[Congressional Record Volume 145, Number 81 (Wednesday, June 9, 1999)]
[Senate]
[Pages S6791-S6793]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Ms. COLLINS (for herself, Mr. Cleland, and Mr. Gregg):
  S. 1189. A bill to allow Federal securities enforcement actions to be 
predicated on State securities enforcement actions, to prevent 
migration of rogue securities brokers between and among financial 
services industries, and for other purposes; to the Committee on 
Banking, Housing, and Urban Affairs.


                 microcap fraud prevention act of 1999

  Ms. COLLINS. Mr. President, today I am introducing the Microcap Fraud 
Prevention Act of 1999 which will equip Federal law enforcement 
authorities with new tools to prosecute the fight against microcap 
securities fraud that costs unwary investors an estimated $6 billion 
annually.
  While cold-calling families at dinnertime and high-pressure sales 
remain a favorite tactic of microcap con artists, the Internet is 
providing a new and inviting frontier for the commission of microcap 
frauds. I find it particularly disturbing that despite the best efforts 
of regulatory authorities, microcap scam artists often commit repeat 
offenses. Similarly, under current law, persons barred from other 
segments of the financial industry, such as banking or insurance, can 
easily bring their deceptive practices into our securities markets.
  I am very pleased to have the cosponsorship of two of my 
distinguished colleagues in introducing this important legislation. 
Senator Cleland and Senator Gregg are united with me in a commitment to 
ensure that security regulators have the necessary authority to crack 
down on securities fraud. Senator Cleland has a longstanding interest 
in protecting investors from securities scams. Senator Gregg also has 
been a leader in this arena in his position as the chairman of the 
subcommittee with jurisdiction over the SEC's budgets.
  In drafting this legislation, I was also pleased to have the 
invaluable assistance of the Securities and Exchange Commission and the 
North American Securities Administrators Association which represents 
State securities regulators. In fact, Richard H. Walker, the SEC's 
Director of Enforcement, and Peter C. Hildreth, the President of NASAA, 
have submitted letters endorsing my legislation. I ask unanimous 
consent that these letters be printed in the Record following my 
statement.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (See exhibit 1.)
  Ms. COLLINS. Mr. President, the Collins-Cleland-Gregg legislation is 
the product of hearings of the Permanent Subcommittee on Investigations 
which I chair. We first started looking at this issue in 1997 and held 
our first hearing in September of that year. Those hearings revealed 
that microcap securities fraud is pervasive, so much so that regulators 
estimated that it cost investors $6 billion in losses annually, 
according to an article in the Wall Street Journal.
  The damage from these microcap scams, however, is not confined to 
investor losses. They also damage the reputation of legitimate small 
companies and limit their ability to raise capital through the 
securities markets. Ironically, the strong performance of the 
securities markets over the past several years has provided an ideal 
breeding ground for these microcap scams as more and more Americans 
invest in stocks. In fact, according to the SEC, in 1980, only 1 in 18 
individual Americans participated in the securities markets. Today, 1 
in 3 Americans participate in the securities markets. There has been a 
tremendous growth in more and more American households investing in 
equities.
  In a typical microcap fraud, an unscrupulous broker, often acting 
through an intermediary, purchases large blocks of shares in a small 
company with dubious business and financial prospects. The company 
stock may be nearly worthless, but the brokers repeatedly cold call 
customers, promise glowing returns and drive up the stock through high-
pressure sales tactics. Inevitably, after the manipulators sell their 
shares at a profit, the artificially inflated price plummets, leaving 
thousands of unsophisticated investors with worthless stock and heavy 
losses. The manipulators then count their ill-gotten gains and move on 
to their next target.
  The subcommittee's investigation demonstrated that the rapid growth 
of the Internet has also provided a new frontier for the commission of 
microcap securities frauds. At hearings held by the subcommittee last 
March, expert witnesses testified that while the Internet provides 
many, many benefits to online investors, such as lower trading costs 
and a wealth of investment information, the medium is inviting to con 
men as well.

