Investors Beware of Pink Sheet Penny Stock Scams

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As more broker dealers are edging away from the commission model and gearing towards the money management model it is eliminating the opportunities of yesteryear for stockbrokers. If they are not in the money management game then they are systematically having their livelihood chopped down one stock at a time. This may be a good thing for investors potentially but as with what transpired during the days of Stratton Oakmont, we may see a resurgence of the chop houses pushing less desirable securities to unsuspecting dice rollers so that these promoters and stockbrokers can supplement their income.

Now using the term less desirable just means securities that are borderline shell deals and provide their own level of risk. These usually trade on the OTC Pink Sheets or now referred to as the Pink Open Market which you can find on OTC Markets and they may be listed there due to them being listed on a foreign exchange or if they are a US based company they are listed there because they may be in financial distress or in default and are the most speculative of all of OTC Markets Group’s platforms.

These penny stock companies on the Pink Open Market do not have to adhere to any particular disclosure requirements or financial standards, basically a company traded on that platform can have zero assets but still have a market cap. This is deceiving to investors as they have no way to really value these companies, which for the most part just may be blank check companies or publicly traded shell companies.

There are a cornucopia of different companies that trade on this exchange and their risk level, even at the lowest, is pretty high. So if you are not a sophisticated investor you should run for the hills because you will not know what hit you once the rug is pulled out from underneath you. The companies listed there could be delinquent companies, very dark companies and so much worse.

Some of these companies have negative assets on the balance sheets and still by some special skill set of overseas and even domestic stock promoters and brokers have the ability to take a company that has little to no value, that may have been trading at 10 cents and run the stock up into the $1-5 range only to see the stock slide down once the promoter has their fill and there are no other investors to throw into the den.

Back during the Stratton Oakmont days there were a number of boutique brokerage firms that preyed on investors by pushing these type of empty companies and taking big cuts for doing so, these illiquid securities were on the Pink Sheets and OTCBB market during that time, now they are primarily on the Pink Open Market as OTC Market Group does put certain things in place to try to prevent fraud and scam companies but they can only do so much.

If you watch the movie “Wolf of Wall Street” you will see some of what transpired during that time but the funny thing is that they were doing this with Nasdaq listed companies and not just penny stocks, but trust me there were more than enough scam brokerage firms robbing investors blind with penny stocks and probably a handful still doing it now, even with major regulations being in place. But that’s why such promoters and stockbrokers get banned, jailed and fined.

These Pink Sheet companies are classified into a few different categories to at least give an investor a fighting chance when they are doing their due diligence and its based on the quality and quantity of the information that they provide to investors.

Current information companies are probably the easiest to do due diligence on as they follow the rules in some respect and are probably seeking to up list to a higher market, so they adhere to the International Reporting Standard or the Alternative Reporting Standard, basically both paths offer investors real information to work with and they are publicly available through OTC Disclosure. Even then those penny stocks may just filing 10Q’s, 10K’s, 8K’s and such just to keep somewhat current and not become a shell risk or have the skull and crossbones on their listing.

Then you have companies that provide limited information and they are usually companies in trouble, in some type of financial distress, accounting issues and even bankruptcy. You also have companies that just refuse to meet the OTC Pink Basic Disclosure Guidelines which is a big red flag across the board. Lastly you have the companies that provide no information at all and those are the ones you run for the hills from.

Any broker dealer that provides a market for these securities in the USA are regulated by FINRA and registered with the SEC, this is in an effort to provide the best execution for a trade but all of that doesn’t matter if the penny stock is being run up on hot air only to come tumbling down at some point when it hits its high point and all the promoters and special shareholders have dumped their shares on unassuming investors which will leave a bunch of people holding the bag in the end.

The run up may attract risk takers to roll the dice and jump in and out but most times the spread is so wide that its almost impossible to make those quick trades so the risk is hour to hour, literally. The FBI once informed by the SEC or other authorities do keep a close eye on situations such as this but they more than likely won’t strike until later on which doesn’t help investors today but they do look into these pump and dump deals.

One way that these pump and dumpers avoid US persecution is by conducting their trading activities overseas, dealing with overseas investors where regulators may not come at that so harshly, it is widely known that penny stock companies that are based in Canada but trade on the Pink Open Market or the OTCQB, which is the venture market, are notorious for pump and dump schemes as well as issuing stock at will. Amazing that this is possible but it is, scary actually, kind of like when Vanderbilt got scammed from a company printing millions of shares of their own stock in their basement.

