Where do penny stock crooks find their victims? Everywhere around the globe. This is an international epidemic, spreading at a record pace, thanks to the efforts of boiler rooms, greedy promoters and unscrupulous company insiders.
Lately, we have been hearing from more and more readers around the world who have been touched by securities scams. It makes perfect sense. Con artists know that U.S. regulators are unlikely to raise their colors on behalf of an individual investor in Barbados, Germany or the Philippines who has tossed away his life's savings buying unregistered shares of an obscure U.S. public company. So the clever pitchmen peddle their wares overseas, then sit back stateside and bank their profits.
Most frequently, fraudulent schemes involve shares of obscure companies which have few assets, negligible revenues, and dubious operations. But foreign investors - and many domestic ones as well - do not know this. They only know what the salesman is saying. And for the foreign individual investor the U.S.-based broker has instant credibility. The con artist relies on the fact that most people in other countries - and many right here - cannot distinguish a legitimate brokerage firm from a fly-by-night operation.
Stock schemes commonly involve shares of companies that trade on the OTC Bulletin Board, Pink Sheets, or non-U.S. exchanges. As of March 2007, 3,472 companies were listed on the OTC Bulletin Board. Another 4,874 stocks were quoted solely on the Pink Sheets. Almost 37 billion shares changed hands on the OTC Bulletin Board in March 2007 alone – an average daily volume of well over one billion shares a day.
This arena is a crucible for securities schemes. Regulatory resources are strained, and frequently focused in other directions. The global nature of these schemes, and the ease with which companies can issue unregistered stock and sell it overseas, makes meaningful oversight difficult - and often impossible.
The term "penny stocks" is something of a misnomer, since it includes stocks that trade for $5 a share or less. Penny stock rules are designed to protect the public since investments in these low priced securities tend to be speculative and risky. When stock brokers recommend these penny stocks they are required to have an existing relationship with their customer or to determine that such investments are suitable for a new customer. Unscrupulous promoters and boiler room operators generally ignore these rules.
Although penny stock schemes are frequently successful, they seldom are subtle. Unlike the elaborate accounting schemes that accompanied massive corporate frauds at the beginning of this decade - Enron, WorldCom and the like - penny stock frauds usually rely on the garden variety "pump and dump" scheme. In many cases promoters or shady stock brokers gain control of a company and then spread false and misleading information by saturating the Internet with spam email or using cold callers to tout shares. In this way they spark interest in the company, pump up prices, and create an environment in which they can sell stock. Once the promoters dump their shares, stock prices slide back toward oblivion. The game takes on several variations, but the basic framework seldom differs.
Often, these schemes employ one or more of the following tools:
IF YOU HAVE QUESTIONS OR COMMENTS FOR STOCKPATROL.COM, CONTACT US AT editor@stockpatrol.com
Lately, we have been hearing from more and more readers around the world who have been touched by securities scams. It makes perfect sense. Con artists know that U.S. regulators are unlikely to raise their colors on behalf of an individual investor in Barbados, Germany or the Philippines who has tossed away his life's savings buying unregistered shares of an obscure U.S. public company. So the clever pitchmen peddle their wares overseas, then sit back stateside and bank their profits.
Most frequently, fraudulent schemes involve shares of obscure companies which have few assets, negligible revenues, and dubious operations. But foreign investors - and many domestic ones as well - do not know this. They only know what the salesman is saying. And for the foreign individual investor the U.S.-based broker has instant credibility. The con artist relies on the fact that most people in other countries - and many right here - cannot distinguish a legitimate brokerage firm from a fly-by-night operation.
Stock schemes commonly involve shares of companies that trade on the OTC Bulletin Board, Pink Sheets, or non-U.S. exchanges. As of March 2007, 3,472 companies were listed on the OTC Bulletin Board. Another 4,874 stocks were quoted solely on the Pink Sheets. Almost 37 billion shares changed hands on the OTC Bulletin Board in March 2007 alone – an average daily volume of well over one billion shares a day.
This arena is a crucible for securities schemes. Regulatory resources are strained, and frequently focused in other directions. The global nature of these schemes, and the ease with which companies can issue unregistered stock and sell it overseas, makes meaningful oversight difficult - and often impossible.
The term "penny stocks" is something of a misnomer, since it includes stocks that trade for $5 a share or less. Penny stock rules are designed to protect the public since investments in these low priced securities tend to be speculative and risky. When stock brokers recommend these penny stocks they are required to have an existing relationship with their customer or to determine that such investments are suitable for a new customer. Unscrupulous promoters and boiler room operators generally ignore these rules.
Although penny stock schemes are frequently successful, they seldom are subtle. Unlike the elaborate accounting schemes that accompanied massive corporate frauds at the beginning of this decade - Enron, WorldCom and the like - penny stock frauds usually rely on the garden variety "pump and dump" scheme. In many cases promoters or shady stock brokers gain control of a company and then spread false and misleading information by saturating the Internet with spam email or using cold callers to tout shares. In this way they spark interest in the company, pump up prices, and create an environment in which they can sell stock. Once the promoters dump their shares, stock prices slide back toward oblivion. The game takes on several variations, but the basic framework seldom differs.
Often, these schemes employ one or more of the following tools:
IF YOU HAVE QUESTIONS OR COMMENTS FOR STOCKPATROL.COM, CONTACT US AT editor@stockpatrol.com
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