  Specifically, the Internet makes it easier and cheaper for microcap 
scam artists to contact potential victims and to perpetrate pump-and-
dump schemes or related securities frauds. Rather than having to cold 
call potential victims one at a time, con men with home computers and 
Internet access can reach millions of potential investors with the 
click of a mouse. At a very low cost, these cybercrooks can deceive 
many more victims using professionally designed web sites, online 
financial newsletters or bulk e-mail. SEC officials testified that the 
agency now receives hundreds of e-mail complaints per day, an estimated 
70 percent of which involve potential Internet securities frauds.
  For example, a constituent of mine from Ellsworth, ME, who appeared 
at the subcommittee's hearings, testified that he lost more than 
$20,000 in a sophisticated Internet securities scam. My constituent has 
an engineering degree, and he has been investing for nearly 10 years. 
This demonstrates the potential risk that Internet fraud poses to even 
experienced investors. Although the SEC has brought charges against the 
alleged perpetrators of this scam, it is, unfortunately, very unlikely 
that my constituent will ever be able to recover his losses.
  Whether they use cold calls, the Internet, or both, microcap scam 
artists rarely strike only once. The subcommittee's investigations have 
found that when regulators close down one microcap scam, often after 
very lengthy proceedings, it is very common

[[Page S6792]]

for the perpetrators to pop up in connection with yet another 
securities fraud.
  Moreover, individuals who have committed consumer frauds in other 
financial services industries, such as insurance or banking, frequently 
move on to work in the securities industry. Our regulatory system must 
be able to prevent these individuals who have violated the law from 
migrating freely from one financial sector to another.
  I commend the actions of the Securities and Exchange Commission and 
the State securities regulators in aggressively fighting microcap 
securities fraud, but they are simply overwhelmed with the magnitude of 
the problem.
  The SEC has established a special unit to monitor the Internet for 
potential microcap or similar stock securities scams and has initiated 
83 enforcement actions against approximately 250 individuals and 
companies who have allegedly committed Internet securities frauds.
  Similarly, in July of 1998, the State securities regulators, 
represented by NASAA, announced that the State securities regulators 
had filed 100 enforcement actions in a ``sweep'' against illegal boiler 
room operations. Approximately 64 of these enforcement actions involved 
brokers peddling microcap stocks. Despite these commendable efforts, 
however, the SEC and State regulators face significant challenges just 
to keep up with the explosive growth of microcap securities fraud, 
particularly on the Internet.
  The legislation that I am introducing today is designed to bolster 
the SEC's ability to protect investors from ever-increasing microcap 
frauds while ensuring that legitimate small companies can continue to 
raise capital through securities offerings. To accomplish these 
objectives, the bill will streamline the microcap fraud investigative 
process and provide the SEC with the tools it needs to suspend or ban 
rogue brokers, particularly those who have a history of committing 
fraudulent offenses.
  Specifically, our legislation will do the following:
  First, it will allow the SEC to bring enforcement actions against 
securities fraud violators on the basis of enforcement actions brought 
by State securities regulators. Currently, State regulators can rely on 
SEC-initiated enforcement actions, but the SEC does not have reciprocal 
authority. Consequently, the SEC must often conduct duplicative 
investigations before the agency can bring enforcement actions against 
microcap securities frauds first identified at the State level but 
which operate on a nationwide basis. With the new authority proposed by 
our legislation, the SEC and the State regulators will be able to 
maximize the impact of their limited enforcement resources.
  Second, our legislation would permit the SEC to keep out of the 
securities business unscrupulous individuals from other sectors of the 
financial services industry. As I stated previously, persons with 
histories of violations too often roam freely throughout the financial 
services industry and commit new frauds. The bill would allow the SEC 
to prevent individuals who have ripped off consumers in insurance or 
banking scams from similarly defrauding America's small investors.
  Third, our legislation will broaden the current penny stock bar to 
include fraudulent violations in the microcap markets. Under current 
law, the SEC can suspend or bar individuals who commit serious penny 
stock frauds involving stocks that cost less than $5. You may be 
surprised to learn, however, that the law permits such violators to 
participate in micro-cap securities offerings, because even though the 
total capitalization of these companies is small, each of their shares 
costs more than $5. Our bill will close this loophole by allowing the 
SEC to suspend or bar individuals who have committed serious penny 
stock fraud from participating in both the penny stock and micro-cap 
securities markets either as registered brokers or in related 
positions, such as promoters.
  Fourth, our proposal will expand the statutory officer and director 
bar to include all publicly traded companies. Current law applies only 
to companies that report to the SEC, leaving the door open for 
violators to serve as officers or directors of all other companies. Our 
proposal would extend the bar to include all publicly traded 
businesses, including ``Pink Sheet'' or Over The Counter (``OTC'') 
Bulletin Board companies, which are often the vehicles for micro-cap 
fraud schemes.

