Pump and Dump Penny Stock Scams
Penny stock scammers could be the owners of the company, penny stock brokerages, and fraudsters who spot the potential to make a quick buck. This is how a pump and dump scam can work. A team of investors who have already accumulated large volumes of the stock hire bloggers, public relations firms and boiler room brokerages to conduct a massive recommendation on the stock. The campaign can include media releases, paid television shows, paid for brokerage reports, email alerts and message board postings.
Investors who fall for the trap see the stock appreciating in value with increasing volumes and start to believe the fraudulent information in the email alerts or stock research reports. The temptation is to believe that a stock can easily double based on its potential performance, many investors don’t think twice about investing hoping to turn a quick profit when there’s the promise of having their investments doubled in days or weeks.
When investors start to buy in droves, the stock price quickly appreciates and volume spikes. Just as quickly, sometimes within a day or over the space of several months, the stock price peaks and falls sharply. That is because the scammers have unloaded their initial holdings to the duped, and have made out like bandits. If you have fallen for such a scam, you can expect the stock price to plummet. You are now stuck with shares worth little or nothing.
It is just as likely that when the stock’s price is falling, scammers, who have yet to fully unload their shares, will offer false hope. They will attribute the price drop to short-selling and offer fraudulent assurances that the upward trend will continue once the short selling is done. This keeps gullible investors holding onto their shares for a turnaround that never comes.
Conspirators in a penny stock scam can even include the company’s management, attorneys and outside auditors. In 2010, the SEC in the US won a case against two Canadians, both of whom came from British Columbia. They ran Exotics.com, which published adult-oriented websites, out of British Columbia, and both were heavily fined for releasing misleading information. Exotics-Nevada traded on the Over-the-Counter Bulletin-Board. This scam involved multiple parties, and included financial statements that were not properly audited, and fax and email spam that contained false revenue information. Furthermore, some of the parties involved used two trading accounts to buy and sell shares to make it appear that there was actually a public market for the stock, by increasing the trading volume, when in reality it was merely the same individuals selling stock back and forth to themselves. For a dizzying account of the length these individuals went to carry out this fraud read the 46 page SEC complaint filed against them.