A few weeks back, our blog began discussing how it's important to understand that the types of fraudulent financial activities investigated by the Securities and Exchange Commission and enforced by the Justice Department go beyond just household names like pyramid schemes and Ponzi schemes.
To that end, we started exploring microcap stock fraud, an incredibly interesting yet somewhat abstruse type of securities fraud involving companies with small operations and limited assets (i.e., a low market capitalization) whose stocks are inexpensive and traded in smaller quantities.
We'll continue this discussion in today's post, examining the conduct that the Justice Department typically equates with microcap stock fraud.
How does microcap stock fraud typically occur?
While there are multiple channels through which microcap stock fraud can be committed, the most common form -- and therefore the one most often broken up by federal law enforcement officials -- is the "pump and dump" scheme.
In general, this involves company insiders and/or outside entities artificially inflating the price of a stock by disseminating inaccurate information that serves to generate buying interest.
Once the stock reaches a certain price point, those behind the activity will sell the entirety of their shares at a profit, causing the otherwise unwitting people they urged to invest in the company to suffer losses owing to the massive stock selloff.
As a point of reference, consider the illegal tactics of the notorious brokerage house Stratton Oakmont, which were depicted in Martin Scorsese's 2013 film The Wolf of Wall Street.
How could the price of a stock be artificially inflated?
Some of the tactics identified by the SEC as being synonymous with microcap stock fraud include the following:
- Setting up so-called "boiler rooms," in which salespeople working for a broker will make cold calls to a large number of people urging them via high-pressure tactics to invest in a stock that the firm has identified as poised for major growth
- Sending out email spam designed to spread inaccurate and supposedly inside information about a particular stock among thousands of potential investors
- Using internet bulletin boards and chat rooms to anonymously post inaccurate information and supposedly inside information about a particular stock among thousands of potential investors
Why does microcap stock fraud continue to be so prevalent?
According to experts, the very nature of microcap stocks -- lack of information for prospective investors, their inherently risky nature, limited government oversight, etc. -- are what makes them such an enticing vehicle for criminal conduct.
Those who find themselves under investigation or charged with some manner of securities fraud must strongly consider speaking with a skilled and experienced legal professional as soon as possible.
At the Law Offices of Mark L. Horwitz, P.A., we have 30 years of experience handling these and other types of white collar crime cases. Learn more about our firm, our approach and our past successes in this complex area of the law by visiting our website.