Penny Stock Fraud

I have added a new category to this blog, Penny Stock Scams. Before I go on, let me define what a "penny stock" is. Fidelity, a large online brokerage firm, defines penny stocks:

The key issues to me for penny stocks are the low price and trading over the counter.

I created this new category here today, but I have long been concerned about penny stock fraud. I bought a domain 8 years ago and will be renewing it again next week. The domain points here now, but it has been pointed to a spot on my New Cannabis Ventures website for a long time. Why? Well, there are a lot of penny stock frauds among cannabis companies. When I first started covering the space in 2013, there were even more.

Not All Penny Stocks Are Fraudulent

I like when a stock trades on a major exchange, like NASDAQ or the NYSE, but many do not. Instead, they trade over the counter (OTC). Many institutional investors are not permitted to invest in OTC stocks, and the filing requirements are substantially weaker than for listed stocks, which file their financials and other reports with the SEC.

Many investors in the cannabis space are turned off by the fact that cannabis producers trade OTC and not on a higher exchange. While there seem to be some scams among cannabis-related companies, many file with the SEC. The reason they are not trading on NASDAQ or the NYSE is that those exchanges refuse to include them. This is their own decision, and not a specific law that stops them, though there are federal laws that do play a role, like "Know Your Customer" and anti-money laundering rules. I have been watching these exchanges for years regarding potential changes they might make, but I have never seen anything in writing from them.

I think a good question for investors is this: Why trade on the OTC and not a higher exchange? For many companies that would like to trade on a higher exchange, the cost of doing so stands in the way. There is an initial listing fee as well as annual fees to stay listed.

Penny Stock Frauds Are Dangerous

Sometimes the fraud is simple in its objective: keeping the insiders earning a paycheck. It can be more complex than this, though, and can often deal with money achieved through conversion of stock into cash.

Many times, the frauds are being conducted by those not directly involved with the company's operations. Ponzi schemes and pyramid schemes can be run by the money people behind a scam. You have probably heard the terms "pump and dump" or perhaps "chop stocks." There are brokers out there that push penny stocks. Even research can be fraudulent, a creation of the scammers to help encourage interest in the penny stock.

One resource that you can use if you are contacted by a broker is BrokerCheck, provided by FINRA.

Stock fraud has been going on for a long time and can take place in lots of different ways. The Office of the Comptroller of the Currency published a piece about investment fraud that details common methods. The article includes ways to report it.

Finally, be careful with social media. Insiders who are being fraudulent can use it to promote their stocks, and the scammers who are not inside can do so as well. Even the victims can cheer on these stocks that they are long.

Conclusion

Not all penny stocks are frauds, and some listed companies turn out to be fraudulent. I am very much against fraud in general, and I have developed a passion against stock fraud.

I wrote a few articles here on this subject (about cannabis stocks) recently, and I intend to write more about penny stock frauds. I try to be careful and to use the word "potentially" as I detail what I see that bothers me. I have no financial benefit if the stock proves to be a fraud, as I am not trading penny stocks personally.

For anyone that has a potentially fraudulent penny stock they would like me to investigate, you can post a comment or email me. I am happy to look into the issues. Yes, I can be the penny stock scam sheriff!