Microcap stock fraud

Very often, the perpetrator will claim to have inside information about impending news to persuade the unwitting investor to quickly buy the shares.

[7] The expanding use of the Internet and personal communication devices has made penny stock scams easier to perpetrate.

[8] Though not a scam per se, one notable example is rapper 50 Cent's use of Twitter to cause the price of a penny stock (HNHI) to increase dramatically.

Described (but perhaps overstated) as "the biggest stock promotion of all time", Lithium Exploration Group's market capitalization soared to over $350 million after an extensive direct mail campaign.

[1][3] This practice differs from a pump and dump in that the brokerages make money not strictly by hyping the stock, but rather primarily by marketing the security at a deep discount to their own purchasing price.

After the block is purchased, the firm's participating brokers will sell the stock to their brokerage customers at the then-current quoted offer/ask price, to the often victimized investors who are generally unaware of this practice.

When a securities dealer sells such instruments 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.

[citation needed] Mafia involvement in 1990s stock swindles was first explored by investigative reporter Gary Weiss in a December 1996 Business Week article.

In the United States, regulators have defined a penny stock as a security that must meet a number of specific standards.

These regulations proved effective in either closing or greatly restricting brokers/dealers, such as Blinder, Robinson & Company, which specialized in the penny stocks sector.

[31] However, sanctions under these specific regulations lack an effective means to address pump-and-dump schemes perpetrated by unregistered groups and individuals.