Editorial: Beware of Straw Man Inc.

Tuesday, Oct. 18, 2005 | 9:43 a.m.

Before plunking money into a business, investors routinely check records in the state where the company was incorporated. Investors, who often live elsewhere in the country or even in foreign countries, rely on the official state records to learn the names of the corporate officers. The names are checked to see if they are associated with any past irregularities, but even experienced investors can be duped by companies incorporated in Nevada. This is because state law allows corporate officers to legally shield their real identities.

The 1991 Legislature saw opportunity in relaxing standards for people who want to incorporate their businesses in this state. At the time, there were about 60,000 corporations registered with the Nevada secretary of state's office. The annual revenue generated by the fees for filing papers of incorporation was then about $7 million. Today there are 260,000 corporations listed by the secretary of state's office, and they generate an additional $50 million in annual filing fees for the state treasury.

These increases were achieved not by strengthening corporate law to protect investors, but by weakening it to protect the confidentiality of corporate officers. The effect is that potential investors have no idea who is actually in charge of a company, even if they have done their research. Nevada law requires corporations to have a resident agent, an individual or company with a street address within the state. But a resident agent acts mostly as a pass-through, receiving legal documents from the state or courts and passing them on to the corporate officers.

The law is outrageously lax, however, when it comes to requirements for listing the people who really run the company. On articles of incorporation in Nevada, names must accompany the positions of president, secretary and treasurer. But the names cannot be trusted. The true owners of the company can simply pay someone else a fee in exchange for associating their names with those positions. These phony executives even have a state-sanctioned name -- "nominee officers," a designation that does not have to appear on the papers. As Las Vegas Sun reporter Steve Kanigher disclosed Sunday in a story on this practice, nominee officers have become part of a cottage industry in Nevada. State records show the same names on hundreds of corporate filings. An A.T. Mathis, of Acorn Corporate Services Inc., for example, has been listed as an officer or director of 3,990 N evada corporations, according to state records.

To show the flaw in such deceptive filing practices, Kanigher traced the history of a purported investment company that had incorporated in Nevada. The company was actually run behind the scenes by a convicted Florida swindler, and investors learned of his true identity only after they had lost thousands of dollars.

We believe the 2007 Legislature should end this practice of allowing nominee officers. It is plain wrong and gives Nevada a bad reputation. In our view, state records should be trustworthy. It is disgraceful that someone can attest on official Nevada records that he is the president of a company, while actually just being a name for hire.