  Finally, our bill will strengthen the SEC's ability to take 
enforcement actions against repeat violators. Currently, the SEC must 
request that the Justice Department initiate criminal contempt 
proceedings against individuals who violate SEC orders or court 
injunctions, which can be a very burdensome and timely process. Our 
legislation would allow the SEC to seek immediate civil penalties for 
repeat violators without the need to file criminal contempt 
proceedings.
  Our Nation is blessed with the strongest and safest security markets 
in the world. This is a tribute to both the industry and its 
regulators. Unfortunately, as our markets bring benefits to more and 
more Americans, they also attract those who would exploit unsuspecting 
investors through manipulative practices.
  By virtue of their small size and relative obscurity, microcap 
securities are the most susceptible to manipulation. By giving the SEC 
the tools it needs to combat this fraud, this legislation will benefit 
not only individual investors, but also the vast majority of legitimate 
small businesses who contribute so much to our Nation's growth and 
prosperity.
  I urge my colleagues to join in supporting the Microcap Fraud 
Prevention Act of 1999.
  I ask unanimous consent that a section-by-section analysis of the 
legislation be printed in the Record.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (See Exhibit 2.)
  Ms. COLLINS. Thank you, Mr. President.

                             Exhibit No. 1


                           Securities and Exchange Commission,

                                     Washington, DC, May 24, 1999.
     Hon. Susan M. Collins,
     Chairman, Permanent Subcommittee on Investigations, Committee 
         on Governmental Affairs, U.S. Senate, Washington, DC.
       Dear Chairman Collins: I commend both you and your 
     Subcommittee for addressing the important issue of fraud in 
     the market for microcap securities. As I said in my March 23, 
     1999 testimony before your Subcommittee, fighting fraud in 
     this market has been one of the Commission's more significant 
     challenges this decade. The hearings you held help to focus 
     the issues and educate investors, and the principles in the 
     bill you plan to introduce will help leverage the 
     Commission's resources to combat microcap fraud.
       As you know, Chairman Levitt testified on microcap fraud 
     before your Subcommittee in September 1997. He noted then 
     that with our resources remaining relatively constant, we 
     must ``rely increasingly on innovative and efficient ways of 
     minimizing fraud and of maximizing the deterrence achievable 
     with the Commission's limited resources.'' In my own view, 
     the concepts underlying ``The Microcap Fraud Prevention Act 
     of 1999'' would be of great assistance to us in this regard. 
     Most importantly, the bill would give us valuable new tools 
     to close off participation in the microcap market by those 
     who would prey on innocent investors.
       In recent years, the Commission has made significant 
     inroads in the fight against microcap fraud. I appreciate 
     your efforts to address this serious problem through hearings 
     and legislation that support our enforcement efforts. I 
     believe your bill would significantly advance the cause and 
     help make our markets safer for investors. My staff and I 
     look forward to continuing to work with you and your 
     Subcommittee on this legislation.
           Very truly yours,

