Microcap stock fraud is a form of securities fraud involving the shares of a "microcap" company, generally defined in the United States as those with a market capitalization of under $ 250 million. Prevalence is estimated to reach billions of dollars a year. Many microcap stocks are penny stocks, which SEC defines as securities trading less than $ 5 per share, are not listed on the national exchange, and fail to meet other specific criteria.
Microcap's stock theft generally occurs between shares traded on the OTC Bulletin Board and the Pink Sheets Electronic Quotation Service, a stock that usually does not meet the requirements to be listed on the stock exchange. Some fraud occurs among stocks traded on the NASDAQ Small Cap Markets, now called NASDAQ Capital Markets.
Microcap scams include several types of investor fraud:
- Pump and throw the scheme, which involves the use of false or misleading statements to mock stock, which is "thrown" at the public at an inflated price. The scheme involves telemarketing and Internet fraud.
- Cut shares , which are shares that are bought with pennies and sold with dollars, provide brokers and stock promoters large profits. Brokers are often paid "under the table" undisclosed payments to sell the shares. Scheme
- Dump and dilute , where companies repeatedly issue shares for no reason other than taking investors' money. Companies using such schemes tend to periodically reverse stocks.
- Other unscrupulous broker practices, including "bait-and-switch", unauthorized trading, and "no net sales" where customers are prohibited or discouraged from selling shares.
Video Microcap stock fraud
Pump and remove
Many penny stocks, especially those who trade in penny fractions, are traded thin. They can be the target of promoters and stock manipulators. These manipulators first purchase large quantities of stock, then raise the price of shares through misleading and misleading positive statements, and then sell their shares with big profits. This is called the "pump and disposal" scheme. Pumps and dumps are a form of microcap stock fraud. In a more sophisticated version of fraud, individuals or organizations buy millions of shares, then use bulletin websites, chat rooms, stock message boards, press releases, or e-mail explosions to increase interest in stocks. Very often, the offender will claim to have inside information about upcoming news to persuade an unconscious investor to immediately purchase the stock. When buying pressure pushing up stock prices, price increases attract more people to believe in hype and buy stocks as well. Finally the manipulators who do the "pumping" eventually "throw" when they sell their holdings.
The widespread use of internet and personal communication devices has made penny stock fraud easier. Although not a scam per se, one noteworthy example is rapper 50 Cent uses Twitter to cause the penny stock price (HNHI) to increase dramatically. 50 Cent has previously bought 30 million shares of the company, and as a result generated a profit of $ 8.7 million. Another example of an activity that limits the boundary between legitimate promotions and hype is the LEXG case. Described (but perhaps exaggerated) as "the greatest shareholder promotion of all time", the market capitalization of the Lithium Exploration Group jumped to more than $ 350 million after a vast direct mail campaign. This promotion leverages legitimate growth in the production and use of lithium, while touting the position of the Lithium Exploration Group within the sector. According to the company on December 31, 2010, the 10-Q form (submitted within months of direct mail promotion), LEXG is a lithium company with no assets. Revenue and assets are now zero. Furthermore, the company acquired the lithium production/exploration property, and addressed the concerns that arose in the media.
Penny stock companies often have low liquidity. Investors may have trouble selling their positions after buying pressure eases, and the manipulators have run away.
Maps Microcap stock fraud
Stop stock
Chop shares are equities, usually trading on the Nasdaq Stock Market, the OTC Bulletin Board or the Pink Sheet list service, which is bought for a share price and sold by unscrupulous stock brokers to unsuspecting retail customers at a few dollars per share.
This practice is different from pumps and dumps where brokers make money, in addition to hypnotizing stocks, by marketing the security they buy at great discounts. In this practice, brokerage firms generally acquire stock blocks by purchasing large blocks of securities (usually from large shareholders not affiliated with the underlying company) at negotiated prices well below the current market price (typically 40% to 50% below price supply/demand at that time) or acquire shares as payment for consultation agreement.
Subject shares usually have little or no liquidity before block purchases. Once a block is purchased, participating brokers will sell the shares to their broker's customers at the current bid/demand price, to the often victimized investor who is generally unaware of this practice. This big difference, or "spread" between the offer price/demand offered at that time and the very high discount price, the block of shares purchased almost always distributed with stock brokers in companies that ask for trade. For this reason, there are major advantages and conflicts of interest inherent in firms and brokers to sell these "exclusive products".
Because firms are technically "at risk" in the stock block (if stock prices fall below the price when the block is purchased, the company will lose the stock) and the stock is usually sold at or even slightly below the current market offer price/demand, legal in the United States. In fact, it is not necessary that the spread of this profit be disclosed to the client, as it is not technically a "commission". When a brokerage firm sells the stock from its own inventory, the client will receive a trade confirmation stating that the transaction is performed as a "No Risks Principle" or "Markup", which, in fact, is like commissions, also revenue for the company, and such practices it is often misused. Only the total amount charged over and above the bid/demand is a commission, and must be disclosed. But while it is still legal, it is condemned by the Stock Exchange Commission, and they use other laws and methods of attack to indirectly thwart the practice.
Organized crime engagement
Microcap scams have become a major source of income for organized crime. Mafia figures from each of the Five New York mafia Families, as well as the New Jersey masses, have been involved in stock fraud. Russian Mafia is also involved with microcap stock scams.
