Since penny stocks are inexpensive, investors often buy large quantities of shares without spending much money.
[10][11] In the United States, the SEC and the Financial Industry Regulatory Authority (FINRA) have specific rules to define and regulate the sale of penny stocks.
When the liquidity and price increase, the manipulator will sell their stock—known as a "pump and dump" scheme—which is a form of microcap stock fraud.
On April 3, 2017, the Federal Bureau of Investigation (FBI) reported on a story in which penny stock fraud was the focal point of the piece.
According to the article, California resident Zirk de Maison was found guilty of conducting a "pump and dump" scheme, during the course of which de Maison and his associates convinced large groups of investors to purchase shares of companies that he had set up as shell organizations.
[14] In more sophisticated versions of the fraud, individuals or organizations buy millions of shares, then use newsletter websites, chat rooms, stock message boards, fake press releases, or e-mail blasts to drive up interest in the stock.
[15] Very often, the perpetrator will claim to have "inside" information about impending news to persuade the unwitting investor to quickly buy the shares.
[16] The expanding use of the Internet and personal communication devices has made penny stock scams easier to perpetrate.
[17] Since the Securities & Exchange Commission allowed for the use of social media outlets like Twitter to disclose public information in lieu of press services, many fraudsters have set up accounts to take advantage of this higher level of traffic on social media,[18] giving investors another thing to consider when searching for viable sources of information.
[19] By 1989, American investors were being cheated out of at least $2 billion a year by schemes involving penny stocks.
"[19] In May 1997, an FBI sting operation led to charges against Louis Malpeso Jr., a reported Colombo crime family associate, for conspiring to commit securities fraud with stock broker Joseph DiBella and Robert Cattogio to inflate the price of penny stock "First Colonial Ventures".
Lithium Exploration Group's market capitalization soared to over $350 million after an extensive direct mail campaign.
[19] In the United States, regulators have defined a penny stock as a security that meets a number of specific standards.
These regulations proved effective in closing or greatly restricting broker/dealers, such as Blinder, Robinson & Company, which specialized in the penny stocks sector.