Penny stocks: definition, regulation, opportunities and risks

What аrе Pеnnу Stосkѕ?


Looking at the definition of Wikipedia for pеnnу ѕtосkѕ,


Penny stocks, also known as cent stocks in some countries, are common shares of small public companies that trade at low prices per share.


In the United States, the SEC defines a penny stock as a security that trades below $5 per share, is not listed on a national exchange, and fails to meet other specific criteria.


In the United Kingdom, stocks priced under £1 are called penny shares


Penny stocks are often referred to as “microcap stock”, which are those companies with low or “micro” capitalizations, usually less than $250 or $300 million.


The smallest public companies, with market capitalization of less than $50
million, are sometimes called ‘nanocap stocks.’


On one side, penny stocks involve a higher risk for traders and investors compared to ordinary stocks.


On the other side, it dоеѕ hарреn that by mаking the correct invеѕtmеntѕ уоu саn ѕtаnd tо make a соnѕidеrаblе рrоfitѕ.

Click here to see the Best Penny Stocks picking systems”


Main features of penny stocks


The main features are the low price and/or the low market capitalization.


These two characteristics may cause penny stocks to be highly volatile, and potentially subject to manipulation by stock promoters.


The typical example of manipulation is the pump and dump technique that we will look at later on in this post.


These risks are offset by the possibility to earn much more than when trading ordinary stocks.


Penny stocks in the USA are often traded over-the-counter on the OTC Bulletin Board, or Pink Sheets, even though also Nasdaq has a number of penny stocks.


In the United States, the Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) regulate the sale of penny stocks.


Regulation of penny stocks


In the United States, regulators have defined a penny stock as a security that must meet a number of specific standards.


The criteria include price, market capitalization and minimum shareholder equity.

Securities traded on a national stock exchange, regardless of price, are exempt from regulatory designation as a penny stock, since it is thought that exchange traded securities are less vulnerable to manipulation.


Therefore, NYSE listed securities which trade below $1.00, while properly regarded as “low priced” securities, are not technically “penny stocks”.


Penny stock trading in the United States is now primarily controlled through rules and regulations enforced by the Securities and Exchange Commission and FINRA.


SEC Penny Stock Rules


According to SEC official information, “the term “penny stock” generally refers to a security issued by a very small company that trades at less than $5 per share”.


Penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board (which is a facility of FINRA) or OTC Link LLC (which is owned by OTC Markets Group, Inc., formerly known as Pink OTC Markets Inc.), but they could also trade on securities exchanges.


Penny stocks are generally considered speculative and risky investments.


For this reason, investors in penny stocks should be prepared for the possibility that they may lose their whole investment, or an amount in excess of their investment if they purchased penny stocks on margin.


Because of the speculative nature of penny stocks, Congress prohibited broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of 1934 (“Exchange Act”) and the rules thereunder.


These SEC rules provide, among other things, that a broker-dealer must:

– approve the customer for the specific penny stock transaction and receive from the customer a written agreement to the transaction;


– furnish the customer a disclosure document describing the risks of investing in penny stocks;


disclose to the customer the current market quotation, if any, for the penny stock;


– disclose to the customer the amount of compensation the firm and its broker will receive for the trade.


In addition, after executing the sale, a broker-dealer must send to its customer monthly account statements showing the market value of each penny stock held in the customer’s account.


For further information read the penny stock rules (Exchange Act Section 15(h) and Exchange Act Rules 3a51-1 and 15g-1 through 15g-100).


Where Do Penny Stocks Trade?


Many microcap stocks trade in the “over-the-counter” (OTC) market, rather than on a national securities exchange such as the New York Stock Exchange or NASDAQ.


They are quoted on OTC systems, such as the OTC Bulletin Board (OTCBB) or OTC Link LLC (OTC Link).



OTC Bulletin Board


The OTCBB operated by the Financial Industry Regulatory Authority (FINRA).

The OTCBB is not part of The Nasdaq Stock Market.


