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Listing Council Decisions
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Identification Number
600
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Rule 5101: NASDAQ is entrusted with the authority to preserve and strengthen the quality of and public confidence in its market. NASDAQ stands for integrity and ethical business practices in order to enhance investor confidence, thereby
contributing to the financial health of the economy and supporting the capital formation process. NASDAQ Companies, from new public Companies to Companies of international stature, are publicly recognized as sharing these important objectives. NASDAQ, therefore,
in addition to applying the enumerated criteria set forth in the Listing Rule 5000 Series, has broad discretionary authority over the initial and continued listing of securities in NASDAQ in order to maintain the quality of and public confidence in its market,
to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and to protect investors and the public interest. NASDAQ may use such discretion to deny initial listing, apply additional or more stringent criteria
for the initial or continued listing of particular securities, or suspend or delist particular securities based on any event, condition, or circumstance that exists or occurs that makes initial or continued listing of the securities on NASDAQ inadvisable or
unwarranted in the opinion of NASDAQ, even though the securities meet all enumerated criteria for initial or continued listing on NASDAQ. In all circumstances where the Listing Qualifications Department (as defined in Listing Rule 5805) exercises its authority
under Listing Rule 5101, the Listing Qualifications Department shall issue a Staff Delisting Determination under Listing Rule 5810 (c)(1), and in all circumstances where an Adjudicatory Body (as defined in Listing Rule 5805) exercises such authority, the use
of the authority shall be described in the written decision of the Adjudicatory Body.
Issue: The company was delisted by a Hearings Panel for public interest concerns. In January 2010, the company issued a press release announcing that it had entered into an agreement to purchase certain assets for approximately $15 million.
Over the following 18 months, the company provided updates regarding the status of the purportedly acquired assets in press releases and periodic filings with the Securities and Exchange Commission, discussing the progress of renovations, payment of deposits,
and expected operational dates. In June 2011, the company hosted a conference call, during which the Chief Executive Officer disclosed for the first time that the acquisition had never been completed, and that the funds for the acquisition had been deposited
into an account under the control of the CEO. The funds were subsequently invested in other assets. The company’s Chief Accounting Officer explained that the decision to provide false information about the matter to the public was due to worry that the cancellation
of the acquisition would provoke negative reactions in the market. The company did not refute the facts noted above, but argued that it should remain listed while its internal investigation continued so that all facts and findings could be presented to the
Hearings Panel. The company argued that investors are adequately protected, since its stock is currently suspended from trading on NASDAQ.
In affirming the Staff’s determination to delist the company, the Hearings Panel stated that the false public disclosures by the CEO and CAO regarding the acquisition and funds may not evidence an intent to defraud shareholders; however, such false disclosures
demonstrate a lack of regard for basic principles of transparency and honesty, as well as for management’s fiduciary responsibilities to shareholders. The Hearings Panel noted in its decision that it only serves to magnify the Hearings Panel’s concerns that
the CEO and CAO were able to hide their misconduct from the Board and the Chief Financial Officer, and for such an extended period of time. The Hearings Panel found the company’s internal controls clearly inadequate, and noted concerns that additional reporting,
disclosure and internal control management deficiencies may yet be uncovered. The Hearings Panel also noted that the facts as presented suggest that the Board is not equipped to manage the crisis this company faces. As evidence, the Hearings Panel cited the
Board’s failure to require management resignations, or at least restrict management access and activities during the investigation; its narrow mandate regarding the scope of the independent investigation; and its lack of engagement and oversight of accounting
disclosures over the past 18 months, stating that all of such facts do not engender confidence that it can lead an investigation that can fully identify and remedy all control deficiencies within a reasonable period of time. To continue the listing, even subject
to a suspension, in light of the admissions that have been made and the probability that the company will not file audited financial statements for an extended period of time would be inconsistent with NASDAQ rules and would serve to undermine the public’s
confidence in its regulatory integrity.
Determination: Affirmed. The Listing Council is concerned the company is unable to determine whether the CEO and CAO misappropriated funds after the failure of the transaction. When faced with evidence of misappropriation, the Board
failed to act appropriately by, at a bare minimum, restricting management access and activities during the investigation. The Listing Council further concludes that the company made false and misleading disclosures concerning the acquisition in filings with
the Securities and Exchange Commission. The Listing Council is particularly concerned about the company’s admissions during the NASDAQ hearing process that it did not publicly disclose the failure of the acquisition because such disclosure could cause the
company’s stockholders to react negatively. This reasoning gets the principles of transparency and accurate public statements completely backwards.
The Listing Council finds no reason to allow the company to remain listed. It is clear from the record that the company is unprepared to meet the governance standards required by listed companies and that it is not fully equipped for the rigors of the
regulatory environment within which exchange-listed companies must operate.
Pursuant to Listing Rule 5101, NASDAQ has “broad discretionary authority” over the listing of securities on NASDAQ, “in order to maintain the quality of and public confidence in the market, to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade and to protect investors and the public interest.” This authority stems directly from NASDAQ’s delegated responsibilities under the Securities Exchange Act of 1934. The Listing Council strongly disagrees with
the company’s assertion that investors are adequately protected, since its stock is currently suspended from trading on NASDAQ. The Listing Council also strongly disagrees with the company’s assertion that allowing the company to remain listed, yet suspended
from trading, will balance the need to protect prospective investors and the integrity of NASDAQ with the need for fair treatment of the company and its shareholders. To the contrary, allowing the company to remain listed in light of the facts developed in
this matter would signal to both current and prospective shareholders a level of comfort with the company that is simply not present. Sending such a signal would in no way serve to protect investors nor maintain the public confidence in the market. Accordingly,
the Listing Council affirms the Panel decision to delist the company’s securities based on the exercise of the broad discretionary authority of Listing Rule 5101.
The Listing Council finds no reason to allow the company to remain listed. It is clear from the record that the company is unprepared to meet the governance standards required by listed companies and that it is not fully equipped for the rigors of the
regulatory environment within which exchange-listed companies must operate.
Pursuant to Listing Rule 5101, NASDAQ has “broad discretionary authority” over the listing of securities on NASDAQ, “in order to maintain the quality of and public confidence in the market, to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade and to protect investors and the public interest.” This authority stems directly from NASDAQ’s delegated responsibilities under the Securities Exchange Act of 1934. The Listing Council strongly disagrees with
the company’s assertion that investors are adequately protected, since its stock is currently suspended from trading on NASDAQ. The Listing Council also strongly disagrees with the company’s assertion that allowing the company to remain listed, yet suspended
from trading, will balance the need to protect prospective investors and the integrity of NASDAQ with the need for fair treatment of the company and its shareholders. To the contrary, allowing the company to remain listed in light of the facts developed in
this matter would signal to both current and prospective shareholders a level of comfort with the company that is simply not present. Sending such a signal would in no way serve to protect investors nor maintain the public confidence in the market. Accordingly,
the Listing Council affirms the Panel decision to delist the company’s securities based on the exercise of the broad discretionary authority of Listing Rule 5101.
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Publication Date*:
7/31/2012
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Identification Number:
600
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