Blog : Is That Legal?

by Peter Leeds on April 2nd, 2015

Most equity trades are perfectly legal. However, not all investors are honest and certain activities are considered illegal acts and criminal offenses. Here we take a look at some of the more common forms of dishonest or shady practices in penny stocks, and even larger Billion Dollar corporations, and analyze their legality.

Insider Trading

An insider is a director and/or senior officer of a corporation. In effect, those who have access to inside information about a the operations of a penny stock. An insider also is someone who owns more than 10% of the voting shares of a company.

Insider trading is when an insider buys or sells a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of information about the security considered non-public.  This practice is actually quite common among penny stocks.

Only trust penny stock picks from authorities which have a 100% Unbiased Guarantee.  No pump & dump, no bribes, no vested interests!

Example: When Discovery Zone started to struggle, the stock dropped from $35 to $10.  By later that year, insiders were selling off shares by the truck-load. By early the following year, Discovery Zone declared bankruptcy, leaving the remaining shareholders with worthless shares. There was a fiduciary duty of the penny stock company's directors to disclose the precarious position of the company, rather than hoarding this information to their own benefit.

Pump and Dump in Penny Stocks

This is common among penny stocks, since pump and dumps work best for promoters on thinly-traded penny stock shares.  A practice by which a large group of people buy into a low priced penny stock and start touting the equity. This is most frequently done on the Internet. Then when you buy that penny stock as it's value increases, the group pumping the penny stock sells and makes a profit.  The shares then collapse back deep into penny stock territory, while the investor is left holding a large loss.

Example: Georgetown University law student Douglas Colt touted four penny stocks on his Website, driving up prices as much as 700 percent.  He and his team profited more than $345,000. They settled with the SEC after an investigation, paying back the penny stock gains they made without admitting guilt.

Bashers

In the exact opposite of the pump and dump, an investor will sell a stock short and spread negative rumors concerning that stock on Internet message boards in order to spur selling and a drop in the stock price. When the price drops they cover their short position and profit from the transaction.

When committed against penny stocks to intentionally drive prices down, this can be considered price manipulation, which can be illegal.

Fraud

This is simply where somebody (either involved with the company or a shareholder) will simply disseminate false information (knowingly) to artificially move the price of a stock.

Example: David Abramson of New York allegedly claimed on his Website that his company possessed technology to transform a type of iron ore into gold. In exchange for an investment, Abramson allegedly promised investors returns of 800 percent to 2600 percent, all in gold. The SEC's launched a lawsuit against Abramson.

The Best Way to Protect Yourself

Protect yourself in risky investments, with the knowledge that the company has been vetted and analyzed by a professional. Follow a source you can trust, like Peter Leeds.