The OTCBB is an electronic inter-dealer quotation system that displays quotes, last-sale prices, and volume information for many OTC equity securities that are not listed on a national securities exchange.


Under the OTCBB’s eligibility rule, companies that want to have their securities quoted on the OTCBB must seek sponsorship by a market maker firm that is a registered broker-dealer as well as file current financial reports with the SEC or with their banking or insurance regulator.



OTC Link is an electronic inter-dealer quotation system that displays quotes, last-sale prices, and volume information in exchange-listed securities, OTC equity securities, foreign equity securities and certain corporate debt securities.


In addition to publishing quotes, OTC Link provides, among other things, broker-dealer subscribers the ability to send and receive trade messages, allowing them to negotiate trades.


OTC Link is registered with the SEC as a broker-dealer and as an Alternative Trading System, and is a member of FINRA.


OTC Link organizes securities into three marketplaces based, in part, on the amount and quality of available information:



OTCQB: it includes the securities of companies that are current in their reporting to the SEC or a U.S. bank, thrift or insurance regulator;



OTCQX: reserved for the securities of companies that are current in their reporting to the SEC or a U.S. bank, thrift or insurance regulator, or, in the case of companies that are not required to report to the SEC, meet and remain current in their reporting obligations to OTC Link under its proprietary Alternative Reporting Standard; meet certain eligibility requirements; have audited financial statements; and partner with a third-party securities attorney or investment bank that reviews disclosure and acts as a professional advisor; and


OTC Pink: it is an open marketplace for a broad spectrum of equity securities, with no financial standards or reporting requirements.

How Are Penny Stocks Different From Other Stocks?

Lack of Public Information

Often, the biggest difference between a microcap stock and other stocks is the amount of publicly available information about the company.

Most large public companies file reports with the SEC that any investor can get for free from the SEC’s website.

Professional stock analysts regularly research and write about larger public companies, and it’s easy to find their stock prices on the Internet or in newspapers and other publications.

In contrast, information about microcap companies can be extremely difficult to find, making them more vulnerable to investment fraud schemes and making it less likely that quoted prices in the market will be based on full and complete information about the company.

No Minimum Listing Standards

Companies that trade their stocks on exchanges must meet minimum listing standards.

For example, they must have minimum amounts of net assets and minimum numbers of shareholders.

In contrast, companies on the OTCBB or OTC Link generally do not have to meet any minimum standards, although companies quoted in OTC Link’s OTCQX marketplace are subject to initial and ongoing requirements and companies quoted in the OTCQB marketplace must be SEC reporting companies.



While all investments involve risk, penny stocks are among the most risky.

Penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them.

because it may be difficult to find quotations for certain penny
stocks, they may be difficult, or even impossible, to accurately price.

Another risk that pertains to penny stocks involves the low volumes of trades.

Because of the low tradinjg volumes, any size of trade can have a large percentage impact on the price of the stock.

Many penny companies are new and have no proven track record.

Some of these companies have no assets, operations, or revenues.

Others have products and services that are still in development or have yet to be tested in the market.


Which Companies File Reports With the SEC?

In general, the federal securities laws require all but the smallest of public companies to file reports with the SEC.

A company can become “public” by issuing securities in an offering or transaction that’s registered with the SEC or by registering a class of the company’s securities with the SEC.

Both types of registration trigger ongoing reporting obligations, meaning the company must file periodic reports that disclose important information to investors about its business, financial condition, and management.

This information is a treasure trove for investors: it tells you whether a company is making money or losing money and why.

You’ll find this information in the company’s quarterly reports on Form 10-Q, annual reports (with audited financial statements) on Form 10-K, and periodic reports of significant events on Form 8-K.

OTC Markets require companies to be current in their SEC or other regulatory disclosure to be quoted in the OTCQB marketplace.

Companies must also be current in providing disclosure to be quoted in the OTCQX marketplace, though that requirement can be met by providing information in accordance with OTC Link’s proprietary Alternative Reporting
Standard rather than through filing with the SEC or a banking or insurance regulator.

