Sample MIS

FIRMA ConferenceWilliam Sweeney

March 28, 2012Microcap Security InvestigationsWe are here to speak with you about micro cap securities.Microcap securities represent the future of business - small business is primary source of new jobs, the backbone of the economic recover and these companies may represent the next Google or Microsoft.

However, this segment has a darker side that represents improper issuance of shares, unwarranted promotion, market manipulation and fraud

1Agenda2 DTCCHistoryStructureParticipantsPartners Microcap 101 & FINRA Notices Deposit Process and DTCCs View Investigation Process 314(b) Guidance Questions?Refresher - Our view into this activity provides insight into which of the micro cap issues are potentially engaging in fraudulent activities:We can aggregate across all BDs large share deposits and withdrawalsWe can aggregate the registrants depositing the security across all BDs

Large share deposits may indicate new share issuanceLarge share withdrawals may indicate a registrants attempt to place securities among other accounts in preparation for cross trading (WTs skirt controls at your firms for journaling)Name changes and splits may indicate a security is reading itself for a new round of pump and dump activity

DTC monitors micro cap closely and has automated scenarios to flag a security when all or some this activity is apparent

2DTCCHistoryStructureParticipantsPartnersWe are here to speak with you about micro cap securities.Microcap securities represent the future of business - small business is primary source of new jobs, the backbone of the economic recover and these companies may represent the next Google or Microsoft.

However, this segment has a darker side that represents improper issuance of shares, unwarranted promotion, market manipulation and fraud

3DTCC Past and PresentWall Streets Paperwork Crises Solution:ImmobilizationNetting

DTCC established in 1999 combines DTC & NSCC

DTCC currently operates through 10 subsidiaries4

Introduction to the Securities Industry4This exchange of physical stock certificates and checks on a trade-by-trade basis literally required bags of securities and checks to be delivered by hand from firm to firm, via a fleet of messengers. Along with the obvious problems stemming from physical deliveries the looming possibility of human error: lost certificates, incorrect ownership records, improper payments or debits the industry was also deeply concerned that it might lose investor confidence. In 1969, the paperwork crisis reached such proportions and became so unbearable that exchanges had to shorten trading hours and also had to close on 3 consecutive Wednesday afternoons.As a result, the Banking and Securities Industry Committee was formed to examine issues facing both the securities and banking industries and to recommend potential solutions.Accordingly, the industry had established a precedent for handling future constraints to unlimited growth and, at the same time, identified a clear priority for its evolution: streamlining processing activities and methodology.

DTCC Structure5

Refresher - Our view into this activity provides insight into which of the micro cap issues are potentially engaging in fraudulent activities:We can aggregate across all BDs large share deposits and withdrawalsWe can aggregate the registrants depositing the security across all BDs

Large share deposits may indicate new share issuanceLarge share withdrawals may indicate a registrants attempt to place securities among other accounts in preparation for cross trading (WTs skirt controls at your firms for journaling)Name changes and splits may indicate a security is reading itself for a new round of pump and dump activity

DTC monitors micro cap closely and has automated scenarios to flag a security when all or some this activity is apparent

5DTCC ParticipantsBanks and Broker Dealers are among DTCCs ParticipantsNot all banks and brokers access DTCC directly they go throughClearing brokersCustodiansDTC and NSCC Participants must go through a membership processDTCC Risk Management monitors the financial health of its DTC and NSCC members 66Partners

Discuss contacts with FBI, FINRA, District Attorneys office, SEC7Micro-cap 101FINRA Guidance on Reg D Offerings9

FINRA reminds firms of their responsibilities to ensure that they comply with the federal securities laws and FINRA rules when participating in unregistered resales of restricted securities. These responsibilities are particularly important in situations where the surrounding circumstances place the firm on notice that it may be participating in illegal, unregistered resales of restricted securities, such as when a customer physically deposits certificates or transfers in large blocks of securities and the firm does not know the source of the securities.

