Despite crackdown, small-stock fraud remains serious problem

State securities cops warn of Internet hype, high-pressure cold-callers

WASHINGTON (December 16, 1999) – Despite a crackdown in recent years by state, industry and federal securities regulators, small-stock fraud remains a serious problem, costing investors many millions of dollars each year.

The bull market on Wall Street shouldn’t lull investors into letting their guard down, state securities regulators warned today, in announcing a new brochure warning about so-called “microcap” stock fraud.

Microcap stocks are low-priced shares in little-known companies traded not on the New York, American or Nasdaq stock markets but on the electronic OTC Bulletin Board or in the Pink Sheets. They’re vulnerable to manipulation because of their small “floats”—the number of shares available to trade–and a dearth of public information on many of the companies.

Microcap shares are often hyped through high-pressure cold-calling stock brokers, misleading press releases, self-serving newsletters and, increasingly, over the Internet via “spam” e-mail, web sites, chat rooms and bulletin boards. As the hype and stock price increases, stock promoters or brokers dump their shares on the market, leaving hapless investors with large losses. This scheme is known as the “pump and dump.”

“With this great bull market, some investors may not be as skeptical as they should be about ‘hot stock tips’ and ‘sure things,’” said Bradley Skolnik, Indiana Securities Commissioner and president of the North American Securities Administrators Association (NASAA). “Con artists prey on the greedy and gullible.”

A new publication, “The Informed Investor: Microcap Fraud,” spells out the risks. The brochure was produced by NASAA’s Investor Education Project Group. Information on avoiding microcap stock fraud is also available on the web site of the Securities and Exchange Commission (

“You really need to do your homework if you want to invest in unlisted securities,” said Skolnik, referring to stocks traded on the OTC Bulletin Board and the Pink Sheets. “These are markets with great opportunities but also great risks.”

Skolnik commended market regulators for acting to increase disclosure requirements for Bulletin Board stocks. In addition, he noted, in recent years regulators and law enforcement agencies have brought major actions against the most notorious securities firms that specialized in microcap stocks. “The biggest microcap outfits, the real fraud factories—the Stratton Oakmonts, the Hibbard Browns, the Monroe Parkers—are gone, but the problem (of microcap stock fraud) remains,” Skolnik said. “Investors need to be very, very careful.”

The new NASAA brochure urges investors to check out any broker pushing low-priced securities. Microcap stocks are often touted and sold by promoters or brokers who have been barred from the securities industry or have long disciplinary histories. Some have suspected links to organized crime.

Before buying a microcap stock, investors should ask the broker for his CRD number and then call their state regulator or the National Association of Securities Dealers’ hotline at (800) 289-9999 to find out if the broker or his firm has a disciplinary history.

Investors should always get written information about the company such as a prospectus and pay attention to such topics as risk factors, management, financials, products and use of proceeds from the stock offering.

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1999 Headlines, Newsroom