Trading & Online Business


5 Penny Stock Fraud Schemes

We have all heard of penny stocks and you may know someone who has made money in a penny stock where they put in a small investment and yielded a huge return.  With that type of reputation, it is easy to get swept up in the idea of making big money in penny stocks, also known as microcap stock.  Fraudsters take advantage of the penny stock reputation to victimize investors.  There are various fraud schemes existing that criminals can use to try to convince investors to give up their hard earned money.

  1. The famous “pump-and-dump” schemeA “pump-and-dump” scheme is where fraudsters attempt to boost the reputation of one specific stock that they own and ask investors to invest similarly in that stock. The stock that they are suggesting is a legitimate stock of a real company, however, often the company behind the stock is failing.  Once enough people have invested in the stock, the fraudsters sell the stock for a large profit leaving the other investors with a worthless stock.Image result for 5 Penny Stock Fraud Schemes
  2. Advance service fee schemeFor this type of scheme, the fraudster sets up call centers or other contact centers that are designed to convince investors to pay for service fees for selling underperforming stocks. The victims of this type of stock fraud scheme are, at times, already victims of a different type of penny stock scheme and would like to get out of the stock.
  3. Microcap Fund fraudA microcap stock is often a low-price stock issued by incredibly small companies. Not much information is available publicly about these stocks.  The lack of information makes it extremely easy for fraudster to spread false information about a stock and provide potential investors with a stock recommendation.  Microcap Funds are an attempt to use the reputation of the penny stock and the reputation of the mutual fund in one swoop.  Mutual funds are often seen as a safer investment option because it is an automatic diversification of a portfolio.  However, when a fraudster offers this option it may be a grouping of shell companies that the fraudsters have a stake or an interest in.
  4. The Chop Stock schemeThe chop stock scheme is similar to the “pump-and-dump”, where the stocks are purchased for pennies but instead of an individual making the money on the stock it is a stock broker. Stock brokers will recommend and sell the penny stock to retail customers at an inflated price, often several dollars per share above asking price.  Because of the difference in the asking price and the inflated purchase price it is seen as a conflict of interest, should you become a victim of this type of stock fraud find a securities attorney to work your case against the brokerage.
  5. The Pyramid schemeIn slang the pyramid scheme is called, “the bigger fool theory”. Which means that a person who has invested in a penny stock needs to find another investor to sell his/her stock to at a higher rate in order to make any money.  This can be done on an individual level or it can be done through a stock broker who is robbing Peter to pay Paul.  Either way, often times, once the transaction is complete the fraudster typically disappears.


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