Firms may not rely solely on others, such as clearing firms, transfer agents, or issuers counsel, to fulfill these obligations.FINRA issued guidance reminding firms to take measures to ensure compliance with securities laws when participating in unregistered resales of restricted securities9Section 5 of the 1933 Act "unlawful for any person to offer or sell a security unless the security is either the subject of a registration statement or exempt from the registration requirement. The term "any person" in Section 5 is defined broadly and easily includes Holders. Holders that wish to resell securities, therefore, may only do so if those securities are the subject of a registration statement or are exempt from the registration requirement.10Discuss Rule 144 exemptions- restricted securities- acquired in unregistered, private lased form issuer or an affiliate- must hold for one year from when securities are bough and fully paid for. Cant sell until the legend is removed from transfer agent based on attorney opinion letters.Rule 504 of Reg D- exemption from registration of companies offer to sell up to $1,000,000 of their securities in any 1 month period. Company does not have to file with SEC.Rule 505 of Reg D- can sell up to $5 million of securities in any 12 month period- only to accredited investors and up to 35 other persons , Must inform purchaser that they received restricted securities- cant be sold for six moths w/o registering them; Cant use general solicitation or advertise the sell the securities. Rule 506 of Reg D cannot use general solicitation or advertising to market securities- can only sell securities to a sophisticated investor (must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks10Microcap Stock 101Low priced stocks issued by the smallest of companies (limited assets)Lack of publicly available and reliable informationMany microcaps trade on the Pinksheets or OTCNo minimum listing standards (net assets or shareholders)Any size trade can have a large impact on the price of stockMicrocaps pay promoters to tout their stockDisseminate misleading informationOfficers and promoters own significant amounts of stock (easy to manipulate)11Deposit process and DTCCs viewWe are here to speak with you about micro cap securities.Microcap securities represent the future of business - small business is primary source of new jobs, the backbone of the economic recover and these companies may represent the next Google or Microsoft.

However, this segment has a darker side that represents improper issuance of shares, unwarranted promotion, market manipulation and fraud

12DematerializationMovement away from printing paper certificates in the first placeRegistered owners can hold securities on the books of the Issuer/Issuers Transfer agent (away from DTC) or,Certain Transfer Agents and certain securities can be created in book entry format only, with actual inventory held at the TA, and DTC maintaining a book-entry inventory which is reconciled with the TACost efficientMandated for exchange traded securitiesLimits DTCs insight into underlying beneficial owner

Discuss history of DTC- vaults- number of shares- reduction in physical inventory1314DTC Deposit ProcessTypes of depositsReceipt of depositsAccounting on DTCs booksTransfer of ownershipReceipt of new certificatesAsset servicing Participant submits physical (securities) deposits to DTC Participant notifies DTC of incoming book-entry depositsDeposits are imaged to capture certificate detailsTransfer agent confirms deposits into DTCs account Physical securities are shipped to agent for re-registrationDTC receives new certificates from agent and stores in Vault Participants request withdrawals and book-entry deliver orders to settle trades. DTC collects principle and income payments and process corporate actions. Participants account is credited for the CUSIP and shares deposited Review process1415DTC Transaction Monitoring ProcessLow-priced securities focusAggregation of deposit activity and alert generationAlert review and researchRelated historical activity for each CUSIPAlert closure or escalationCase conclusionDTC focuses on physical and book-entry deposits of low-priced securities made by participants to identify potential suspicious activityDTC aggregates all incoming deposit activity at the end of each month and generate alerts that meet certain rules and criteria for low-priced securitiesDTC creates reports of historical transactional activity for alerted CUSIPs and performs additional researchAlerts are resolved and closed or escalated to Investigations for additional due diligence - lookups of issuer officers, registrants, 314(b) with participant, etc.Based on the findings of the investigation, a decision is made to escalate for further investigationDTC looks up the registration and other issuance information on the certificates from the imaging systemDiscuss changing scenarioReorgsLarge volume of low valued securitiesWTsOther- always changing15DTCs Insight Into Microcap Share Activity DTCC Specific information314(b) Information sharing with DTC ParticipantsDeposit volumes (any patterns)Registrants depositing the securityCorporate reorganization information (splits/name changes etc.)Continuous Net Settlement (CNS) data