Companies quoted in the OTC Pink tier are assigned different symbols by OTC
Markets, depending on whether they have provided “current” information, “limited” information or “no information.”

A company must file reports with the SEC if:

it has 2,000 or more investors or more than 500 investors that do not qualify as ‘accredited investors,’ and $10 million or more in assets; or

it lists its securities on any ‘national securities exchange, or

its securities are quoted on the OTCBB or in the OTCQB marketplace of OTC Link, or it has registered an offering of its securities under the Securities Act of 1933 and has more than 300 holders of record or more than 1,200 holders of record if a bank or bank holding company.

All OTCBB and OTCQB companies must file updated financial reports with the SEC or with their banking or insurance regulator.

Any company that does not file timely reports with the SEC or their banking or insurance regulator is removed from the OTCBB and OTCQB.

When an OTCBB company fails to file its reports on time, filed an incomplete filing or for those companies that file with a banking or insurance regulator, has not provided FINRA a copy of the report, FINRA will add a fifth letter “E” to the OTCBB trading symbol.

The company then has 30 days to file with the SEC or 60 days to file with its banking or insurance regulator.

If it’s still delinquent after the grace period, the company will be removed from the OTCBB.

You’ll find a list of securities that have been removed from the OTCBB at

Edgar system


With few exceptions, companies that file reports with the SEC must do so electronically using the SEC’s EDGAR system.

EDGAR stands for electronic data gathering and retrieval. The EDGAR database is available on the SEC’s website at

You’ll find many corporate filings in the EDGAR database, including annual and quarterly reports and registration statements.

Any investor can access and download this information for free from the SEC’s website.

By law, the reports that companies file with the SEC must be truthful and complete, presenting the facts investors find important in making decisions to buy, hold, or sell a security.

But the SEC cannot guarantee the accuracy of the reports companies file.

Every year, the SEC brings enforcement actions against companies who have “cooked their books” or failed to provide important information to investors.

What’s So Important About Public Information?

Many of the microcap companies that don’t file reports with the SEC are legitimate businesses with real products or services.

Even in the absence of fraud, a lack of public information about a company can make investing in its stock more risky because the prices that are quoted for the stock are less likely to accurately reflect the risks and opportunities associated with the company and its business.

In addition, stocks of such companies may trade only in small volumes.

Of potentially greater concern is that the lack of reliable, readily available information about some microcap companies can open the door to fraud.

It’s easier for fraudsters to manipulate a stock when there’s little or no information available about the company.

Fraud involving microcap stocks often depends on spreading false information.

Here’s how some fraudsters carry out their scams:

Email Spam Fraudsters distribute junk e-mail or “spam” over the Internet to spread false information quickly and cheaply about a microcap company to thousands of potential investors.

Spam allows the unscrupulous to target many more potential investors than cold calling or mass mailing.

Internet Fraud Fraudsters often use aliases on Internet bulletin boards and chat rooms to hide their identities and post messages urging investors to buy stock in microcap companies based on supposedly “inside” information about impending developments at the companies.

For more information about Internet fraud and on-line investing, read Internet Fraud and Tips for Online Investing:

What You Need to Know About Trading in Fast-Moving Markets.


Paid Promoters

Some microcap companies pay stock promoters to recommend or “tout” the microcap stock in supposedly independent and unbiased investment newsletters, research reports, or radio and television shows.

Paid promoters are generally behind the unsolicited “junk” faxes, e-mail messages, or high-end glossy mailers you may receive, touting a microcap company.

The federal securities laws require the publications to disclose who paid them for the promotion, the amount, and the type of payment.

Many fraudsters fail to do so and mislead investors into believing they are receiving independent advice.

“Boiler Rooms” and Cold Calling

Dishonest brokers set up “boiler rooms” where a small army of high-pressure salespeople use banks of telephones to make cold calls to as many potential investors as possible.

These strangers hound investors to buy “house stocks”, that is stocks that the firm buys or sells as a market maker or has in its inventory.

