Emory Bankruptcy Developments Journal


Harrison Lipsky


The scourge of public shell trafficking has led to fraudsters taking advantage of and pilfering the hard-earned dollars of the American investing public for decades. These fraudsters seek to abuse the chapter 11 bankruptcy process by discharging the debt of such public shells, so that they can increase the profitability of schemes that target innocent investors, such as reverse mergers and pump-and-dump schemes. Regulators and lawmakers alike have fought back against this phenomenon through statutory reform and targeted regulatory programs; recently, their principal method of fighting back has been to consistently object to chapter 11 plans of reorganization that could potentially be used in such schemes. This Comment analyzes the strengths and weaknesses of the current regulatory approaches to combat public shell trafficking and proposes a new solution: the Shell Reprocessing Approach (“SRP Approach” or “Approach”). The SRP Approach involves regulators taking a more active role in debtor reorganization by moving for the appointment of a chapter 11 trustee and/or filing a competing plan as a party in interest. The Approach has the potential to enable regulators to stop bad actors seeking to abuse the bankruptcy process in a potentially more effective and innovative manner and to better protect the American public from fraudulent investment schemes. Ultimately, unlike objections to confirmation, the Approach promises to preserve the economic value of a debtor public shell by repurposing its ticker and to close the information gap by subjecting the entity to greater regulatory scrutiny via existing Special Purpose Acquisition Company (“SPAC”) regulations.