Penny Stock Scalping 101 – Securities Lawyer 101
Stock scalping refers to the illegal and deceptive practice of recommending that others purchase a security while secretly selling the same security. In recent years, the Securities and Exchange Commission (the “SEC”) and Department of Justice have brought an increasing number of cases alleging securities violations for stock scalping activity. Most often stock scalping occurs in connection with stock promotion or penny stock investor relations activity.
In these schemes, investor relations paid in securities are often engaged in stock scalping activity. Other times, insiders may hire or cause third parties to hire investor relations providers to increase the price and volume of an penny stock issuer’s stock so that they can secretly sell their securities during the investor relations campaigns.
A key element of criminal cases involving stock scalping schemes is that the scalpers recommend that investors purchase stock while secretly selling their own securities.
Stock promoters use a variety of media including email, internet,direct mail newsletters, and their own websites to tout stock. Some buy mailing lists and send spam to the individuals named, but the CAN-SPAM Act and organizations like Spamhaus can create serious consequences for spammers, so most limit their mailings to recipients who opt to receive them. A common misconception is that an opt in email list will ensure compliance with the CAN-SPAM Act.
While investor relations activity is not illegal, it can be a mine field. The people who hire promoters are less likely to be accused of stock scalping than the promoters themselves.
If the stock promoter made the required disclosure of their intention to sell the same securities they recommend investors purchase, fewer investors would purchase the security. Recent SEC enforcement actions suggest that many promoters’ disclosure is often unclear, incomplete, or entirely untrue.
A few should be given credit: they announce in their disclaimer how much cash they’ve been paid. They name the “third party” payer, and disclose how much stock he owns, adding that he intends to sell it all. Such honesty rarely inhibits the pump, in part because most investors don’t bother to read disclaimers.
Anyone who intends to sell during a stock promotional campaign should specifically state that he or she intends to sell during the campaign. Prior sales should also be disclosed in the disclaimer.
Promoters should remember that the securities laws require stock promotional materials to disclose certain information to investors including their compensation and their intention to sell securities during the campaign. In addition, the disclosures provided must be truthful and complete. Due to increasing SEC scrutiny, stock promoters should work closely with a securities lawyer in building compliance procedures.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855