Penny stock

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.[1]

According to the U.S. Securities and Exchange Commission (SEC) the term “penny stock” generally refers to a security issued by a very small company that trades at less than $5 per share initially. Penny stocks generally are quoted over-the-counter, hence the name “OTC stocks”. Over-the-counter exchanges that list penny stocks include, the OTC Bulletin Board (which is a facility of FINRA) or OTC Link LLC (which is owned by OTC Markets Group, Inc., formerly known as Pink OTC Markets Inc.). Penny stocks can also trade on securities exchanges, including foreign securities exchanges. Penny stocks can include the securities of certain private companies with no active trading market.[2]

Prosecutors and the Federal Bureau of Investigation say that fraud is widespread in the penny stock market.[3][4][5] Even though the penny stock companies are small, the scams that involve them can be for tens of millions of dollars.[4]

In the case of many penny stocks, low market price inevitably leads to low market capitalization. Such stocks can be highly volatile and subject to manipulation by stock promoters and pump and dump schemes. Such stocks present a high risk for investors, who are often lured by the hope of large and quick profits. Penny stocks in the US are often traded over-the-counter on the OTC Bulletin Board, or Pink Sheets.[6]

Another problem with the penny stock market is that it has little liquidity, so holders of shares in penny stock companies often find it difficult for them to cash out of positions.[7]

In the United States, the SEC and the Financial Industry Regulatory Authority (FINRA) have specific rules to define and regulate the sale of penny stocks.

Concerns for investors

Many penny stocks, particularly those that trade for fractions of a cent, are thinly traded. They can become the target of stock promoters and manipulators.[8] These manipulators first purchase large quantities of stock, then artificially inflate the share price through false and misleading positive statements. This is referred to as a “pump and dump”[9] scheme. The pump and dump is a form of microcap stock fraud.

In more sophisticated versions of the fraud, individuals or organizations buy millions of shares, then use newsletter websites, chat rooms, stock message boards, fake press releases, or e-mail blasts to drive up interest in the stock.[10] Very often, the perpetrator will claim to have “inside” information about impending news to persuade the unwitting investor to quickly buy the shares. When buying pressure pushes the share price up, the rise in price entices more people to believe the hype and to buy shares as well. Eventually the manipulators doing the “pumping” end up “dumping,” when they sell their holdings.[11]

The expanding use of the Internet and personal communication devices has made penny stock scams easier to perpetrate.[12]

Notable cases

The Mafia had infiltrated Wall Street by the 1970s.[13] In the 1980s Lorenzo Formato conducted penny-stock manipulations.[13][14] Formato testified in Congressional hearings that during the years he promoted and sold penny stocks, he was involved in organized crime, and testified to rampant penny stock manipulation by organized crime.[13][14] The Congressional hearings led to passage of the Penny Stock Reform Act of 1990.[13]

By 1989, American investors were being cheated out of at least $2 billion a year by schemes involving penny stocks.[14]

Mob activity on Wall Street reportedly increased in the 1990s. On February 10, 1997, The New York Times reported that “Mafia crime families are switching increasingly to white collar crimes” with a focus on “small Wall Street brokerage houses.”[13]

In May 1997, an FBI sting operation led to charges against Louis Malpeso, Jr., a reported Colombo crime family associate, for conspiring to commit securities fraud with stock broker Joseph DiBella and Robert Cattogio to inflate the price of a penny stock, First Colonial Ventures. All three defendants pled guilty.[13]

Another example of an activity that skirts the borderline between legitimate promotion and hype is the case of LEXG. Lithium Exploration Group’s market capitalization soared to over $350 million after an extensive direct mail campaign. The promotion drew upon the legitimate growth in production and use of lithium, while touting Lithium Exploration Group’s position within that sector. According to the company’s December 31, 2010 form 10-Q (filed within months of the direct mail promotion), LEXG was a lithium company without assets. Its revenues and assets at that time were zero.[15][16] Subsequently, the company did acquire lithium production/exploration properties, and addressed concerns raised in the press.[17]

The “pump and dump” tactic is also known as a supernova and, unlike regular stocks, penny stocks usually move on momentum of the price action.

One of the biggest penny stock operators in the 1950s was Tellier & Co.[18] In the 1980s, major penny stock brokerages included Blinder Robinson,[19] First Jersey Securities, Rooney Pace,[20] and Stuart-James.[21] Major penny stock brokerages operating in the 1990s included Stratton Oakmont, Sterling Foster, A.S. Goldmen, and Hanover Sterling.[13]


In the United States, regulators have defined a penny stock as a security that meets a number of specific standards. The criteria include price, market capitalization, and minimum shareholder equity. Securities traded on a national stock exchange, regardless of price, are exempt from regulatory designation as a penny stock,[22] since it is thought that exchange-traded securities are less vulnerable to manipulation.[23] Therefore, Citigroup (NYSE:C) and other NYSE-listed securities which traded below $1.00 during the market downturn of 2008–09, while properly regarded as “low-priced” securities, were not technically “penny stocks”.