Publically available InformationSEC Litigation and indictment historyIssuer and Principal Information (other companies, prior history, associations, etc.)Gatekeepers (prior infractions, associations, etc.)Trade volatility & price fluctuationStock promotion and press releases

16Discuss the value of 314(b) info sharingDiscuss importance of details and documentation.16Investigation ProcessWe are here to speak with you about micro cap securities.Microcap securities represent the future of business - small business is primary source of new jobs, the backbone of the economic recover and these companies may represent the next Google or Microsoft.

However, this segment has a darker side that represents improper issuance of shares, unwarranted promotion, market manipulation and fraud

17Security and Exchange Act-1933Enacted after the great depression.Must be registered or exempt from registration.Rule 144(b)- selling Restricted SecuritiesRule 504 Reg D Rule 505 Reg DRule 506 Reg D

18Rule 144- IPO- what you can say and cant say1)All shares must be registered2)Exemption from registration- private placement

Rule 504 Reg DIntended For small companies- family businesses2) Must be issued with restrictive legend- 1 year non reporting- 6 month reporting3) Can issue W/O restrictive legend- state law pre-empts- ex Texas/Nevada- are the registrants bona-fide residents of the State4) Convertible Debt Agreement 1 Year from date of executing agreement- real consideration paid)Rule 5051)-Limited to 5 Million shares cant sell within 6 month period- can sell up to accredited investors(hedge fund) and up to 35 other persons2) Dont have to register with SEC, but must file a From D after they sell this is a notice of companies owners and stock promoters.3) Need financial statementRule 506No limit on money you can raiseCan only sell to accredited investors or sophisticated investors that can weigh the risksFinancial Statements requiredPurchasers receive restricted securities- cant be sold for a yearMust file a Form D

18www.SEC.gov19

Perform search by issue name or symbolSEC actions20

Read the SEC Filings!Form 8-K- Current report pursuant to Section 13 or 15DForm 10- General form for registration of Securities pursuant of Section 12(b) or (g)Form 10-K- Annual report pursuant to Section 13 or 15(d)Form 10-Q General form for quarterly reports under Section 13 or 15(d)Form 15- Certification and notice of termination21Useful Websites22Bloomberg Businessweek-www.businessweek.com

23OTC Markets- www.otcmarkets.com/pink/index

24Talk about Attorneys, is it SEC registered, Prohibited attorneys list, promotion companies24British Columbia Securities Commision-www.bcsc.bc.ca

25Corporation Wiki-http://www.corporationwiki.com

26Secretary of State Corporate Searches- nvsos.gov/sosentitysearch/CorpSearch.aspx

27FINRA- www.finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm

28Price fluctuation29

52 week high was .0042 and the low was .0009Thats 367% shiftwww.LexisNexis.com30

Discuss searches- person and relationships and relatives, business, negative news30Facebook

31Power of Google32

Simple searches uncover substantive info.Simplify searches33

Precious metals company?34

Discuss mail drops, common addresses, etc. 34Telephone Number Search35A simple search can identify multiple different companies who may also share the same address and officers.

Website registrant36

Can find who is promoting stock.36314(b) Information Sharing 37314(b) GuidanceDTCC investigations have benefited from shared information through 314(b).

Title 18 > Part I > Chapter 95 > 1956 - transaction includes a purchase, sale, loan, pledge, gift, transfer, delivery, or other disposition, includes a deposit, withdrawal, transfer between accounts, purchase or sale of any stock, bond, certificate of deposit, etc.

38Discuss 314(b) relationships- voluntary38Any Questions?Thank you.39