Fraudulent Stock Promotions: Get’em While They’re Hot

By Bryan Rafie, Fall 2015 Student Intern

Supply and demand is what help sets the price of a stock. There are fraudsters who take advantage of this by supplying investors with false information regarding a stock, and suggesting they take advantage of the information by buying the stock. These promotional activities can in some cases create a buying frenzy that cause the price of a stock to jump dramatically. The fraudster will take advantage of this by then selling the shares they hold or taking payments from promoters/company insiders who stand to gain from the price increase.

The problem with this scheme is that artificially increases the price of the stock. Once the fraudsters or the company insiders sell their shares, the price of the stock normally drops significantly and the investors who purchased the stock stand to lose their investment.

The SEC warns that fraudsters use a variety of channels to promote stocks. Some of them include:

  • Social Media – The profiles used can either be the fraudsters pretending to be someone else or just anonymous.
  • Investment Newsletters – The fraudsters in some cases will pay the publisher to promote a stock.
  • Online Advertisements – Fraudsters will target groups with particular interests and even purchase ads on financial web pages.

According to the SEC, fraudsters often target Microcap stocks. Microcap stocks are stocks that belong to companies with a market value of $50-300 million dollars. Comparatively these companies are small. Their small size makes their stock harder to sell on the open market. This difficulty makes them more susceptible to price increases resulting from an increase in demand. Information on these companies is normally very limited. This makes them perfect target for the fraudster’s schemes. When considering microcap stock be aware of a few of the warning signs listed below.

  • The SEC has suspended the trading of other microcap stocks advocated by the promoter.
  • A sharp increase in the price of a microcap stock.
  • Frequent changes in the company’s name or address.
  • Information announcing contracts, licensure, or agency approval that doesn’t actually happen or is delayed.