Question

Stock Frauds:

what went wrong? Penny stocks, also known as micro-cap stocks, nano-cap stocks, small cap stocks, or OTC stocks, are common shares of small public companies that initially trade at low prices per share. It is also a term for inexpensive stocks that subsequently become highly lucrative holdings. However, sometimes, it is too good to be true if some tend to manipulate the market. •

Question: what sort of issues involved, what they would have done differently to prevent the issues in the first place, what is pump and dump strategy, what SEC actions were?

Answer 1

Stock Fraud occurs when an individual or a company persuades potential buyers to buy a share of the company. These are usually fake companies or small companies with no credibility.

ISSUES WITH SUCH KINDS OF STOCKS:

• Small companies have the power of manipulating its customers
• These companies are not regulated ones; mostly fakes ones with big brand names,trying to lure customers.
• There can be a reporting gap - the company might give false information about itself to make it look better and more credible.
• Many documents go unaudited or the numbers are manipulated.
• Easy excess to the internet helps them to lure the naive customers who fall easy prey to attactive schemes.

HOW CAN THESE ISSUES BE PREVENTED?

The above issues can be prevented by the customers if:

• They take time out to research about the company or the individual before buying.
• They understand about the nature of the product they are buying.
• They take help from trusted organizations, such as SEC (Securities and Exchange Commissions) to review the company policies.

PUMP AND DUMP STRATEGY:

Pumping occurs when the company spreads false information about itself to grow its credibility and gain potentital customers. They do so via various means of online forums, such as emails, chat rooms, advertisements, boards, et al.

Dumping occurs when the company sells off its products or holdings when the prices peak in the securities market incurring huge profit, meanwhile, putting the customers at loss.

SEC ACTIONS:

SEC is the first feredal organization to regulate the securities market.

They provide full disclosure to the public about the comapnies they are interested to invest in.They ensure the customers have complete information about the comapany, They can take serious civil enforcement actions against companes or individuals who are found violating the securities laws. They make sure the firms are showing full transparency in their audits and documents. They have the power to bring injunctions to the companies to stop them from misconducts.