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How to Spot Penny Stock Frauds



January 26, 2009 – Comments (32)

I felt now was a good time to revisit this topic, since TMFsmashy has been on such a run digging OTC dookies out of who knows where lately. Also I've had a couple newer CAPS members ask me if such and such .OB or .PK stock is a good investment. Fortunately it's very easy to tell whether it's a very bad investment which most OTC stocks are as you will see below.

This is a skill set I believe every investor should have, because occasionally these turds actually make it onto the NASDAQ or AMEX. Actually I believe we may see more of them do so in the near future, as the NASDAQ is desperate to retain listings (in fact they've discontinued delisting stocks that no longer meet inclusion criteria, as they would have to kick as much as 20% of their current members off the exchange). Hopefully they keep the listing standards high.

I found a very good list of redflags on Stockpatrol that I wish to share with you, while it isn't exhaustive it's a very good starting point that anybody should check out before even thinking about before buying any over the counter stock.

Nice it saves me the time of writing one. :-)

I can tell you from personal experience it's frighteningly easy to spot penny stock fraud on your own, which really says something about the SEC doesn't it? 



"February 20 2008

Where do penny stock crooks find their victims?  Everywhere around the globe.  This is an international epidemic, spreading at a record pace, thanks to the efforts of boiler rooms, greedy promoters and unscrupulous company insiders. 

Lately, we have been hearing from more and more readers around the world who have been touched by securities scams.  It makes perfect sense.  Con artists know that U.S. regulators are unlikely to raise their colors on behalf of an individual investor in Barbados, Germany or the Philippines who has tossed away his life's savings buying unregistered shares of an obscure U.S. public company.  So the clever pitchmen peddle their wares overseas, then sit back stateside and bank their profits.

Most frequently, fraudulent schemes involve shares of obscure companies which have few assets, negligible revenues, and dubious operations.  But foreign investors - and many domestic ones as well - do not know this.  They only know what the salesman is saying.  And for the foreign individual investor the U.S.-based broker has instant credibility.  The con artist relies on the fact that most people in other countries - and many right here - cannot distinguish a legitimate brokerage firm from a fly-by-night operation.

Stock schemes commonly involve shares of companies that trade on the OTC Bulletin Board, Pink Sheets, or non-U.S. exchanges.  As of March 2007, 3,472 companies were listed on the OTC Bulletin Board.  Another 4,874 stocks were quoted solely on the Pink Sheets.  Almost 37 billion shares changed hands on the OTC Bulletin Board in March 2007 alone – an average daily volume of well over one billion shares a day.

This arena is a crucible for securities schemes.  Regulatory resources are strained, and frequently focused in other directions.  The global nature of these schemes, and the ease with which companies can issue unregistered stock and sell it overseas, makes meaningful oversight difficult - and often impossible.

The term "penny stocks" is something of a misnomer, since it includes stocks that trade for $5 a share or less.  Penny stock rules are designed to protect the public since investments in these low priced securities tend to be speculative and risky.  When stock brokers recommend these penny stocks they are required to have an existing relationship with their customer or to determine that such investments are suitable for a new customer.  Unscrupulous promoters and boiler room operators generally ignore these rules.

Although penny stock schemes are frequently successful, they seldom are subtle.  Unlike the elaborate accounting schemes that accompanied massive corporate frauds at the beginning of this decade -  Enron, WorldCom and the like - penny stock frauds usually rely on the garden variety "pump and dump" scheme.  In many cases promoters or shady stock brokers gain control of a company and then spread false and misleading information by saturating the Internet with spam email or using cold callers to tout shares.  In this way they spark interest in the company, pump up prices, and create an environment in which they can sell stock.  Once the promoters dump their shares, stock prices slide back toward oblivion.  The game takes on several variations, but the basic framework seldom differs.

Often, these schemes employ one or more of the following tools:

 E-mails touting little known struggling companies with virtually no chance of success.  These spam e-mails seldom identify the sender or provide accurate contact information.  They do not provide a balanced view or disclose investment risks.  E-mails promoting worthless companies have proliferated in recent years, appealing to investors around the world.


Unrealistic financial reports and research reports that tout a company without presenting a balanced view and occasionally include unsupportable financial projections.


