Stock Transfer Fraud

A Matter of Trust


CFOs will have to monitor the activities of stock transfer agents more closely if a recent case of fraud proves to be a harbinger. Transfer agents normally issue and store paper certificates that represent the stock holdings of investors. But when direct digital marketing software maker MindArrow Systems Inc. replaced RTT Transfers Inc. with U.S. Stock Transfer Corp., a firm the new CEO had previously worked with, MindArrow executives found that RTT had issued 1.1 million counterfeit shares, representing additional equity MindArrow had not authorized but that threatened to dilute existing shares.

Once the new agent raised the matter last February, CFO Michael Friedl and CEO Robert Webber swung into action, notifying Nasdaq, the U.S Attorney, and the Securities and Exchange Commission. "We found our situation was virtually unprecedented--we had never seen anything like it, and neither had any of the agencies," says Friedl.

The SEC registers and oversees transfer agents, but historically has taken few actions against them, according to SEC spokesman John Heine. And those in the stock transfer industry, such as Leon Urbaitel, CEO of advisory service, say that such fraud is rare, if not unprecedented.

Nasdaq immediately suspended the company's shares, then trading at $4.50, and the FBI swooped in to investigate the fraud. Two RTT agents later pleaded guilty to fraudulently issuing the additional shares to companies they owned, reselling them, and pocketing $16 million in proceeds. RTT is no longer in business.

The fraud didn't affect MindArrow's net worth, since its two founders surrendered 1.1 million of their own shares for cancellation to keep outside investors whole. However, to document the event, the SEC required MindArrow to take an $18.7 million noncash, nonoperating charge in the quarter ending March 31, 2001, increasing its loss-per-share for the quarter from $1.24 to $3.

Workin' It

Executives put in at least 11 hours of work a day, which, for 36% of them, is more time then they spent at the office five years ago, says Robert Half International.


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