Good News for Swindlers: Penny Stocks are Booming

Good News for Swindlers: Penny Stocks are Booming

The surge in trading of cheap but risky “penny” stocks is part of a broader increase in retail trading reminiscent of the 1920s, “when amateurs flooded into the stock market before the 1929 crash,” according to a recent article in The New York Times.

“Penny stocks occupy a low-rent district of Wall Street,” the article states, “a world rife with fraud and chicanery where companies that don’t have a viable product, or are mired in debt, often sell their shares. Traded on the lightly regulated over-the-counter, or O.T.C., markets, penny stocks face fewer rules about publishing information on financial results or independent board members. Wall Street analysts don’t usually follow them. Major investors don’t buy them.”

But in February, the article reports there were 1.9 trillion transactions on OTC markets, up more than 2,000 percent from a year earlier (data from FIRA).

The lack of oversight makes penny stocks “easy targets for scammers” and the risk can attract inexperienced investors with FOMO. Especially now, when commission-free trades and online trading platforms (i.e., Robinhood) mean small investors don’t need a traditional broker.

Because penny stocks are small and lightly traded, the article explains, “a sudden surge of interest can make their prices go berserk.” Melissa Hodgman, acting director of the SEC’s Division of Enforcement, said, “We proactively monitor for suspicious trading activity tied to stock promotions on social media, and act quickly to stop that trading when appropriate to safeguard the public interest.” But the article stipulates that both current and former regulators “say penny stock fraud will remain as long as penny stocks are traded.”