                                            Richard H. Walker,

                                                         Director,
     Division of Enforcement.
                                  ____

                                        North American Securities,


                             Administrators Association, Inc.,

                                     Washington, DC, May 17, 1999.
     Hon. Susan M. Collins,
     U.S. Senate,
     Washington, DC.
       Dear Chairman Collins: On behalf of the membership of North 
     American Securities Administrators Association, Inc. 
     (``NASAA'') \1\, I commend you for recognizing and 
     confronting the problem of fraud in the microcap securities 
     market. At your invitation NASAA testified before you and the 
     members of the Permanent Subcommittee on Investigations, and 
     took part in your fact-finding mission. We appreciate your 
     efforts to protect the investing public from frauds and for 
     introducing legislation to enhance enforcement efforts in 
     this area.
       As you know, several years ago, state securities 
     administrators recognized the problem of fraud in the 
     microcap market. Since then the states have led enforcement 
     efforts and filed numerous actions against microcap firms. 
     There are systematic problems in this area, but they can be 
     addressed effectively if state and federal regulators and 
     policymakers work together on meaningful solutions.

[[Page S6793]]

       NASAA wholeheartedly supports the intent of The Microcap 
     Fraud Prevention Act of 1999. It would be an important step 
     in combating abuses in the microcap market and maintaining 
     continued public confidence in our markets.
       I pledge the support of NASAA's membership to continue to 
     work with you to secure passage of this important 
     legislation.
           Sincerely,

                                            Peter C. Hildreth,

                                New Hampshire Securities Director,
                                                  NASAA President.

                             Exhibit No. 2

  S. 1189, Microcap Fraud Prevention Act of 1999--Section-by-Section 
                                Summary


     sec. 1. short title: ``microcap fraud prevention act of 1999''

       Explanation: The purpose of the bill is to protect 
     investors against fraud in the micro-cap securities market, 
     and for other purposes.


       sec. 2. amendments to the securities exchange act of 1934

       This section amends the Securities Exchange Act of 1934 to 
     grant the SEC authority to take actions against registered 
     persons who have violated the law. It allows SEC enforcement 
     actions to be predicated on state enforcement actions and 
     take steps to prevent the entry into the securities industry 
     of individuals who have committed fraud in other sectors of 
     the financial services industry.
       Explanation: Currently, state securities laws do not allow 
     state regulators to obtain civil relief having nation-wide 
     effect. Rather, state regulators only have jurisdiction to 
     prohibit defendants from doing business in their state. 
     Wrongdoers are thus free to perpetrate fraud in any other 
     state where they have not been separately barred. This 
     section amends Exchange Act section 15(b)(4)(G) to allow the 
     SEC to bring a follow-up administrative proceeding to suspend 
     or bar regulated persons who either (1) have been barred by a 
     state securities administrator from operating within that 
     state or (2) is subject to a final order for fraudulent, 
     manipulative, or deceitful conduct.
       The SEC would not have the authority to follow-up on ex 
     parte temporary restraining orders. Such orders are imposed 
     immediately by state regulators and do not provide alleged 
     violators with a chance to present a defense until after the 
     order has already been entered. The SEC would have the 
     ability to act on these state actions if, after adjudication, 
     the defendant were ultimately found to have committed a 
     violation or reached a settlement agreement.
       Currently, the Securities Exchange Act does not permit the 
     SEC to take administrative actions to bar or suspend from the 
     securities industry individuals who have committed serious 
     violations--i.e. fraud--in other financial industries, such 
     as the insurance or banking sectors. This section amends 
     Exchange Act 15(b)(4)(G) to authorize the SEC (1) to take 
     administrative action seeking bars or suspensions against a 
     broker-dealer or associated person based on orders issued by 
     federal regulators of other financial services industries and 
     (2) to allow the SEC to take follow-up actions when a foreign 
     financial regulatory authority has previously found 
     violations in other financial sectors. To ensure parity and 
     close off any remaining loopholes, corresponding changes have 
     also been made to Exchange Act sections 15B(c), 15C(c), and 
     17A(c) to extend this provision to those who seek to 
     associate with municipal securities dealers, government 
     securities dealers, and transfer agents.


