FINRA & SEC Issue Investor Warning on Penny Stock Fraudsters

The Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission's (SEC) Office of Investor Education and Advocacy has

finraThe Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission’s (SEC) Office of Investor Education and Advocacy have released a warning to investors over volatile penny stocks.

Investors trade with myriad financial instruments everyday, all of which carry some degree of risk, whether it be FX, binary options, equities, etc. FINRA and the SEC both are responsible for policing financial markets, most recently including a $6 million fine of Merrill Lynch.

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The recent warning however comes amid penny stock trading, which underscores the vulnerability investors face against pump-and-dump schemes. More specifically, fraudsters will purposely buy shares of very low-priced stocks and then spread false or misleading information to pump up the price, in turn leading to steep sell-offs and worthless shares of stock.

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According to Gerri Walsh, FINRA’s Senior Vice President for Investor Education, in a recent statement on the warning, “Investors should be on the lookout for press releases, tweets or posts aggressively promoting companies poised for explosive growth because of their ‘hot’ new product. In reality, the company may be a shell, and the people behind the touts may be pump-and-dump scammers looking to lighten your wallet.”

“Fraudsters continue to try to use dormant shell company scams to manipulate stock prices to the detriment of everyday investors. Before investing in any company, investors should always remember to check out the company thoroughly,” added Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy, in an accompanying statement.

According to the official alert as released by both FINRA and the SEC, investors should adhere to the following tips:

  • Research whether the company has been dormant—and brought back to life. You can search the company name or trading symbol in the SEC’s EDGAR database to see when the company may have last filed periodic reports.
  • Know where the stock trades. Most stock pump-and-dump schemes involve stocks that do not trade on The NASDAQ Stock Market, the New York Stock Exchange or other registered national securities exchanges.
  • Be wary of frequent changes to a company’s name or business focus. Name changes and the potential for manipulation often go hand in hand.
  • Check for mammoth reverse splits. A dormant shell company might carry out a 1-for-20,000 or even 1-for-50,000 reverse split.
  • Know that “Q” is for caution. A stock symbol with a fifth letter “Q” at the end denotes that the company has filed for bankruptcy.
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