Penny Stock Fraud

Be wary: Penny stock fraud — or microcap fraud — is common and widespread. Don’t let this keep you away from trading penny stock, but understand that there many in the market who attempt to profit by exploiting the volatility of these low value stocks in a variety of mischievous ways.

Recent microcap stock fraud estimates have risen to billions of dollars each year. Because stocks not listed on the NASDAQ or NYSE often are not required to meet the same stringent requirements to trade on the OTCBB or the Pink Sheets Electronic Quotation Service, they’re more vulnerable to market manipulation and financially devastating fraud.

While some fraud does occur in the NASDAQ Capital Market (formerly the Small Cap Market), a vast majority of stock promotional schemes occur within the penny stock trading market.

In an ironic and frustrating twist, sometimes these fraudulent techniques can be exploited for profit without breaking laws or even compromising lenient ethical principles. A perfect example of this is the so-called “Pump and Dump” scheme. If you’re aware someone is about to sponsor the contrived promotion of a penny stock, you may actually be able to profit from it during its “pump” period. This is still bad practice, however, as the value of the penny stock may drop from the time you start and complete your order.

Biased Penny Stock Recommendations

Some micro cap companies pay individuals to recommend the company stock in different media, i.e. newsletters, financial television and radio shows. You may receive spam email trying to persuade you to purchase particular stock. All emails, postings and recommendations of that kind should be taken with a grain of salt.

Look to see if the issuers of the recommendations are being paid for their services as this is a giveaway of a bad investment. Also make sure that any press releases aren’t given falsely by people looking to influence the price of a stock.



Offshore Brokers

With regulation S the SEC (Securities and Exchange Commission) permits companies selling stock outside the U.S. to foreign investors to be exempt from registering stock. These companies will usually sell the stock at a discount to offshore brokers who, in turn, sell them back to U.S. investors for a substantial profit. By cold calling a list of potential investors (investors with enough money to buy a particular stock) and providing attractive information, these dishonest brokers will use high-pressure “boiler room” sales tactics to persuade investors to purchase stock.

This is one reason why I urge you to stay with reliable, established penny stock brokers.

Pump and Dump

Pump and dump schemes involve use of false or misleading statements to hype stocks, which are “dumped” on the public at inflated prices. Such schemes involve telemarketing and Internet fraud. Some penny stock newsletters provide picks, but when you read the small print upon subscription, you’ll learn the picks will be sponsored picks, and the newsletter will use its subscriber base to “pump” before they dump. This is one of the more common penny stock scams.

I almost hate to point this out, but sometimes you can still profit from these sponsored picks. I really wouldn’t make it a consistent practice, but you can still profit if you buy during the pump and sell fast before the dump.

But you can also get yourself into real trouble with these methods, so I urge you to instead learn proper penny stock trading principles.

Chop stock

Chop stocks are stocks purchased for pennies and sold for dollars, providing both brokers and stock promoters massive profits. Brokers are often paid “under the table” undisclosed payoffs to sell such stocks.

So while it would be foolish to let the existence of these schemes paralyze you, I strongly suggest you familiarize yourself with how these systems work and where they thrive so you can avoid them altogether.