Questionable Press Releases

Fraudsters often issue press releases that contain exaggerations or lies about the microcap company’s sales, acquisitions, revenue projections, or new products or services.

These fraudulent press releases are then disseminated through legitimate financial news portals on the Internet.

Microcap fraud schemes can take a variety of forms.


How Do I Get Information About Microcap Companies?

If you’re working with a broker or an investment adviser, you can ask your investment professional if the company files reports with the SEC and to provide you written information about the company and its business, finances, and management.

Be sure to carefully read any prospectus and the company’s latest financial reports.

Remember that unsolicited e-mails, message board postings and company news releases should never be used as the sole basis for your investment decisions.

You can also get information on your own from these sources:

From the company

Ask the company if it is registered with the SEC and files reports with the SEC.

If the company is small and unknown to most people, you should also call your state securities regulator to get information about the company, its management, and the brokers or promoters who’ve encouraged you to invest in the company.


From the SEC

A great many companies must file their reports with the SEC.

Using the SEC’s EDGAR database at, you can find out whether a company files with the SEC and get any reports in which you’re interested.

For companies that do not file on EDGAR, use the SEC’s online form at or email the SEC’s Public Information Office at to see whether the company has filed an offering circular under Reg A.


From your state securities regulator

We strongly urge you to contact your state securities regulator to find out whether they have information about a company and the people behind it.

Look in the government section of your phone book or visit the website of the North American Securities Administrators Association at to get the name and phone number.

Even though the company does not have to register its securities with the SEC, it may have to register them with your state.

Your regulator will tell you whether the company has been legally cleared to sell securities in your state.


From other government regulators

Many companies, such as banks, do not have to file reports with the SEC. But banks must file updated financial information with their banking regulators.

Visit the Federal Reserve System’s National Information Center site at, the Office of the Controller of the Currency at, or the Federal Deposit Insurance Corporation at


From reference books and commercial databases

Visit your local public library or the nearest law or business school library.

You’ll find many reference materials containing information about companies.

You can also access commercial databases for more information about the company’s history, management, products or services, revenues, and credit ratings.

The SEC cannot recommend or endorse any particular research firm, its personnel, or its products.

But there are a number of commercial resources you may consult, including: Bloomberg, Dun & Bradstreet, Hoover’s Profiles, Lexis-Nexis, and Standard & Poor’s Corporate Profiles. Ask your librarian about additional resources.


The Secretary of State Where the Company Is Incorporated

Contact the secretary of state where the company is incorporated to find out whether the company is a corporation in good standing.

You may also be able to obtain copies of the company’s incorporation papers and any annual reports it files with the state.

Please visit the National Association of Secretaries of State website at for contact information regarding a particular Secretary of State.

If you’ve been asked to invest in a company but you can’t find any record that the company has registered its securities with the SEC or your state, or that it’s exempt from registration, call or write your state’s securities regulator or submit a complaint to the SEC at immediately with all the details.


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What if I Want to Invest in Penny Stocks?

To invest wisely and avoid investment scams, research each investment opportunity thoroughly and ask questions.

These simple steps can make the difference between profits and losses.

Find out whether the company has registered its securities with the SEC or your state’s securities regulators.

Make sure you understand the company’s business and its products or services.

Read carefully the most recent reports the company has filed with the SEC and pay attention to the company’s financial statements, particularly if they are not audited or not certified by an accountant.

If the company does not file reports with the SEC, ask your broker if she has any information on the company.

They may have a ‘Rule 15c2-11 file’ containing basic facts about the company.

However, in reviewing the Rule 15c2-11 file, it is also important to keep in mind that this information may have become inaccurate or out-of-date, and your broker is not responsible for ensuring that the information in the file remains accurate and timely.

Check out the people running the company with your state securities regulator, and find out if they’ve ever made money for investors before.

Also ask whether the people running the company have had run-ins with the regulators or other investors.

Make sure the broker and his or her firm are registered with the SEC and licensed to do business in your state.

