Microcap (Penny Stock) Fraud

New York Securities Fraud Attorney: What to Do if Charged with Penny Stock Fraud

Definition of Microcap Fraud

Microcap fraud is a common type of financial fraud. Because the microcap market or over-the-counter market is comprised of companies with low stock prices, acquiring large volumes of these stocks is easy and inexpensive. Many schemes invol ve purchasing penny stocks in the microcap market, heavily marketing the stocks so their price increases significantly, then selling the stock at the higher price. After the stock is dumped, the marketing efforts end, leaving the other investors with shares that plummet in price.

Microcap fraud is a form of market manipulation that can result in serious criminal penalties. If you are charged, you need an attorney with an understanding of state and federal laws regulating securities trading. You need to fight the charges and your attorney needs to understand financial markets to help you do that.

At Bukh Law Firm, PLLC, our New York criminal defense lawyers have a long track record of defending clients accused of all types of securities fraud offenses. We can put our extensive legal knowledge and experience to work on your case.

Understanding Pink Sheet Scams

Microcap fraud goes by many names, including pink sheet fraud. Companies not sold on the major markets like the NASDAQ or New York Stock Exchange need to have their prices made public so trades can be executed. Each day, Pink Sheets are published that provide bid-ask stock quotes for companies that are not listed on major national exchanges. There are approximately 15,000 stocks traded on pink sheets but pink sheets are NOT a stock exchange- they are simply a quotation service.

Pink sheets are not very well regulated because stocks traded on the Pink Sheets are usually below the threshold for Securities and Exchange Commission Regulation and because only brokers are regulated by the NASD, not the stocks that brokers are trading. Because of the lax regulations, pinks sheet scams are common.

Some examples of pink sheet scams include:

• Bogus research reports: Firms create “reports” on stocks and try to make them appear as if they came from legitimate brokerages. The reports are distributed to try to encourage the purchase of a particular stock.
• Reverse mergers: Pink sheet listed companies can be purchased and have their names changed. There is far less regulation when a company is taken over rather than when a company wants to issue a new stock. These pink sheet companies can end up having no assets and may be just shell companies.

Bogus research reports and reverse mergers are two ways in which the prices of stock shares in the microcap market can be manipulated. Manipulation of low value or penny stocks on the microcap market is commonly part of a pump and dump scheme. This type of microcap fraud means that a cheap stock is purchased for a few cents, the stock price is artificially inflated using bogus reports or other types of aggressive marketing, and the stock is then sold at that higher price.

Because stocks sold on pink sheets usually have very low initial values, a great many shares of these penny stocks can be purchased for very low prices. When the pump and dump scheme is successful, the stock prices can increase dramatically and significant profit can be achieved. The problem is, although regulating penny stock fraud is difficult, there are some laws that you could be accused of breaking if you participate in a pump and dump scheme.

Penalties for Penny Stock Fraud or Microcap Fraud

In December of 2014, a penny stock promoter was charged by the Securities and Exchange Commission with orchestrating a pump and dump scheme. The SEC charged the defendant with violating:

• Section 17(A) of the Securities Act of 1933: This provision makes it a criminal offense for anyone involved in the offer or sale of securities to use interstate commerce to employ a scheme or artifice to defraud; to obtain money or property by making untrue statements of material facts or omissions of material facts; or to engage in transactions, business or practices that deceive purchasers.
• Rule 10b-5 of the Securities Exchange Act of 1934: This provision makes it a criminal offense to employ schemes or artifices to defraud; to make materially false statements or omit material facts; or to engage in any fraudulent or deceitful practices in connection with the purchase or sale of any securities.

Defendants could also be charged under other federal and state statutes, including being charged with wire fraud or mail fraud if any communications that were part of the pump and dump scheme were sent via wire or mail.

Getting Legal Help if You Are Accused of Microcap Fraud

Criminal penalties for microcap fraud can include jail time and large fines, while a civil case can also be brought to recover more funds after alleged penny stock fraud. You need to understand your rights and defend against charges.

An experienced criminal defense lawyer at Bukh Law Firm, PLLC can help you. Call today to schedule a consultation and learn more.

Lawyer Arkady Bukh | Top Attorney Criminal Defense

Lawyer Arkady Bukh | Lawyer Criminal Defense

Lawyer Arkady Bukh | Lawyer Criminal Defense