       sec. 3. amendments to the investment advisers act of 1940

       This section amends Investment Advisers Act section 203 to 
     allow the SEC to bring a follow-up administrative proceeding 
     to suspend or bar investment advisors who are subject to 
     certain federal, state, or foreign orders. This sections also 
     amends section 203(f) of the act to permit the SEC to bar a 
     person associated with an investment adviser on the basis of 
     a felony conviction.
       Explanation: This section makes the same changes to the 
     Investment Adviser Act that Section 2 of the bill makes to 
     the Exchange Act. Both allow SEC enforcement actions to be 
     predicated on certain federal, state, or foreign enforcement 
     actions against individuals found to have committed 
     fraudulent or similar acts in the financial services sector.


        sec. 4. amendments to the investment company act of 1940

       This section amends Investment Company Act section 9(b)(4) 
     to allow the SEC to bring a follow-up administrative 
     proceeding to suspend or bar individuals covered by the 
     Investment Company Act who are subject to certain federal, 
     state, or foreign orders.
       Explanation: This section makes the same changes to the 
     Investment Company Act that Section 2 of the bill makes to 
     the Exchange Act. Both allow SEC enforcement actions to be 
     predicated on certain federal, state, or foreign enforcement 
     actions against individuals found to have committed 
     fraudulent or similar acts in the financial services sector.


                     sec. 5. conforming amendments

       This section amends various provisions of the Securities 
     Exchange Act of 1934 to authorize the SEC to take 
     administrative actions against individuals--based on the 
     findings of certain federal, state, or foreign enforcement 
     actions--who seek to associate with municipal securities 
     dealers, government securities brokers and dealers, and 
     clearing agencies. The section also amends the Securities 
     Exchange Act of 1934, so that actions by state securities 
     commissions and other regulators can trigger a statutory 
     disqualification. This section will focus statutory 
     disqualifications on serious violations of state law, 
     particularly fraud and similar offenses.
       Explanation: This section seeks to prevent individuals who 
     have committed fraud in other financial services sectors from 
     entering the securities industry. The section also expands 
     the definition of violations that trigger automatic statutory 
     bars from the securities industry.


                 Sec. 6. broadening of penny stock bar

       This section amends Exchange Act section 15(b)(6) to expand 
     the penny stock bar to cover a broader category of offerings.
       Expanation: This section would extend the penny stock bar 
     to all offerings other than those involving securities traded 
     on the NYSE, AMEX, NASDAQ, NMS, or investment company 
     securities. While there is no formal definition of ``micro-
     cap'' security, this statutory amendment would cover what are 
     generally referred to as ``micro-cap'' securities.


sec. 7. court authority to prohibit offerings of non-covered securities

       This section amends Exchange Act section 21(d)(5) to 
     provide federal court judges the authority to impose the 
     remedy outlined in Section 9 of the bill.
       Explanation: This section would allow the SEC to obtain all 
     necessary relief more efficiently and expeditiously by 
     requesting, in appropriate cases, a district court to issue a 
     penny stock bar order. This authority would be provided as an 
     alternative to the SEC's current ability to seek such orders 
     only through administrative proceedings.


             sec. 8. broadening of officer and director bar

       This section amends Exchange Act section 21(d)(2) in order 
     to broaden the scope of the officer and director bar.
       Explanation: Current law allows persons barred from serving 
     as an officer or director of companies that report to the SEC 
     to serve as officers or directors of other companies. This 
     section removes the limitation to SEC reporting companies, 
     and instead covers all publicly traded companies--those 
     registered pursuant to Exchange Act section 12, those 
     required to file reports pursuant to Exchange Act section 
     15(d), and those whose securities are ``quoted in any 
     quotation medium.''


                sec. 9. violations of court ordered bars

       This section adds section 21(i) to the Exchange Act to give 
     the SEC a more direct remedy against recidivist violators of 
     prior bar orders.
       Explanation: This section makes it a stand-alone violation 
     of the securities laws for a person to engage in conduct that 
     violated a prior order barring him from acting as an officer, 
     director or promoter. It allows the SEC to take direct 
     enforcement action (seeking per-day money penalties, among 
     other remedies) against a recidivist without the need for 
     criminal authorities to bring a contempt proceeding.
                                 ______