Zombie Stocks: Why You Need to Avoid Dormant Shell Companies


John WasikContributor

PERSONAL FINANCE 1/02/2015 @ 9:32AM 327 views

Zombie Stocks: Why You Need to Avoid Dormant Shell Companies

Imagine companies that are pretty much left for dead, only to be revived by toxic waste handlers called penny stock promoters. These “dormant shell” companies are corporations in name only. Even though they don’t have any viable business operations, they continue to trade. Here’s how these companies are seemingly brought back to life:

A promoter hawks them to investors, thus pumping up the stock price, then dumps them without telling their customers, who get creamed. It’s a classic “pump and dump” scheme. The U.S. Securities and Exchange Commission and FINRA, the securities industry self-regulator recently warned about these zombie entities.Here’s what you need to know, courtesy of FINRA:

Research whether the company has been dormant—and brought back to life. You can search the company name or trading symbol in the SEC’s EDGAR database to see when the company may have last filed periodic reports. Another resource is the Secretary of State’s office in the state where the company was formed or incorporated.

Know where the stock trades. Most stock pump-and-dump schemes involve stocks that do not trade on The NASDAQ Stock Market, the New York Stock Exchange or other registered national securities exchanges. Instead, these stocks tend to be quoted on an over-the-counter (OTC) quotation platform like the OTC Link Alternative Trading System (ATS) operated by OTC Markets Group, Inc.

Be wary of frequent changes to a company’s name or business focus. Name changes and the potential for manipulation often go hand in hand. You can learn about name changes and other corporate events on OTC Markets website. If the company files periodic reports, you can search changes in a company name or business focus in the SEC’s EDGAR database. Internet searches may also turn up this information.

Check for mammoth reverse stock splits. A reverse stock split reduces the number of shares outstanding and increases the price per share without changing the total economic value of the shares. A company might perform a reverse stock split with a 1-for-5 or similar ratio (in an effort to meet minimum bid price requirements for continued listing on an exchange).A dormant shell company, on the other hand, might carry out a 1-for-20,000 or even 1-for-50,000 reverse split. This may be done to inflate the price of the stock. Check for reverse splits on the OTC Markets website.

Know that “Q” is for caution. A stock symbol with a fifth letter “Q” at the end denotes that the company has filed for bankruptcy. Like other non-reporting shell companies, dormant, bankruptcompanies can be candidates for manipulation.

I know this sounds like a lot of homework, so I’ll make it simple. If anyone solicits you with a “hot stock tip” on phone or through email, ignore it.

That’s the best way to stay out of trouble.

If you want to be diligent and protect other investors, contact your state securities regulator to report the broker.
They may be able to shut them down quickly if they’re fronting a scam.



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