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Its prevalence has been estimated to run into the billions of dollars a year. Microcap stock fraud generally takes place among stocks traded on the OTC Bulletin Board and the Pink Sheets Electronic Quotation Service, stocks which usually do not meet the requirements to be listed on the stock exchanges. Many penny stocks , particularly those that trade for fractions of a cent, are thinly traded. They can become the target of stock promoters and manipulators.
This is referred to as a "pump and dump" scheme. The pump and dump is a form of microcap stock fraud. In more sophisticated versions of the fraud, individuals or organizations buy millions of shares, then use newsletter websites, chat rooms, stock message boards, press releases, or e-mail blasts to drive up interest in the stock.
Very often, the perpetrator will claim to have inside information about impending news to persuade the unwitting investor to quickly buy the shares.
When buying pressure pushes the share price up, the rise in price entices more people to believe the hype and to buy shares as well. Eventually the manipulators doing the "pumping" end up "dumping" when they sell their holdings. The expanding use of the Internet and personal communication devices has made penny stock scams easier to perpetrate. The promotion drew upon the legitimate growth in production and use of lithium, while touting Lithium Exploration Groups position within that sector.
According to the company's December 31, form Q filed within months of the direct mail promotion , LEXG was a lithium company without assets. Its revenues and assets at that time were zero.
Penny stock companies often have low liquidity. Investors may encounter difficulty selling their positions after the buying pressure has abated, and the manipulators have fled. A chop stock is an equity, usually trading on the Nasdaq Stock Market, OTC Bulletin Board or Pink Sheets listing services, that is purchased at pennies per share and sold by unscrupulous stock brokers to unsuspecting retail customers at several dollars per share. This practice differs from a pump and dump in that the brokerages make money, in addition to hyping the stock, by marketing a security they purchase at a deep discount.
The subject stocks usually have little or no liquidity prior to the block purchase. For this reason, there is a large benefit and an inherent conflict of interest for the firm and the broker to sell these "proprietary products".
In fact, it is not required that this profit spread be disclosed to the client, since it is not technically a "commission". When a brokerage house sells such stock from its own inventory, a client will receive a trade confirmation stating the transaction was done as "Riskless Principal" or "Markup", which in fact, just like commissions, is also revenue to the firm, and such a practice is often subject to abuse. But even though it is still legal, it is frowned upon by the Securities Exchange Commission, and they are using other laws and methods of attack to indirectly thwart the practice.
Microcap fraud has been a major source of income for organized crime. The Russian Mafia is also involved with this type of microcap stock fraud. Mafia involvement in s stock swindles was first explored by investigative reporter Gary Weiss in a December Business Week article.
Organized crime elements were believed to have been short-selling chop stocks in the late s. One method of regulating and restricting pump-and-dump manipulators is to target the category of stocks most often associated with this scheme. To that end, penny stocks have been the target of heightened enforcement efforts. 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. Although penny stock trading in the United States is now primarily controlled through rules and regulations enforced by the U. The State of Georgia was the first state to codify a comprehensive penny stock securities law. Morton , the only stockbroker in the Georgia General Assembly at the time, was principal sponsor of the bill in the House of Representatives.
Georgia's penny stock law was subsequently challenged in court. However, the law was eventually upheld in U. District Court ,  and the statute became the template for laws enacted in other states. Meyer Blinder was jailed for securities fraud in , after the collapse of his firm. Income Tax Authorities in India in unearthed the 1. Around 25 premises were raided in Mumbai and 10 in Bangalore. After the raids, the Additional Commissioner set up a team and investigated this scam.
They pursued the investigations and issued orders on December 31, that are said to have national ramifications. The team found that the traders had ramped up penny stocks to launder money an organised crime and a serious economic offence that has misused provisions of the Securities and Exchange Board of India and Registrar of Co-operatives. This route is chosen to use capital gains tax and legalise the unaccounted money. On April 28, the Central Board of Direct Taxes and the Ministry of Finance billed the case as the best investigation and assessment order of the year.
The team picked up accounts of 30 Chikpet traders who were into penny stocks and found bogus claims through capital gains. The finding has also debunked the claim that demat is sacrosanct though the depository participation did not have any role in the manipulation, the demat procedure was misused. From Wikipedia, the free encyclopedia. United States Securities and Exchange Commission. Retrieved 18 October Securities and Exchange Commission. Retrieved 21 November Financial Industry Regulatory Authority.
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Organized Crime on Wall Street R. Henriques February 16, Archived from the original on 12 January The Times Of India. Benefit Electoral Medicare Visa Welfare. Retrieved from " https: Spamming Finance fraud Financial crimes Organized crime activity Stock market.