One increasingly common type of securities fraud is the so-called “Microcap stock fraud.” The microcap stock fraud is a form of securities fraud involving stocks of “microcap” companies, generally defined in the United States as those with a market capitalization of under $250 million. Its prevalence has been estimated to run into the billions of dollars a year. Many microcap stocks are penny stocks, which trade at below $5 a share.
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. Some fraud occurs among stocks traded on the NASDAQ Small Cap Market, now called the NASDAQ Capital Market.
Microcap fraud encompasses several types of investor fraud:
• Pump and dump schemes, involving use of false or misleading statements to hype stocks, which are “dumped” on the public at inflated prices. Such schemes involve telemarketing and Internet fraud.[5]
• Chop stocks, which are stocks purchased for pennies and sold for dollars, providing both brokers and stock promoters massive profits. Brokers are often paid “under the table” undisclosed payoffs to sell such stocks.[6][7]
• Other unscrupulous brokerage practices, including “bait and switch,” unauthorized trading, and “no net sales” policies in which customers are prohibited or discouraged from selling stocks.
If your financial advisor is pushing penny stocks, he may have a pecuniary interest in doing so. This securities fraud scheme is common throughout the country, but has also been seen in the South Florida area. For example, the SEC recently brought an action entitled In the Matter of Newbridge Securities Corp., Guy S. Amico, Scott H. Goldstein, Eric M. Vallejo, and Daniel M. Kantrowit. The Commission issued an Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, and Sections 15(b) and 21C of the Securities Exchange Act of 1934 (Order) against Newbridge Securities Corp., Guy S. Amico, Scott H. Goldstein, Eric M. Vallejo, and Daniel M. Kantrowitz. The Division of Enforcement alleges in the Order that in 2003 and 2004, while associated as a registered representative with Newbridge, Kantrowitz used Newbridge’s market making capacity to manipulate the shares of Roanoke Technology Corp. and Concorde America, Inc., respectively. The Order further alleges that Newbridge and Kantrowitz participated in the unregistered distribution of Roanoke securities.
The Order alleges that in October 2002 and December 2003, Newbridge was advised by the Commission’s examination staff of supervisory failures at Newbridge’s trading desk. The Order also alleges that, despite these warnings, Newbridge failed to develop and implement policies, procedures, and systems reasonably designed to prevent and detect Kantrowitz’s manipulation of Roanoke and Concorde securities and his and Newbridge’s participation in the Roanoke unregistered distribution. The Order further alleges that Newbridge, and Amico and Goldstein, Newbridge’s president and chief executive officer, respectively, failed reasonably to supervise Kantrowitz in connection with his activities in Roanoke and Concorde. In addition, the Order alleges that Vallejo, Newbridge’s head trader, failed reasonably to supervise Kantrowitz in connection with his manipulation of Roanoke and Concorde securities.
Unfortunately, Newbridge Securities is not the only broker dealer implicated in an alleged pump and dump scheme. Such schemes are increasingly common. If your financial advisor is recommending penny stocks or large purchases of a small company, the broker may have a financial incentive in doing so and you should consider whether to continue investing with this financial advisor.
If you believe that you have been the victim of a pump and dump securities fraud scheme, or some other type of securities fraud, The White Law Group can help. To speak to a securities attorney, please call our Chicago Office at 312-238-9650 for a free consultation.
The White Law Group, LLC is a national securities fraud, securities arbitration, investors protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.
To learn more about The White Law Group, visit https://whitesecuritieslaw.com.
Last modified: July 17, 2015