So if you are an investor and are pitched a company that shows “SHELL RISK” then run run and keep running, your money is better used to light your fireplace as opposed to filling someone else’s pockets up.
Another red flag is when a company rolls their stock back and then all of a sudden you begin to see heavy activity and the stock moving up fast, all this means is that all the poor schmucks from the last circus with the same stock got pushed out of the shares and now new ones are buying it. Its how this all works folks, it’s a rough and tumble atmosphere that is not for the faint of heart, if you can’t take the risk then don’t buy the penny stocks, if you lose your investment then don’t cry about it because you have been warned, well at least by me at this point.

Keep in mind just because a penny stock is up to date with their financial reporting doesn’t make it a good investment , it just means they are showing you part of their hands however if you choose to dive into a publicly traded company like that just know the risks as they are high, know that you make lose all of your investment.

I’d recommend listening to the Watchdog on Wall Street Podcast where Christopher Markowski takes on Wall Street and the Scams for the benefit of the people.
https://watchdogonwallstreet.com/

This is also good reading which will allow investors to be informed from Investopia , it highlights the mechanics of a Pump and Dump scam: “The stock is usually promoted as a “hot tip” or “the next big thing” with details of an upcoming news announcement that will “send the stock through the roof.” The details of each individual pump and dump scam tend to be different but the scheme always boils down to a basic principle: shifting supply and demand.” https://www.investopedia.com/ask/answers/05/061205.asp

Additional Articles to take a look at:
“Why do people buy a stock even when they know there’s a good chance its price is manipulated? Because they want to get rich, whatever the risks.”
https://qz.com/1148413/people-invest-in-penny-stock-scams-even-when-they-know-they-are-scams/

“No stock quadruples or quintuples in price over a few days and continues to rise. What goes up really does come down, usually as quickly as it went up. When touts say a stock is about to “go parabolic,” that’s often literally the case. It may well return to the range it traded in before it was pumped.”
https://www.securitieslawyer101.com/2018/how-to-spot-a-penny-stock-scam/

“The Securities and Exchange Commission charged three men who live in Israel in connection with a penny-stock scam that may have wider implications. The SEC says the three men bought shares in microcap stocks, and then pumped them up via thousands of promotional emails so they could dump the stock later at inflated prices and for substantial profits.”
https://www.marketwatch.com/story/sec-penny-stock-scam-charges-may-be-related-to-jp-morgan-computer-hack-2015-07-22

“Two US businessmen made more than $15 million over five years by allegedly scamming “elderly and unsophisticated” pensioners through an elaborate pump-and-dump scheme that stretched from Florida to Switzerland to Colombia, according to the FBI and SEC. Michael J. Black and Garrett O’Rourke acquired millions of shares in small public companies for as little as one ten-thousandth of a cent—that’s $0.000001—while hiding their ownership stakes by funneling the stocks through shells based offshore in Malta, according to an FBI affidavit reviewed by Quartz”.
https://qz.com/1675811/how-an-undercover-fbi-sting-busted-a-multimillion-dollar-stock-fraud/


“The temptations of penny stocks are legion. It’s hard to resist a cheap stock, especially a “sub-penny,” which is worth a teensy fraction of a cent. Loading up on a few hundred thousand shares looks impressive on your account statements and holds out the promise of massive profits if the company succeeds. Unfortunately, most penny stocks will stay just that, and there are more scams than legitimate opportunities in this corner of the investment world.”

https://finance.zacks.com/avoid-penny-stock-scams-9617.html


“However, the SEC found that a quarter of the money raised went to pay personal expenses, while another quarter of the amount raised ultimately paid for undisclosed commissions. The defendants named in the case were NIT Enterprises’ CEO Gary R. Smith plus Jason M. Ganton, and James E. Cleary, Jr., and the SEC clarified that Ganton and Cleary were both previously banned by the SEC regarding selling penny stocks. “
https://securityaffairs.co/wordpress/94869/cyber-crime/penny-stock-scam.html

“Here’s how the stock spammers make their money. Before doing any spamming, they buy up a lot of shares in a penny stock—let’s call it “X Co” with ticker symbol XCOM. I can buy, say, 100,000 shares of XCOM for just $1000 if it’s trading at $0.01 (one cent) per share. If I can drive the price up to just $0.02 (two cents) I can double my money. If I can drive it up to just $0.03 (three cents) I can triple my money. So, after I buy a big load of XCOM shares at one cent each, I send out a massive spam to millions of people. It says something like, “Hey, have you heard the news about XCOM that’s going to be released tomorrow? This stock is going to explode! Get in now and you’ll make a fortune with XCOM!”
https://scamhunter.org/how-do-penny-stock-scams-work/

J.Stein

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