[Congressional Record Volume 148, Number 22 (Tuesday, March 5, 2002)]
[Senate]
[Pages S1537-S1538]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Ms. COLLINS:
  S. 1985. 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.
  Ms. COLLINS. Mr. President, today I am introducing the Microcap Fraud 
Prevention Act of 2001. This bill will close loopholes in the 
enforcement of our securities laws and furnish Federal authorities with 
the tools they need to combat growing fraud in the microcap securities 
market. While the Enron debacle has focused attention on the need for 
tougher and fuller financial disclosure standards to protect small 
investors, microcap fraud costs investors an estimated $6 billion every 
year.
  I first introduced this bill in the 106th Congress after extensive 
examination by the Senate's Permanent Subcommittee on Investigations, 
which I chaired. I am pleased that the North American Securities 
Administrators Association, which is made up of our Nation's State 
securities regulators, has once again sent me a letter of strong 
support and has made passage of legislation such as this one of its top 
legislative priorities.
  Today's securities markets are much different than they were even a 
decade ago. Many more people own securities than ever before. The rise 
of the Internet has allowed investors greater access to market 
information and investment advice. Unfortunately, not all of this 
information and advice has been sound, or even honest.
  These problems are exacerbated in the microcap market. Microcap 
stocks are those of smaller, thinly capitalized companies. Because the 
individual share prices may be higher than a certain threshold, 
however, they may avoid regulation as ``penny stocks.'' Because 
investors typically know little of these companies, their share prices 
are easier to manipulate due to the small amount of total capital. They 
are often less regulated than the securities of larger companies and, 
therefore, they can pose difficult challenges for law enforcement and 
unique opportunities for dishonest brokers.
  It is this combination of a microcap company's low capitalization, 
making its share price more easily manipulable, and obscurity, along 
with high-pressure sales tactics, that make microcap stocks so 
appealing to the more dishonest elements in our securities markets.
  Frequently, salesmen will call customers, pitching these 
investments with high pressure sales tactics. More sophisticated scams 
involve a practice known as the ``pump and dump'' where a securities 
firm that has purchased a large block of a microcap company's stock 
will market it aggressively and quickly to investors. As a result of 
the surge in demand, the share's price will rise sharply but 
temporarily, despite the unchanged fundamentals underlying the stock's 
price.

  After a short time, investors will realize that the company's 
performance does not merit its new share price. The stock's share price 
will then plummet, but the firm will by then have unloaded its shares, 
leaving investors holding the bag. In other cases, however, dishonest 
brokers and firms simply fail to execute sales orders or otherwise 
commit garden variety theft masquerading as securities transactions, 
such as churning or making unsuitable recommendations.
  States prosecute these criminals activities with some success and 
often obtain orders prohibiting further securities activities by bad 
actors within their jurisdiction. Because such an order ends at a 
State's borders, however, the defendants can simply pick up, move to a 
new State, and begin their schemes anew. In contrast, a Federal order 
would have effect nationwide. Because Federal law enforcement resources 
are limited, however, there is only so much it can do, and many smaller 
time criminals can continue to operate below the federal government's 
radar screen. My bill would institute several reforms to address these 
problems.
  First, it would allow the SEC to take enforcement actions against 
brokers and firms on the basis of those already concluded by state 
agencies. Although States may base their actions on Federal actions, 
the reverse is not true. As a result, the SEC must duplicate the 
State's efforts to provide nationwide protection to investors. By 
allowing the SEC to base disciplinary actions on those concluded by 
states, the State's disciplinary actions can be given effect 
nationwide, when appropriate, without the SEC's having to commit 
significant amounts of additional resources.
  Second, the bill would allow the SEC to keep those who commit any 
type of financial fraud from participating in the microcap market. 
Currently, the SEC can ban those who commit securities violations. But 
the SEC should have the poser to discipline those who commit other 
types of financial services offenses as well.
  Third, this bill would broaden provisions designed to prevent fraud 
in the penny stock market. Under current law, the SEC can suspend or 
bar those who commit fraud in this market. However, brokers so barred 
can turn around and commit the same types of offenses in the microcap 
market because their individual share prices might exceed $5 per share, 
even though the total capitalization amount is small enough to lend 
itself to easy manipulation. The penny stock market ban needs to be 
expanded to the microcap market as well.
  Fourth, the statutory officer and director bar would be expanded to 
cover all publicly traded companies. Currently, this bar only applies 
to companies that report to the SEC, leaving open the possibility that 
those who have been barred from serving in these companies could serve 
in others that are exempt from reporting. Companies involved in 
microcap schemes are frequently traded over the counter and are not 
covered by the bar. Under my bill, this bar would extend to all 
publicly traded companies.
  Finally, the bill would allow the SEC to enforce its own orders and 
court injunctions against repeat offenders directly rather than waiting 
for the Justice Department to initiate contempt proceedings. Instead 
the SEC would be able to seek immediate civil penalties for repeat 
violations without the delay that can occur from the initiation of 
contempt proceedings.
  These are common sense, measured steps that can make a real 
difference in the level of protection that we provide to investors, 
many of whom are new to our capital markets. I would urge the Senate to 
consider and pass the

[[Page S1538]]

Microcap Fraud Prevention Act quickly. Mr. President, I ask unanimous 
consent that the letter of support from the NASAA be printed in the 
Record.
  There being no objection, the letter was ordered to be printed in the 
Record, as follows:

                                                        NASAA,

                                Washington, DC, November 15, 2001.
     Hon. Susan M. Collins,
     U.S. Senate,
     Washington, DC.
       Dear Senator Collins: On behalf of the membership of North 
     American Securities Administrators Association, Inc. (NASAA), 
     I commend you for recognizing and confronting the problem of 
     fraud in the microcap securities market. We appreciate your 
     efforts to protect the investing public from frauds in low-
     priced securities, and for your plans to introduce 
     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.
       NASAA wholeheartedly supports the intent of The Microcap 
     Fraud Prevention Act of 2001. It would be an important step 
     in combating abuses in the microcap market and maintaining 
     continued public confidence in our markets.
       We applaud your leadership in the fight against microcap 
     fraud, and I pledge the support of NASAA's membership to 
     continue to work with you to secure passage of this important 
     legislation.
           Sincerely,

                                               Joseph P. Borg,

                                      Alabama Securities Director,
                                                  NASAA President.
                                 ______