A Short Essay for a Intro to Bussiness Class

In the October 14th issue of Businessweek there
is an article entitled "Cavwat Entrepreneur" by
Michelael Schroeder. This artical details how modern
day stock fraud scams are committed and it details
one such example. In brief, the conmen target a small,
non-public company that has the prospects of growth.
They promise its managers finanial assistance by
merging it with a public company in financial trouble,
getting the public listing with minimal disclosure. The
conmen pump in money, aquiring ventures, while taking
control by placing cohorts on the board of directors.
They then do a reverse stock split to boast the stock
price and reduce the number of shares (in the example
the number of shares outstanding dropped from 10 million
to about 500,000, which caused the stock's price to rise
from 34 cents a share to nearly $7.00 a share). Then the
board of directors quietly issued millions of additional
shares, which they and the conmen snapped up, registering
the shares through SEC loopholes. Next they get brokers to
push customers to buy the stock, which increases the stock's
price. When the stock price is high enough, the hustlers
then unload their shares, employing off-shore accounts
to hide the profits.
What makes this type of stock fraud often go undetected
is the fact that the conmen work through leditmate
companies and not some sham organization. By the time anyone
figures out that a crime has been committed, the conmen
have their money in off-shore accounts.
This is a good case of what happens when there are no checks
on busunessmen. All the stake-holders in the company that was used
by the conmen lose, because once it is made known what has happened,
the stock becomes worthless, and a successful up and coming company
is destroyed by such a stock scam. Personally, I believe that steps
should be taken to tighten up the regulations in such
mergers, so that these sorts of stock frauds can be stopped. Changing
the minimal disclosure reguirements, and corking the SEC loopholes would
be the best steps to take to correct this problem.