Penny stock fraud, also known as microcap stock fraud, involves stocks of "microcap" companies, which are generally defined as having a market capitalization of under $250 million. Penny stock fraud generally takes place among stocks traded on the OTC Bulletin Board and the Pink Sheets Electronic Quotation Service. Microcap stock companies usually do not meet the requirements to be listed on the stock exchanges.
Penny stock fraud encompasses several types of investor fraud:
PUMP AND DUMP schemes involve the use of materially false or misleading statements disseminated by fraudsters or "stock promoters" to hype (pump) stocks, which are then "dumped" to the public at prices that have been artificially inflated by press releases, spamming, message board pumping and other means, frequently involving telemarketing and various types of Internet fraud. Stock promoters will often claim to have "inside" information about impending news and refer to the stock they're "pumping" as being "undervalued". Various participants that purport to offer unbiased recommendations then tout the company as a "hot" stock, promising investors quick profit once the stock skyrockets, based on the impending "development" or "acquisition". Messages in chat rooms, on investors boards (such as Investors Hub) and email spam urge investors to buy the stock quickly, as the price of securities is projected to increase in the near future.
The converse of a PUMP AND DUMP is a fraud called the POOP AND SCOOP.
PENNY STOCK FRAUD: WHAT YOU NEED TO KNOW
PENNY STOCKS EXPOSED