Microcap Security
Investigations
FIRMA Conference
William Sweeney
March 28, 2012
Agenda
 DTCC
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

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History
Structure
Participants
Partners
Microcap 101 & FINRA Notices
Deposit Process and DTCC’s View
Investigation Process
314(b) Guidance
Questions?
2
DTCC
History
Structure
Participants
Partners
DTCC Past and Present
 Wall Street’s
“Paperwork Crises”
Solution:
1.
2.
Immobilization
Netting
 DTCC established in
1999 combines DTC
& NSCC
 DTCC currently
operates through 10
subsidiaries
4
DTCC Structure
5
DTCC Participants
 Banks and Broker Dealers are among DTCC’s
Participants
 Not all banks and brokers access DTCC directly – they go
through
 Clearing brokers
 Custodians
 DTC and NSCC Participants must go through a
membership process
 DTCC Risk Management monitors the financial
health of its DTC and NSCC members
6
Partners
FINRA Guidance on Reg D Offerings
FINRA reminds firms of their responsibilities to ensure
comply with the federal
securities laws and FINRA rules
when
participating
in
unregistered
resales
of
restricted securities.
These
that they
responsibilities are particularly important in situations
where the surrounding circumstances place the firm on
notice that it may be participating in illegal, unregistered
such as when
a customer physically deposits
certificates or transfers in large
blocks of securities and the
firm does not know the source
of the securities.
resales of restricted securities,
Firms may not rely solely on others, such as clearing
firms, transfer agents, or issuers’ counsel, to fulfill these
obligations.
9
Section 5 of the 1933 Act
"unlawful for any person” to offer or sell a security
unless the security is either the subject of a
registration statement or exempt from the
registration requirement. The term "any person"
in Section 5 is defined broadly and easily includes
Holders. Holders that wish to resell securities,
therefore, may only do so if those securities are
the subject of a registration statement or are
exempt from the registration requirement.”
10
Microcap Stock 101
 Low priced stocks issued by the smallest of companies
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

(limited assets)
Lack of publicly available and reliable information
Many microcaps trade on the Pinksheets or OTC
No minimum listing standards (net assets or shareholders)
Any size trade can have a large impact on the price of stock
Microcaps pay promoters to tout their stock
Disseminate misleading information
Officers and promoters own significant amounts of stock
(easy to manipulate)
11
Deposit process and
DTCC’s view
Dematerialization
 Movement away from printing paper certificates in
the first place
 Registered owners can hold securities on the books of
the Issuer/Issuer’s Transfer agent (away from DTC)
or,
 Certain Transfer Agents and certain securities can be
created in “book entry” format only, with actual
inventory held at the TA, and DTC maintaining a
book-entry inventory which is reconciled with the TA
 Cost efficient
 Mandated for exchange traded securities
 Limits DTC’s insight into underlying beneficial owner
DTC Deposit Process
Types of
deposits
Receipt of
deposits
Accounting on
DTC’s books
Transfer of
ownership
Receipt of new
certificates
Asset servicing
Participant submits physical
(securities) deposits to DTC
Participant notifies DTC of
incoming book-entry deposits
Deposits are imaged to capture
certificate details
Transfer agent confirms deposits
into DTC’s account
Participant’s account is credited for the CUSIP and shares deposited
Physical securities are shipped to
agent for re-registration
DTC receives new certificates
from agent and stores in Vault
Participants request withdrawals and book-entry deliver orders to settle
trades. DTC collects principle and income payments and process
corporate actions.
14
DTC Transaction Monitoring Process
Low-priced
securities focus
Aggregation of
deposit activity
and alert
generation
Alert review and
research
Related
historical
activity for each
CUSIP
DTC focuses on physical and book-entry deposits of low-priced securities made
by participants to identify potential suspicious activity
DTC aggregates all incoming deposit activity at the end of each month and
generate alerts that meet certain rules and criteria for low-priced securities
DTC looks up the registration and other issuance information on the certificates
from the imaging system
DTC creates reports of historical transactional activity for alerted CUSIPs and
performs additional research
Alert closure or
escalation
Alerts are resolved and closed or escalated to Investigations for additional due
diligence - lookups of issuer officers, registrants, 314(b) with participant, etc.
Case conclusion
Based on the findings of the investigation, a decision is made to escalate for
further investigation
15
DTC’s Insight Into Microcap Share Activity
DTCC Specific information
 314(b) Information sharing
with DTC Participants

Deposit volumes (any
patterns)

Registrants depositing the
security


Corporate reorganization
information (splits/name
changes etc.)
Continuous Net
Settlement (CNS) data
Publically available Information
 SEC Litigation and indictment
history
 Issuer and Principal Information
(other companies, prior history,
associations, etc.)

Gatekeepers (prior infractions,
associations, etc.)

Trade volatility & price
fluctuation

Stock promotion and press
releases
16
Investigation
Process
Security and Exchange Act-1933
 Enacted after the great depression.
 Must be registered or exempt from registration.
 Rule 144(b)- selling Restricted Securities
 Rule 504 Reg D
 Rule 505 Reg D
 Rule 506 Reg D
18
www.SEC.gov
Perform search by issue
name or symbol
19
SEC actions
20
Read the SEC Filings!
 Form 8-K- Current report pursuant to Section 13 or 15D
 Form 10- General form for registration of Securities
pursuant of Section 12(b) or (g)
 Form 10-K- Annual report pursuant to Section 13 or
15(d)
 Form 10-Q General form for quarterly reports under
Section 13 or 15(d)
 Form 15- Certification and notice of termination
21
Useful Websites
22
Bloomberg Businessweekwww.businessweek.com
23
OTC Markets- www.otcmarkets.com/pink/index
24
British Columbia Securities Commisionwww.bcsc.bc.ca
25
Corporation Wikihttp://www.corporationwiki.com
26
Secretary of State Corporate Searchesnvsos.gov/sosentitysearch/CorpSearch.aspx
27
FINRAwww.finra.org/Investors/ToolsCalculators/BrokerCheck/index.ht
m
28
Price fluctuation
52 week high was .0042
and the low was .0009
That’s 367%
shift
29
www.LexisNexis.com
30
Facebook
31
Power of Google
Simple searches
uncover
substantive info.
32
Simplify searches
33
Precious metals company?
34
Telephone Number Search
A simple search can
identify multiple
different companies
who may also share
the same address
and officers.
35
Website registrant
36
314(b) Information Sharing
314(b) Guidance

DTCC investigations have benefited from shared
information through 314(b).

Title 18 > Part I > Chapter 95 > § 1956 - “transaction”
includes a purchase, sale, loan, pledge, gift, transfer,
delivery, or other disposition, includes a deposit,
withdrawal, transfer between accounts, purchase or sale of
any stock, bond, certificate of deposit, etc.
38
Any
Questions?
Thank you.