The Problem(s) with Penny Stocks.
What’s the problem? Well, the problem is that there are MANY problems with Penny Stocks!
We can start by looking at the most egregious of ways people got ripped off. I suppose we could look at the sentencing rules to determine which of these ways is the “worst”, but that’s outside the scope of this discussion. We gotta start somewhere, so let’s start with…
FRAUD
Fraud manifests in many ways, but can generally be defined as the result of “fraudulent activity”… activity performed with an intent to deceive an investor regardless of whether it results in a profit for the fraudster or results in a loss for the investor. On a corporate level, this can happen when a company issues shares that it knows has no value, and are later sold to investors who have been intentionally deceived into thinking that those shares have greater than their actual value. And/or when such a company intentionally lies about how much money they’re making or how much money they have.
Generally, INTENT plays a major role, where the fraudster has no intentions to adhere to the truth, but has intentions to profit from being untruthful or in some cases simply intends to shield theirself from financial harm or cause financial harm to others.
Fraud can also occur at the Broker-Dealer/Advisor level, though outright fraud tends to be a little less common. One way it can occur is not so much from a broker facilitating a transaction for you, but more so from a Registered Investment Advisor who fradulently advises you on your holdings and/or fraudulently informs you of the transactions in your account (see Bernie Madoff).
While the following link is wholly unassociated with my website, I strongly encourage you to check out the Investor.gov website and their section on Fraud.