Although penny stock trading in the United States is now primarily controlled through rules and regulations enforced by the SEC and FINRA, the genesis of this control is found in State securities law. The State of Georgia was the first state to codify a comprehensive penny stock securities law.[24] Secretary of State Max Cleland, whose office enforced State securities laws,[25] was a principal proponent of the legislation. Representative Chesley V. Morton, the only stockbroker in the Georgia General Assembly at the time, was principal sponsor of the bill in the House of Representatives. Georgia’s penny stock law was subsequently challenged in court. However, the law was eventually upheld in U.S. District Court,[26] and the statute became the template for laws enacted in other states. Shortly thereafter, both FINRA and the SEC enacted comprehensive revisions of their penny stock regulations.

These regulations proved effective in closing or greatly restricting broker/dealers, such as Blinder, Robinson & Company, which specialized in the penny stocks sector. Meyer Blinder was jailed for securities fraud in 1992, after the collapse of his firm.[27]


  1. ^Lawrence, Adam (2019-03-15). “What is a Penny Stock?”.
  2. ^“ | Penny Stock Rules”. Retrieved 2019-03-25.
  3. ^Eaglesham, Jean. “Mob-Busting Informant Resurfaces in SEC Probe”. Retrieved 14 November 2018.
  4. ^ Jump up to:ab Eaglesham, Jean. “Inside One of the U.S.’s Biggest-Ever Investment-Fraud Stings”. Retrieved 14 November 2018.
  5. ^Friedrichs, David O. (25 June 2009). “Trusted Criminals: White Collar Crime In Contemporary Society”. Cengage Learning. Retrieved 14 November 2018 – via Google Books.
  6. ^“Penny Stock”. Investopedia. Retrieved 30 March 2012.
  7. ^Davis, Blayne (25 August 2015). “Former Mob Snitch All But Indicted”. Retrieved 14 November 2018.
  8. ^SEC (2005-01-11). “Pump&Dump.con”. U.S. Securities and Exchange Commission. Retrieved 2006-11-21.
  9. ^Pump-and-Dumps” and Market Manipulations”. Retrieved 4 January 2014.
  10. ^Staff Writer. “The $400 million buyout hoax that fooled many”. Retrieved 4 January2014.
  11. ^FINRA (2012). “Spams and Scams”. Financial Industry Regulatory Authority. Retrieved 2012-07-29.
  12. ^Harry Domash (2000-06-12). “Internet Makes Scams Easy”. San Francisco Chronicle. Retrieved 2006-06-15.
  13. ^ Jump up to:ab c d e f g “SEC Testimony: Organized Crime on Wall Street (R. Walker)”. Retrieved 14 November 2018.
  14. ^ Jump up to:ab c Press, From Associated (8 September 1989). “Witness Tells of Mob Influence in Penny Stocks”. Retrieved 14 November 2018 – via LA Times.
  15. ^“Lithium Exploration Group: Beware of Mailmen Bearing Gifts”. Seeking Alpha. 10 May 2011. Retrieved 30 March 2012.
  16. ^“An Insight into Penny Stock Trading”. Wealth Setup. Retrieved 2006-12-13.
  17. ^“Lithium Exploration Group Inc”. New York Times. Retrieved 4 January 2014.
  18. ^“Con Artist Hall of Infamy : Walter Tellier”. Retrieved 14 November 2018.
  19. ^Douglas Martin (2004-03-04). “Meyer Blinder, Penny Stock King, Dies at 82 New York Times March 4, 2004”. Retrieved 2019-01-15.
  20. ^“SEC Settlement : Rooney Pace Halting Securities Business Los Angeles TimesNovember 17, 1987”. 1987-11-17. Retrieved 2019-01-15.
  21. ^Penny Stock Dealer Stuart-James, Executives, Appeal Sanctions Associated PressOctober 9, 1996
  22. ^Taylor, J. Lynn. “SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 240”(PDF). Retrieved 4 January 2014.
  23. ^“SEC Charges Eight Participants in Penny Stock Manipulation Ring”. SEC. Retrieved 4 January 2014.
  24. ^Darden, Stan (20 March 1990). “Georgia to OK Tough Law for Penny Stocks”. LA Times. Retrieved 4 January 2014.
  25. ^“1/3/14: Commissioner enters Order in Georgia Commerce Bancshares, Inc.’s fairness proceeding under O.C.G.A. §10-5-11(9)”. Ga. SoS. Retrieved 4 January 2014.
  26. ^“GEORGIA LAW WON’T HURT BROKERS, JUDGE RULES”. Deseret News. Retrieved 4 January 2014.
  27. ^HENRIQUES, DIANA B (16 February 2003). “Penny-Stock Fraud, From Both Sides Now”. New York Times. Retrieved 4 January 2014.

Ofer Abarbanel – Executive Profile

Ofer Abarbanel online library

Ofer Abarbanel online library

Ofer Abarbanel online library