Friday’s Fraud: Avoid Pump-And-Dump Schemes Involving Penny Stock

By Patricia Uceda, Fall 2014 Graduate Research Assistant

pump and dumpEarlier this week, we told you about the SEC recently charging a ring of eight individuals with orchestrating a massive pump-and-dump scheme with a penny stock company based in California. Because of their very low-cost and lack of available information about the issuing company, penny stocks are easily subject to manipulation.  Last year, student intern Cassandra Bradford told you about 50 Cent’s penny stock dealings in a small company known as H&H Imports, which specialized in creating house slippers with night lights.  50 Cent did not to sell his stock, despite having made a profit of almost $5.2 million on paper. Fraudsters, however, do sell their stock back at the artificially inflated price, leaving the other investors who bought into the stock to suffer as the price of the stock falls back down to its ordinary price.

Thankfully, there are actions investors can take to avoid falling victim to this fraud. The SEC and FINRA advise that you should:

  • Be wary of investment advice on the Internet – False claims touting a small company’s stock are typically made on the Internet where the messages are anonymous and the writer can claim to have “inside” information about a small company.
  • Do some investigating – Do a basic Internet search of a company before you invest. Take note of any news reports that raise red flags, or company officials with unclear or unverifiable backgrounds.
  • Read company’s SEC filings – Most public companies are required to file reports with the SEC. You can check the SEC’s EDGAR database to read the company’s filings and verify any information you have may have been given by the company’s promoters.
  • Know where the stock trades – Most pump-and-dump schemes involve stocks that do not trade on registered national securities exchanges such as NASDAQ or NYSE. Instead, they usually appear on the OTC Bulletin Board and do not have to meet any minimum listing standards.
  • Be wary of frequent name changes or business focus changes – Changes to name or company focus are a sign of a potential scam, as it indicates that the company may be merely a vehicle for a penny stock pump-and-dump scheme instead of an actual functioning business.