FINRA maintains a BrokerCheck website at where you can check the professional background of individual brokers and firms, as well as investment adviser firms and representatives.

Taking notes of answers


When you ask these questions, write down the answers you received and what you decided to do.

Let your broker or investment adviser know you’re taking notes.

They’ll know you’re a serious investor and may tell you more – or give up trying to scam you.

SEC has developed a form for taking notes at to help you.

You’ll find these and other useful publications on the Office of Investor Education and Advocacy section of the SEC’s website.


Also, watch out for these “red flags”


SEC Trading Suspensions

The SEC has the power to suspend trading in any stock for up to 10 days when it believes that information about the company is inaccurate or unreliable.

Think twice before investing in a company that’s been the subject of an SEC trading suspension.

You’ll find information about trading suspensions on the SEC’s website.

Assets Are Large But Revenues Are Small

Microcap companies sometimes assign high values on their financial statements to assets that have nothing to do with their business.

Find out whether there’s a valid explanation for low revenues, especially when the company claims to have large assets.

Odd Items in the Footnotes to the Financial Statements

Many microcap fraud schemes involve unusual transactions among individuals connected to the company.

These can be unusual loans or the exchange of questionable assets for company stock that may be discussed in the footnotes.

Unusual Auditing Issues

Be wary when a company’s auditors have refused to certify the company’s financial statements or if they’ve stated that the company may not have enough money to continue operating.

Also question any change of accountants.

Insiders have lots of shares

In many microcap fraud cases – especially “pump and dump” schemes – the company’s officers and promoters own significant amounts of the stock.

When one person or group controls most of the stock, they can more easily manipulate the stock’s price at your expense.

You can ask your broker or the company whether one person or group controls most of the company’s stock, but if the company is the subject of a scam, you may not get an honest answer.

Additional Red Flags

Don’t deal with brokers who refuse to provide you with written information about the investments they’re promoting.

Never tell a cold caller your social security number or numbers for your banking and securities accounts.


Piсking Pеnnу Stocks

Yоu wаnt tо knоw how to buу cheap ѕtосkѕ, likе Pink Shееt реnnу ѕtосkѕ? I аm gоing tо givе уоu ѕоmе tiрѕ оn рiсking реnnу ѕtосkѕ, how to find penny ѕtосkѕ thаt will bе good penny stocks. Thеѕе аrе ultrа-hаzаrdоuѕ invеѕtmеntѕ, ѕресulаtiоnѕ оnlу. Thеrе are mаnу ѕсаmѕ in these mаrkеtѕ. Smаll companies are еаѕiеr tо mаniрulаtе and thеу аrе еаѕу рrеу fоr short ѕеllеrѕ.

Penny Cоmраniеѕ

Pеnnу company managements usually put thе invеѕtоr firѕt – right after their оwn wаllеtѕ. Thеу mау рау themselves big ѕаlаriеѕ аnd реrkѕ. They mау raise mоnеу by using mаѕѕivе dilutiоn.

Dilution is selling stock bеlоw itѕ vаluе. Thiѕ reduces thе vаluе of your stock. They mау dumр their оwn stock on thе mаrkеt. Thеѕе соmраniеѕ mау аlѕо сruѕh уоur ѕtосk vаluе bу mаking ruinоuѕ reverse ѕрlitѕ. Mаnаgеmеnt mау ѕimрlу аbаndоn the соmраnу.

Whаt tо Lооk Fоr

Lооk firѕt fоr vаluе bу finding соmраniеѕ ѕеlling below bооk vаluе. Thiѕ mау bе imроѕѕiblе if information iѕ miѕѕing. Lооk for lоw mаrkеt capitalizations. Look fоr inѕidеr buуing. Look fоr рrераrаtiоnѕ for development, rеоrgаnizаtiоnѕ. If уоu have fоund value, thеn look for possible еxсitеmеnt. Get оut your сrуѕtаl ball – whаt will hарреn? Anticipate аnd predict. Call the соmраnу to find out mоrе but bе саrеful. Iѕ thе соmраnу dоing rеѕеаrсh, соming out with a nеw рrоduсt, lооking fоr a dеаl?

