Penny Stocks: Caution

There were 1,513 victims of Jordan Belfort’s Pump and Dump scam. Tom Porkony owned a commercial General Contracting Business. Dr. Vitt was a dentist who was pressured to buy stock from Stratton Oakmont’s salespeople. The victims of Jordan Belfort’s crime were intelligent and educated people. They made their living as owners of contracting firms, dental offices and car dealerships; they fell victim to the high-pressure tactics of salespeople who conned them into giving hundreds of thousands of dollars. You have worked hard for your money: be cautious and don’t fall victim to high-pressure tactics.

There are different types of situations in which you could be lured by a fraudster. There’s the person who has recently received a windfall and is interested in gaining more interest than in a bank. There’s the person who has recently lost a substantial amount of money because of a divorce, lost their job or have had a death in the family. They want to make money as fast as possible. They may not speak to anyone else about their finances. There’s the person who may even be suspicious about it at first, but consider the reward to be greater than the risk. There’s also the person who is adventurous and talks to people about their investments but disregards their misgivings. These other people are ‘too-conservative’. They can be easily flattered by stroking their egos or being promised a large windfall. Could you possibly be any of these people?

Penny stocks are often talked about and seen in ads but aren’t well understood. A common misconception about penny stocks is that they are worth a few cents. A penny stock is a particular type of stock that trades at under 5$ a share on an over the counter market. These stocks are typically companies with a small or ‘micro’ capitalization. That means that the total value of the company’s stock is less than $250 million. It sounds like a lot, but compare that to Google. Google has a market capitalization of 494.93 billion. Historically, these kinds of stocks were known as trading in ‘pink sheets’ because of the color of paper they used to trade on. These securities carry a high amount of risk because of its weak oversight and low trading volume.

Penny Stocks trade on Over the Counter (OTC) Markets, such as the OTC Bulletin Board (OTCBB) or OTC Link LLC (OTC Link). Keep this in mind when trading in these OTC markets. The first thing to know is that trading in OTC Markets are precarious and require extensive research. Unlike companies with larger capitalizations, OTC Markets are less regulated and don’t provide as much public information compared to an exchange like NASDAQ or the New York Stock Exchange. For companies that wish to be eligible to be listed on the OTC Bulletin Board, they must file current financial reports with the SEC or with other regulators. There are a few ways to research companies on the OTC Bulletin Board: The EDGAR Database lists required filing information for businesses for free through the SEC’s website. The OTC Bulletin Board Page will also contain information concerning companies that have left that market.

For the OTC Link LLC (OTC Link) market, companies are not required to meet any listing requirements. Be aware that a company that leaves the OTC Bulletin Board for any reason, such as the failure to file a financial report, may continue to be listed on OTC Link.

Are all companies that trade under 5$ a penny stock or a scam? The short answer is no. From time to time, companies with a large capitalization may trade at under 5$ for a variety of reasons. If they trade in a major market like NASDAQ or the NYSE, those companies are subject to many filing regulations necessary to be listed on those exchanges.

The most important thing to remember about Penny Stocks that trade on an OTC Market is that small companies are only required to disclose minimal public information. The lack of information makes it hard for someone to make an informed decision about a company. This vacuum of information creates opportunities for scammers to defraud the public. A scammer can put out false or misleading press releases, send spam e-mails, create hundreds of Twitter bots to generate false interest, and pay companies to recruit Facebook users to post on behalf of a company. This artificial interest is the firepower that scammers need to convince a victim that a stock is worth buying.

If necessary to protect shareholders and the public, FINRA will halt trading on securities. The Trading Halt page can give you more information and current halts for the OTC Bulletin Board. For any suspensions or halts on the OTC Link Markets, click here. The information listed here could save you from making a catastrophic financial mistake.

Anyone interested in investing in OTC companies must commit to heavy research before considering to buy. If you do plan to buy penny stocks, think about the fact that they trade less frequently and are less ‘liquid.’ In financial terms, liquid means how quickly a stock will be bought and sold. With tiny companies, people may not be interested in buying what you are trying to sell, forcing you to hold on to stock for longer than you anticipated.

This scenario is precisely the type of situation you may be involved in if you fall into a Penny Stock Scam. Bankrate has a thorough explanation of how a Pump and Dump Scam works. The FBI also has a page as well as the SEC. Red flags include an unsolicited stock recommendation, the kind that many investors in Stratton Oakmont received when first contacted. This Reddit Ask Me Anything thread was written by a penny stock promoter and can give you an idea on how they operate. The movie Boiler Room is another example of the world of Penny Stock sales people.

Remember that you have rights concerning cold calls: take a look at them here.

Beware of unsolicited stock advice from e-mails. Did you know that in 2006, 15% of all spam e-mail messages were related to pump and dump scams? And they don’t solely exist in electronic mail, either. Twitter bots and Facebook groups are also rampant with Penny Stock promoters who aid in pump and dump scams. Computer Intrusion is another serious problem where hackers get ahold of your brokerage account to buy shares of a targeted stock to inflate its price.

What to do if you’ve been a victim? You can file a complaint with FINRA, the Financial Industry Regulatory Authority here, or by calling them at (240) 386-HELP (4357). You can also E-Mail the Securities and Exchange Committee at enforcement@sec.gov. White collar crime such as market manipulation falls under the jurisdiction of the FBI: contact the local field office in New York City at (212) 384-1000. Or send them a tip at http://tips.fbi.gov. Make sure to visit StopFraud.gov to report Financial Fraud.

For more information and resources, visit these links:

Penny Stocks: Caution

Penny Stocks: Caution

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