Stoltmann Law Offices has represented investors in cases where brokers have swindled their clients in penny stock scams. “Penny Stocks” are defined as the common stock of companies with low (typically under $250 million) market capitalization, and share prices that are under $5 per share. Although some penny stocks do trade on exchanges like the NYSE or NASDAQ, most trade “over the counter” or OTC. Penny-stocks are famous for their speculative qualities and volatility. Because they are usually thinly-traded compared to non-penny stocks, the share price is easily impacted by large block transactions, which can lead to manipulation. The classic “pump and dump” scheme almost always depends on penny stocks. If the following scenario sounds familiar to you, then you should consider calling Stoltmann Law Offices at 312-332-4200 for a consultation with a securities attorney.
Here’s how the scam goes. First, a promoter pumps out positive news about a company on social media, in online chat rooms, and through press releases. They’ll announce some new deal (almost always some sort of merger) which will lead to great things for the company. The stock will pop based on the news, usually based on sales to investors by promoters or brokers affiliated with the promoters. This is the “pump” part of the scam. As brokers drive investors to the stock, the price goes up, sometimes meteorically, and investors keep buying it on the way up. Once the stock price gets to a certain price, unbeknownst to any investors, the original holders, the promoters, and insiders, all dump their shares at once, causing the stock price to drop like a rock. This is the “dump” part of the scam. Because liquidity is a problem with penny stocks, even if you are watching the stock minute to minute, you might not get a bid when you try to sell your shares. A day or two later, you are left with shares of stock that are near-worthless and are likely looking at substantial losses. If you think you’ve seen movies like this, you are correct. The Wolf of Wall Street, both Wall Street movies, and Boiler Room were all largely based on pump and dump scams.
Recently, The U.S. Securities and Exchange Commission (SEC) charged four individuals with running a penny-stock fraud scheme targeting retail investors. The defendants were ‘variously involved in different parts of fraudulent schemes involving three separate publicly-traded companies that generated $9.1 million in illicit stock sale proceeds,” according to the SEC.