Mafia involvement in the 1990s, stock fraud was first explored by investigative reporter Gary Weiss in a December 1996 article Business Week. Weiss then explored the Wall Street Mafia scam in a book.
Organized crime is believed to have sold chop stocks in the late 1990s.
Penny stock rules
One method of arranging and limiting pump-and-dump manipulators is by targeting the stock categories most often associated with this scheme. To that end, penny stock has become the target of high law enforcement efforts. In the United States, regulators have set up the money stock as a security that must meet certain standards. Criteria include price, market capitalization, and minimum shareholder equity. Securities traded on the national stock exchange, regardless of price, are exempt from appointment of the regulation as penny stock, since it is estimated that exchange-traded securities are less prone to manipulation. Therefore, CitiGroup (NYSE: C) and other NYSE securities traded under $ 1.00 during the downward market from 2008-2009, while considered as "low-value" securities, are technically not "penny stocks". Although stock trading in the United States today is mainly controlled by the rules and regulations imposed by the US Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA), the origins of these controls are found in State securities laws. The State of Georgia was the first country to codify comprehensive stock securities laws. Secretary of State Max Cleland, whose office imposes state securities laws is a major supporter of the law. Representative Chesley V. Morton, the only stockbroker in Georgia's General Assembly at the time, was the main sponsor of the bill in the House of Representatives. Georgia penny stock law was then challenged in court. However, the law was finally enforced in the US District Court, and the law became the framework for laws enacted in other countries. Shortly thereafter, both FINRA and SEC enacted a comprehensive revision of their penny stock regulations. This rule proves to be effective either in closing or severely limiting the broker/dealer, such as Blinder, Robinson & amp; The company, which is specialized in penny stock sector. Meyer Blinder was imprisoned for securities fraud in 1992, following the collapse of his company. However, sanctions under this particular regulation do not have an effective means of overcoming the pump-and-disposal schemes undertaken by unregistered groups and individuals.
Penny stock scam India
The Indian Income Tax Authority in 2006 found a $ 1.6 million fraud in Bangalore. The fraud was a collapse of the national income tax raids at employers' premises in April 2006, suspecting large-scale money laundering and tax evasion through increases in small-company stocks. About 25 places were raided in Mumbai and 10 in Bangalore. After the raid, the Supplementary Commissioner formed a team and investigated the fraud. They pursued an investigation and issued an order on December 31, 2008 which is said to have national consequences. The team found that traders have increased penny stocks to launder money organized crime and serious economic violations that have abused the terms of the Securities and Exchange Board of India and the Registrar of Co-operatives. This route is chosen to use capital gains tax and legalize countless money. On April 28, the Central Board of Direct Tax and the Treasury Department charged this case as the best inquiry and appraisal this year. The team took accounts of 30 Chikpet merchants who became penny stocks and found false claims through capital gains.
This finding also dismantles claims that demat is sacred even though storage participation has no role in manipulation, misuse of demat procedures.
In popular culture
Microcap's stock fraud has been explored in several books and movies:
- A book that investigates microcap fraud is Gary Weiss's 2003 book "Born to Steal . It describes the micro underworld of the 1990s through the eyes of a young broker named Louis Pasciuto. Although this book focuses on mafia broker infiltration, it also explains in detail the operation of microcap fraud.
- Microcap scams are explored in anonymously written books License to Steal and in The Scorpion and the Frog. Both of these books explore the pump-and-disposal schemes in detail but, Unlike Born to Steal , do not provide the real name of the particular company and the people described.
- This kind of cheating also gives the title of the book by Robert H. Tillman and Michael L. Indergaard called Pumps and Dumps: New Economic Rancid Rules .
- Fictitious accounts of pump-and-waste schemes can be seen in the Movie Boiler Room . According to press reports, the film director and writer worked briefly as a cold caller for Oakton Stratton brokerage house, which was shut down by regulators in the late 1990s. Stratton Oakmont is run by Jordan Belfort, who is jailed for fraud, and whose memoir, The Wolf of Wall Street, is the foundation of the 2013 film by Martin Scorsese.
- A pump-and-dump scam is also the subject of several episodes of the popular HBO series, The Sopranos , drawn by Christopher Moltisanti, Matthew Bevilaqua and Sean Gismonte.
- In the drama episode Legal & amp; Order , entitled "This Trade", the murder of a young stockbroker at a prestigious company was found to be related to his boss's involvement in several pump-and-dump scams financed by members of the Mafia criminal family. Similarly, in the first computer game franchise, Legal & amp; Order: Dead on the Money , the victim is a female stockbroker under investigation for pump-and-dump fraud involving a suspicious IPO of the company's biotech.
- This strategy is also proclaimed by Jeffrey Archer in his book Not Penny More, Not a Penny Less .
References
Further reading
- Gary Weiss, Born to Steal: When the Mafia Hit Wall Street (2003, ISBNÃ, 0-446-52857-9)
External links
- OAG New York report about micro hat scams
- 1997 Articles on stock chop and stock fraud, from Business Week
- SEC Testimony on Organized Crime in the Markets, September 13, 2000
- Chop Stock Suey
- Investors Beware: Cutting Stock Up Stock
Source of the article : Wikipedia
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