Penny stocks are one of the many ways of investing your money with the intent of making a profit. Compared with stocks on the major stock exchange boards, penny stocks are low priced, allowing you to purchase bigger volumes at a much cheaper price.
Because the boards that host the penny stocks do not require as much information as the SEC does with the big boards, getting information on the companies selling penny stocks is much harder.
Although many of these companies on the otcbb and pink sheets are legitimate, the lack of information about these companies makes fraud very easy. Fraudsters target potential investors with news and tips about a penny stock to convince them to buy, and most investors do not realize the hype about the penny stock was a setup.
Spreading False Information
Thru email. Have you ever received an unsolicited email touting the qualities and the great investment potential of a microcap company and encouraging you to invest in it? The email may contain a link to a website purportedly giving you information on everything you’d like to know about this company. Spreading false information through email spamming allows fraudsters to target many more potential investors cheaply than mass mailing or cold calling.
Thru internet fraud. Fraudsters usually post messages on internet bulletin boards and chat rooms encouraging people to buy stock in penny stock companies, and citing inside information about developments in these companies. It is easy to mask their identities because these internet venues allow them to hide behind aliases.
Thru paid promoters. Some microcap companies pay stock promoters to recommend penny stocks. These paid promoters put out what look like unbiased, legitimate newsletters and research reports, and they could even be bold enough to go on radio and television to promote these penny stocks.
Under the federal securities law, newsletters must disclose who paid them, how much they were paid and the type of payment made, but many fraudsters fail to do this. The potential investors usually don’t check, and are quite easily led to believe that the information they are getting is from an independent, unbiased source.
Thru boiler rooms. Some dishonest brokers set up cold calling teams also called boiler rooms with an army of high-pressure sales people who make cold calls to as many potential investors as possible. The sales people sell the broker firm’s house stock, which are penny stocks that the firm buys and sells as a broker or has in its inventory.
Thru questionable press releases. It is easy to write a press release about anything under the sun. Fraudsters sometimes issue press releases that look legitimate and contain information about the penny stock company’s sales, revenue projections, new products and services, and acquisitions. These press releases are then spread around through legitimate financial news portals. What investors don’t know is that much of the information is exaggerated, and probably downright false.
Fraudsters use many scams to promote and push the sale of penny stocks. Here are the most common ones:
The classic pump and dump scheme. Paid promoters and/or company insiders spread false information about a micro cap company and its supposedly promising penny stocks throughout the internet. Very often, these promoters will claim that their tip is based on inside information about the company. As more people read the information and snap up the penny stocks, the value goes up. Then the fraudsters sell their shares and stop promoting the stock. The value falls usually suddenly and investors lose their money.
Variation of the pump and dump scheme. A person receives a supposedly misdialed call from a stranger, with a hot tip about a penny stock. The call sounds legitimate, as if the caller doesn’t realize she is calling the wrong number. Actually, she dialed the right number the caller is a promoter who is being paid to call numbers and leave messages on answering machines about this hot tip. If the receiver of the call falls for the scheme and buys the penny stocks, he could be a victim of the pump and dump scheme.
Offshore scam. There is a rule called Regulation which says that companies do not have to register the stock that they sell to outside of the U.S. to foreign or offshore investors. An unscrupulous micro cap company can sell its penny stocks at a big discount to parties posing as foreign investors. These investors then sell the stock to U.S. investors at inflated prices, thus making a huge profit that they then share with the micro cap companies. The flood of the unregistered stock into the U.S. eventually causes the price to drop, leaving U.S. investors with big losses.