Hоw Stocks Mоvе

Stocks mоvе in a раttеrn оf ассumulаtiоn – mаrkuр – distribution. Yоu wаnt tо buy when the ѕtосk iѕ being ассumulаtеd fоr аn up move. Buy with thе ѕmаrt mоnеу. Avоid сhаѕing рriсе – lооk fоr gооd cheap buуѕ. Pеnnу ѕtосk соmраniеѕ оftеn hаvе hugе ѕwingѕ = mоmеntum.

Look аt the Chаrt

Lооk fоr соmраniеѕ with lоw mаrkеt vаluеѕ. Look for ѕtосkѕ mоving ѕidеwауѕ in раttеrnѕ thаt suggest thеу аrе being ассumulаtеd. Watch for breakouts оn thе uрѕidе. Do nоt сhаѕе price. I like tо рut in a low bid for the ѕtосk, fiѕhing fоr a bаrgаin. If I miѕѕ one ѕtосk, there iѕ аlwауѕ another bеhind it. Dо nоt wоrrу аbоut moves you miѕѕ, rather spend your timе lооking fоr mоvеѕ. Wаrning – thеѕе ѕtосkѕ саn turn оn a dimе. Dо nоt get carried аwау bу nеwѕ. Avоid ѕtосkѕ thаt are bеing hуреd, ѕuсh аѕ ѕраm ѕtосkѕ.

When tо Sell

Sell tоо soon! Sеll at the first ѕign аn uрtrеnd is brоkеn. Dо not аѕk whу. Yоu will find оut ѕix wееkѕ lаtеr whеn thе price iѕ down significantly – tоо late tо sell. Never аvеrаgе down in a реnnу ѕtосk! Thе fact that thе ѕtосk iѕ nоw half of its реаk mеаnѕ nоthing. Thе ѕtосk mау bе hеаdеd to zеrо. Livе to trаdе аnоthеr day. Thе biggеѕt оf thе реnnу ѕtосk tips iѕ to keep learning mоrе. Professional trаdеrѕ stay on top оf their game. Thеу ѕtudу еvеrуthing оut thеrе. They knоw the right infоrmаtiоn is worth tоnѕ оf money. Lеаrn frоm your miѕtаkеѕ аnd your profits.



The risk for investors: the Pump and Dump scheme

As said before, due to the low capitalization and the low trading activity, penny stocks may be manipulated by traders.

This phenomenon is referred to as “pump and dump” scheme.

Click here to see the SEC page dedicated to this practice.

The “Pump and dump” practice is a form of microcap stock fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the shares at a (much) higher price.

Once the price is finally up, the operators of the scheme “dump” their overvalued shares, and after that the price falls.

If in the meantime you bought the shares, the risk is that you paid a wrong and inflated price.

Basically the manipulators buy a huge amount of share, pump up the price by sending out announcements which could be misleading, or at least exaggerating the reality, and eventually sell the shares for a large profit.

The announcements are spread by the use of chat rooms or
stock message boards urging readers to rush and buy the stock,
professionally-looking newsletters,
spammy email marketing campaigns and even live seminars and fake press-releases.

In many cases, the interested parties pretend to have inside information on upcoming events that will positively and drastically change the scenario of the penny company.

The more the price increases, the higher the interest also by cold investors, which could lead to further purchases of shares and then to significant price spykes.

After the price has reached satisfactory levels, the manipulators just drop their own shares in the market making huge profits.

The stock is then left to its own destiny and the price bounces back down to normal levels.


Surveys and data from researches on Pump & Dump practice

Pump and dump stock scams are prevalent in spam, accounting for about 15% of spam e-mail messages.

A survey of 75,000 unsolicited emails sent between January 2004 and July 2005 concluded that spammers could make an average return of 4.29% by using this method, while recipients who act on the spam message typically lose close to 5.5% of their investment within two days.

A study by Böhme and Holz shows a similar effect.

