Connect to share and comment
By Suzanne Barlyn
(Reuters) - The frenzy of trading in Cynk Technology Corp shares that ended with their suspension by U.S. securities regulators on Friday was likely their final ride, according to securities lawyers and market participants.
Trading suspensions like the one imposed on Cynk are typically a death knell for penny stocks because the regulatory requirements brokerages must meet to trade the stock again are often insurmountable, these experts said.
Cynk, which said it intended to create a social network business, traded around 6 cents until mid-June when its price shot up out of the blue. It hit $21.95 on Thursday, briefly giving it a market value of $6.4 billion.
"Suspensions make it virtually impossible to make a market in the stock again," said Tom Sporkin, a former SEC enforcement lawyer now with BuckleySandler LLP in Washington.
Citing concerns about possible market manipulation, the SEC and Financial Industry Regulatory Authority, or FINRA, halted trading in Cynk, a company with no assets or revenue that listed its business address in Belize.
The suspension extends through July 24, but, at best, the stock will only ever again trade in the so-called "gray market," because no securities firm is likely to be willing to make a market for the stock. With no broker to quote or advertise the stock, it can be nearly impossible to locate shares to trade, and, even then, there is next to no price transparency.
Companies that are suspended must provide regulators with information they request, such as updated financial details or details about their operations, according to a SEC bulletin on suspensions.
In addition, any brokerage wanting to market the stock must file a form with FINRA, explaining that they are satisfied with the company's updated information. But that information will not exist if the offering is actually a scam, as penny stock deals often are, Sporkin said.
It would be unusual for a broker to have information about a suspended stock that is more current than the SEC’s, said George Brunelle, a securities lawyer who advises brokerages. Moreover, firms requesting to trade it could themselves become regulatory targets, said Brunelle, former legal head of a surveillance unit of the New York Stock Exchange.
"Regulators will look at you with a magnifying glass," he said.
Cromwell Coulson, president and chief executive at OTC Markets Group, which operates the OTC Pink market on which Cynk had traded, agreed the stock is not likely to be publicly quoted again because no broker will be able to file the appropriate paperwork with regulators.
SKULL AND CROSS BONES
The SEC is investigating Cynk for possible market manipulation as part of a so-called pump-and-dump scheme, according to people familiar with the matter.
A pump-and-dump scheme involves a group of insiders who conspire to drive up a stock's price, then lure in unwary outside investors to buy the shares at an inflated price and abscond with the proceeds.
The agency in the past year has made combating microcap fraud a priority and formed a special task force that keeps an eye out for similar schemes.
People familiar with the matter said that Cynk did not trigger any regulatory red flags until last week, partly because the trading volume had been fairly low. In addition, there were no press releases or mailers sent touting the stock.
In the case of Cynk, Coulson said, the stock was not being touted through established means like press releases.
"The difference with this one is that it (the advertising) was made through Twitter," Coulson said.
It is still unknown whether any investors were harmed. Regulators need to review trading data to see who was trading the stock. People familiar with the matter believe, however, the trading was shut down fairly early.
Coulson said he believes the harmed parties will be a mix of "speculators who didn’t do their research and probably some short sellers who were bought in."
He expects the SEC will find that a short squeeze drove the price higher. That would leave some short sellers who were dubious of the stock's rise in the space of a few weeks as among those who suffered losses when trading was stopped.
OTC Markets Group began sounding alarm bells about Cynk to investors on July 9, more than a day before the SEC and FINRA suspensions. At that time, OTC branded the company's information page with a skull-and-cross bones icon it uses to flag concerns about a company or the activity in its shares.
(Additional reporting by Rodrigo Campos in New York and Sarah N. Lynch in Washington; Editing by Dan Burns and Cynthia Osterman)