SEC Halts Trading In 17 'Penny Stocks'

By Jessica Holzer and Melodie Warner
  Of DOW JONES NEWSWIRES

WASHINGTON (Dow Jones)--The Securities and Exchange Commission halted trading in 17 microcap stocks it said had been hyped by Internet promoters despite a lack of reliable information publicly available about the companies.

The mass-trading suspensions represent the SEC's first action to call attention to possible "penny stock" promotion schemes since it began a stepped-up effort last autumn to crack down on the proliferation of microcap-stock fraud.

The SEC said stock-touting websites, Twitter users and often anonymous individuals posting to message boards have swayed the investing decisions of the public, which often doesn't have adequate information about the securities.

Companies don't necessarily have to file periodic reports with the SEC for their shares to trade, particularly in the over-the-counter markets, where the stocks subject to Tuesday's trading halt were bought and sold. But rules require brokers, issuers and others to disseminate only accurate information about a company in connection with a securities sale or offering.

As an example, the SEC said one of the companies, Calypso Wireless Inc. (CLYW), hasn't filed periodic reports to the SEC since February 2008. The company's shares rose to an intra-day high of 17 cents on Sept. 24, the same day a stock-promoting website allegedly encouraged investors to continue buying the stock. The stock traded at 4 cents on Sept. 21.

In another example, several stock-promoting websites promoted Kore Nutrition Inc. (KORE) as a "winner" following the company's disclosures on Sept. 1 and 8, 2010, of new distribution agreements to market its energy drinks and the release of a company-funded research report that pegged the stock at $10.50. But the company's Sept. 30, 2010, quarterly report didn't mention the distribution agreements.

Calypso didn't immediately return a request for comment; Kore couldn't be reached.

"They may be called penny stocks, but victims of microcap fraud can suffer devastating losses," said Robert Khuzami, director of the SEC's division of enforcement.

Aside from Calypso Wireless and Kore Nutrition, the SEC halted trading in American Pacific Rim Commerce Group (APRM), Anywhere MD Inc. (ANWM), Cascadia Investments Inc. (CDIV), CytoGenix Inc. (CYGX), Emerging Healthcare Solutions Inc. (EHSI), Evolution Solar Corp. (EVSO), Global Resource Corp. (GBRC), Go Solar USA Inc. (GSLO), Laidlaw Energy Group Inc. (LLEG), Mind Technologies Inc. (MTEK), Montvale Technologies Inc. (IVVI), MSGI Security Solutions Inc. (MSGI), Prime Star Group Inc. (PSGI), Solar Park Initiatives Inc. (SOPV) and U.S. Oil & Gas Corp. (USOG).

Trading in the stocks will be frozen through Friday, June 17.

After the shares resume trading, brokers and other financial intermediaries will have a heightened obligation to ensure the publicly available information about the companies' operations and financial condition is accurate.

Last autumn, the SEC started a nationwide initiative aimed at targeting what are known as the gatekeepers in microcap fraud--brokers, lawyers, auditors, transfer agents and others that spread misleading information about companies--and bringing actions against them for multiple violations. The effort represents a shift from the SEC's previous strategy of going after microcap issuers one by one for single violations. The effort encompasses staff from all 11 regional SEC offices as well as numerous SEC divisions and offices aside from the enforcement division.

Microcap stocks are vulnerable to fraudulent schemes because it is often easy for a bad actor to gain control over a large portion of the shares, hype the company to investors based on misleading information and then dump the stock.

While many microcap companies are legitimate startups, a large portion are suspected of being complicit in such schemes or, at the very least, unwilling to correct false or outdated information being used by others to stir up interest in the stock, SEC officials said.

-By Jessica Holzer, Dow Jones Newswires; 202-862-9228;

-By Melodie Warner, Dow Jones Newswires; 212-416-2283; melodie.warner@dowjones.com