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FIRMA Conference William Sweeney March 28, 2012 Microcap Security Investigations.

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Presentation on theme: "FIRMA Conference William Sweeney March 28, 2012 Microcap Security Investigations."— Presentation transcript:

1 FIRMA Conference William Sweeney March 28, 2012 Microcap Security Investigations

2 Agenda 2  DTCC  History  Structure  Participants  Partners  Microcap 101 & FINRA Notices  Deposit Process and DTCC’s View  Investigation Process  314(b) Guidance  Questions?

3 DTCC  History  Structure  Participants  Partners

4 DTCC Past and Present Wall Street’s “Paperwork Crises” Solution: 1.Immobilization 2.Netting DTCC established in 1999 combines DTC & NSCC DTCC currently operates through 10 subsidiaries 4

5 DTCC Structure 5

6 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

7 Partners


9 FINRA Guidance on Reg D Offerings 9 FINRA reminds firms of their responsibilities to ensure that they comply with the federal securities laws and FINRA rules when participating in unregistered resales of restricted securities. These responsibilities are particularly important in situations where the surrounding circumstances place the firm on notice that it may be participating in illegal, unregistered resales of restricted securities, 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. Firms may not rely solely on others, such as clearing firms, transfer agents, or issuers’ counsel, to fulfill these obligations.

10 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

11 Microcap Stock 101 Low priced stocks issued by the smallest of companies (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

12 Deposit process and DTCC’s view

13 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

14 14 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 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. Participant’s account is credited for the CUSIP and shares deposited

15 15 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 Alert closure or escalation Case conclusion 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 creates reports of historical transactional activity for alerted CUSIPs and performs additional research Alerts are resolved and closed or escalated to Investigations for additional due diligence - lookups of issuer officers, registrants, 314(b) with participant, etc. Based on the findings of the investigation, a decision is made to escalate for further investigation DTC looks up the registration and other issuance information on the certificates from the imaging system

16 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

17 Investigation Process

18 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

19 19 Perform search by issue name or symbol

20 SEC actions 20

21 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

22 Useful Websites 22

23 Bloomberg Businessweek- 23

24 OTC Markets- 24

25 British Columbia Securities Commision- 25

26 Corporation Wiki- 26

27 Secretary of State Corporate Searches- 27

28 FINRA- m 28

29 Price fluctuation 29 52 week high was.0042 and the low was.0009 That’s 367% shift

30 30

31 Facebook 31

32 Power of Google 32 Simple searches uncover substantive info.

33 Simplify searches 33

34 Precious metals company? 34

35 Telephone Number Search 35 A simple search can identify multiple different companies who may also share the same address and officers.

36 Website registrant 36

37 314(b) Information Sharing

38 314(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

39 Any Questions? Thank you.

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