will be a lowball. Very low. It may take the stock down as much as 80%. Very likely that the person who ventures that initial trade has entered a market order. Don't be that guy. Wait to see what happens in the next couple of hours. Usually the price will tick up a little. But you still have a problem: you're trading blind. There's no Level II, and no bid or ask. You need to decide what offer you think will be accepted. You'll be able to see executed trades as they happen, and they will give you an idea of what range you should try for. Trading is likely to be extremely volatile, but by the end of the session price will be sharply down; a loss of between 60% to 80% is common.
When a very active stock is suspended, MMs are trapped along with traders. If they've been selling naked to provide liquidity, they may be left with open short positions. They'll want to cover as soon as trading resumes, and therefore will be buyers. Do not, however, imagine that those short positions will be gigantic; they'll only provide a brief window in which volume will be high. So time your exit accordingly. Once they've taken care of themselves they tend to lose interest.
The stock may rise a little in the week or so following its debut on the Greys, but if as it does so, volume will decline, making fills more difficult. It's best not to wait too long, and lose your chance at recovering some of your investment. After weeks, or perhaps a few months, price will plateau for awhile, as volume continues to drop. In the end, liquidity will dry up entirely, and the issue will trade only now and then. Price will drift down slowly.
Here's a chart for Southridge Enterprises (SRGE), a particularly stinky Pink scam that was suspended on 28 December 2012, showing what happened in the succeeding two months. Things have only got worse since then.
As time goes by, it's possible that the SEC will finally bring closure, in the form of litigation for fraud. In especially outrageous cases, the Department of Justice may join in with a criminal prosecution. It can take as long as two years or more for that to happen. Do not believe anyone who claims that if there's no further action six months after the suspension, somehow all is well.
In most cases, suspensions for cause don't result in SEC civil lawsuits, much less DOJ prosecutions. The SEC appears to believe that much of the time suspension alone is enough punishment. Often the people behind the suspected fraud are offshore and out of reach. If the SEC can't collect, it makes no sense for them to carry on. They will by then have achieved their object, which is to stop the fraud that provoked the suspension in the first place. If the company is an SEC filer, it will probably stop filing after the suspension; reporting to Edgar is costly, and is pointless for an issuer stuck on the Greys. After a couple of years of delinquency, the SEC may decide to put an end to the story altogether, and will move to revoke registration. That move will not be challenged.
If you're heavily invested, an SEC suspension is an unforgettable nightmare. If a stock you're playing is heavily promoted, or if those Nasty Bashers have raised serious questions about filings, press releases, or other communications from the company, take profits early and often. Ignoring red flags could cost you dearly if a suspension is invoked. There are no good outcomes for suspended stocks.