The “night singer of shares” sold stock on the streets during the South Sea Bubble. Its prevalence has been estimated to run into the billions of dollars a year. Microcap stock fraud generally takes place among stocks traded on the OTC Bulletin Board and the Pink Sheets Electronic Quotation Penny stocks or forex news, stocks which usually do not meet the requirements to be listed on the stock exchanges.
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. 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. Dump and dilute schemes, where companies repeatedly issue shares for no reason other than taking investors’ money away.
Companies using this kind of scheme tend to periodically reverse-split the stock. 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. Many penny stocks, particularly those that trade for fractions of a cent, are thinly traded. They can become the target of stock promoters and manipulators.
The expanding use of the Internet and personal communication devices has made penny stock scams easier to perpetrate. Penny stock companies often have low liquidity. Investors may encounter difficulty selling their positions after the buying pressure has abated, and the manipulators have fled. A chop stock is an equity, usually trading on the Nasdaq Stock Market, OTC Bulletin Board or Pink Sheets listing services, that is purchased at pennies per share and sold by unscrupulous stock brokers to unsuspecting retail customers at several dollars per share. This practice differs from a pump and dump in that the brokerages make money, in addition to hyping the stock, by marketing a security they purchase at a deep discount. The subject stocks usually have little or no liquidity prior to the block purchase.
In fact, it is not required that this profit spread be disclosed to the client, since it is not technically a “commission”. Microcap fraud has been a major source of income for organized crime. Mob figures from each of the Five Families of the New York mafia, as well as the New Jersey mob, have become involved in stock scams. Mafia involvement in 1990s stock swindles was first explored by investigative reporter Gary Weiss in a December 1996 Business Week article.