Concept
Microcap stock fraud is a form of securities fraud involving stocks of "microcap" companies, generally defined in the United States as those with a market capitalization of under 5 per share, is not listed on a national exchange, and fails to meet other specific criteria. Microcap stock fraud generally takes place among stocks traded on the OTC Bulletin Board and the Pink Sheets Electronic Quotation Service, stocks which usually do not meet the requirements to be listed on the stock exchanges. Some fraud occurs among stocks traded on the NASDAQ Small Cap Market, now called the NASDAQ Capital Market. Microcap fraud encompasses several types of investor fraud: Pump and dump schemes, involving use of false or misleading statements to hype stocks, which are "dumped" on the public at inflated prices. Such schemes involve telemarketing and Internet fraud. Chop stocks, which are stocks purchased for pennies and sold for dollars, providing both brokers and stock promoters massive profits. Brokers are often paid "under the table" undisclosed payoffs to sell such stocks. Dump and dilute schemes, where companies repeatedly issue shares for no reason other than taking investors' money away. Companies using this kind of scheme tend to periodically reverse-split the stock. Other unscrupulous brokerage practices, including "bait-and-switch", unauthorized trading, and "no net sales" policies in which customers are prohibited or discouraged from selling stocks. Pump and dump 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. These manipulators first purchase large quantities of stock, then drive up the share price through false and misleading positive statements; they then sell their shares at a large profit. This is referred to as a "pump and dump" scheme.
