Articles Tagged with Boiler Room

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.

According to a press release last week, a North Dakota farmer brought a claim against National Securities Corporation, alleging that brokers at the firm engaged in churning in his account, recommended unsuitable high risk securities and used boiler room tactics to convince him to invest in the unsuitable securities. Boiler room tactics can be classified by brokers selling stock (typically micro-cap stock) and using false or misleading statements to sell it, because of their overwhelming desire to sell the stock and claim large commissions for themselves. Often, the stocks that are touted trade on the Pink Sheets (or the system on which companies trade do not need to meet minimum requirements or file with the SEC), because this exchange requires very little in terms of disclosure and regulation.

According to the press release, brokers at National Securities Corp recommended the client purchase a small amount of stock in an agricultural security. Subsequently, the brokers then recommended the client invest most of the remaining balance of his account in a single high-risk security called the First Hand Technology Value. This concentrated approximately half of the client’s net worth into a single security. A broker must take into account the client’s age, net worth, investment objectives and portfolio sophistication before recommending or selling a security. If he does not, his brokerage firm may be responsible for investment losses because it is the firm’s responsibility to reasonably supervise their brokers.

Up until that point, the client’s investment experience had been limited to self-directed trades in a relatively small online account, and conservative trades in his IRA. According to the allegations in a claim filed with the Financial Industry Regulatory Authority (FINRA), the brokers failed to discuss with the customer his investment experience, and also failed to discuss the risky and speculative nature of the securities they were purchasing for them. The brokers continued to aggressively buy and sell stocks in the customer’s account, sometimes using margin debt. The client was not aware what margin was, nor was he aware that he was accumulating significant interest obligations. When the client attempted to close his account in 2014, the brokers met with the client in person, convincing him to leave the account in their hands and convincing him to give them more money. The customer then gave them the rest of his savings, which the brokers subsequently put half into a single illiquid, high-fee investment. These tactics resulted in the client losing more than half a million dollars, not including his losses sustained in a private real estate investment trust (REIT).

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