Stocks targeted by spam are almost always penny stocks, selling for less than $5 per share, not traded on major exchanges, are thinly traded, and are difficult or impossible to sell short.

Pump and dump differs from many other forms of spam (such as advance fee fraud emails and lottery scam messages) in that it does not require the recipient to contact the spammer to collect supposed “winnings,” or to transfer money from supposed bank accounts.

This makes tracking the source of pump and dump spam difficult, and has also given rise to “minimalist” spam consisting of a small untraceable image file containing a picture of a stock symbol.

The Latest Variation of the “Pump and Dump” Scheme

The misdialed call

Some people are finding that they have received a “misdialed” call from a stranger, leaving a “hot” investment tip for a friend.

The message is designed to sound as if the speaker didn’t realize that he or she was leaving the hot tip on the wrong answering machine.

If you get a message like this, it’s not a wrong number at all.

Instead, it is from someone who is being paid to leave these messages on a whole lot of answering machines.

Check out “Wrong Numbers” and Stock Tips on Your Answering Machine for more information and to hear one of these scams.

The OffShore Scam

Under a rule known as “Regulation S,” companies do not have to register stock
they sell outside the United States to foreign or “off-shore” investors.

In the typical off-shore scam, an unscrupulous microcap company sells unregistered Reg S stock at a deep discount to fraudsters posing as foreign investors.

These fraudsters then sell the stock to U.S. investors at inflated prices and share the resulting profits with company insiders.

The flow of unregistered stock into the U.S. eventually causes the price to drop, leaving unsuspecting U.S. investors with losses.


Cases of Pump & Dump practice


Rapper 50 Cent

One notable example is rapper 50 Cent’s use of Twitter to cause the price of a penny stock (HNHI) to increase dramatically.

50 Cent had previously invested in 30 million shares of the company, and as a result made $8.7 million in profit.


Lithium Exploration Group

Lithium Exploration Group’s market capitalization soared to over $350 million after an extensive direct mail campaign.

The promotion drew upon the legitimate growth in production and use of lithium, while touting Lithium Exploration Group’s position within that sector.

According to the company’s December 31, 2010 form 10-Q (filed within months of the direct mail promotion), LEXG was a lithium company without assets and its revenues and assets at that time were zero.

Subsequently, the company did acquire lithium production/exploration properties, and addressed concerns raised in the press.


Stratton Oakmont

During the dot-com era, when stock-market fever was at its height and many
people spent significant amounts of time on stock Internet message boards, a 15-year-old named Jonathan Lebed showed how easy it was to use the Internet to run a successful pump and dump.

Lebed bought penny stocks and then promoted them on message boards, pointing at the price increase.

When other investors bought the stock, Lebed sold his for a profit, leaving the other investors holding the bag.

He came to the attention of the U.S. Securities and Exchange Commission (SEC), which filed a civil suit against him alleging security manipulation.

Lebed settled the charges by paying a fraction of his total gains.

He neither admitted nor denied wrongdoing, but promised not to manipulate securities in the future.




As late as April 2001, before the company’s collapse, Enron executives participated in an elaborate scheme of pump and dump, in addition to other illegal practices that fooled even the most experienced analysts on Wall Street.

Studies of the anonymous messages posted on the Yahoo board dedicated to Enron revealed predictive messages that the company was basically a house of cards, and that investors should bail out while the stock was good.

After Enron falsely reported profits which inflated the stock price, they covered the real numbers by using questionable accounting practices.

29 Enron executives sold overvalued stock for more than a billion dollars before the company went bankrupt.



Langbar International

Started as Crown Corporation, Langbar was the biggest pump and dump fraud on the Alternative Investment Market, part of the London Stock Exchange.

The company was at one point valued greater than $1 billion, based on supposed bank deposits in Brazil which did not exist.

None of the chief conspirators were convicted, although their whereabouts are known.

A patsy who made a negligent false statement about the assets was convicted and banned from being a director.

The investors who lost as much as £100 million sued one of the fraudsters and recovered £30 million.