Press releases that are issued to create a buzz about a company.  Upon close examination, these press releases are short on details and long on unrealistic promises.  They provide just enough information to whet an investor's appetite. 


Announcements that an obscure under capitalized company is about to become a player in a cutting edge industry.  After a season of brutal hurricanes, promoters seized upon the plight of storm victims to tout tiny companies that claimed to be poised to profit from relief efforts.  For the most part, these claims were without substance.


Internet message boards used to tout or attack a company.  Message boards have become a haven for zealots who are prepared to defend worthless companies, even though every available fact indicates that the company has virtually no chance of success.  They offer little opportunity for honest debate; just a forum for a company's fans, where negative messages are labeled as "bashing" and critics of the company are accused of undermining the stock.


Shady stockbrokers use aggressive tactics, distorting "facts" about companies and intimidating potential investors.

As we noted, these schemes are transparent.  There are a number of bright red flags that should trigger concern:

Claims that an obscure company is poised to capitalize in a "hot" sector, like video sharing, homeland defense, hurricane recovery or AIDS research.  In the wake of
September 11th many of these schemes claimed to have developed cures for anthrax and other biological threats.


Companies claim to have relationships with better known, successful businesses.  Usually, these relationships are non-existent or insignificant.


The company being promoted does not file regular public financial reports with the SEC.


The company being promoted has negligible assets or revenues.


There has been unusual, excessive trading in a stock.


There have been sudden dramatic price swings for the stock of a company with no track record, discernible business or demonstrated revenues.


The Company routinely uses Form S-8 to register shares for insiders, employees or consultants.  Form S-8 allows companies and promoters to flood the marketplace instantly, with registered shares that have been issued to anonymous individuals and companies.


A company with little operating history employs numerous consultants and awards them shares.


The company sells unregistered stock overseas under Regulation S.  Regulation S has created a virtually unregulated environment for offshore sale of U.S. securities.  Companies listed on U.S. exchanges may sell unregistered stock to non-U.S. residents.  U.S. investors are protected because those shares cannot be resold in the U.S. for at least one year.  Overseas investors?  They are on their own.


The company has engaged in one or more reverse-mergers.


The company has offshore investors whose principals are undisclosed.


A public company frequently changes its business plan, while maintaining the same management.


The business is incorporated in Nevada.  Nevada corporate law affords the individuals in control of a company to make significant decisions without first notifying or gaining approval from public shareholders.


Canadian connections.  Tiny companies have proliferated with the following in common:  they are incorporated in Nevada, have offices in Canada (usually British Columbia), have attorneys in Florida, California or New York, and often use transfer agents housed in Utah.  Their goal is to create a jurisdictional blend that allows them to scam investors in the U.S., Canada and around the world.  In order to catch these crooks, regulators from these various jurisdictions must cooperate.  That takes time and resources – and plays into the hands of promoters who are operating at a far quicker pace.

Where does this leave investors?  The red flags are there – and obvious to even the most nearsighted and shortsighted.  The bottom line remains, as always – before you invest, investigate."


Tasty here-

so there you go, a pretty good list of the tricks and tactics they tend to use. Hopefully this will be of some use to you.  It's your money after all, there are plenty of people out there trying to take it from you. It pays to be skeptical.



32 Comments – Post Your Own

#1) On January 26, 2009 at 2:17 PM, kali77 (98.94) wrote:


 Great post. Thanks!

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#2) On January 26, 2009 at 2:22 PM, Tastylunch (28.61) wrote:


np glad it was of use to you.

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#3) On January 26, 2009 at 2:27 PM, anchak (99.89) wrote:

Good post.....especially since it covers an obscure yet dangerous arena which investors should be wary off....also opportunity for those bold enough to venture and short

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#4) On January 26, 2009 at 2:31 PM, Tastylunch (28.61) wrote:


ha thanks AC.

I figure guys like you wouldn't need this as most of this I'm sure you know already! but I'm always try to be mindful that there are new players/investors on CAPS.

The easiest way to sum this up I suppose, is that if it's too be good to be true, theres a 99.99% chance it is. :-)

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#5) On January 26, 2009 at 2:52 PM, kstarich (28.89) wrote:


Thanks for the the detailed low down on OTC trading.  I did buy CHNG.OB last year.  I did my due diligence, weighed  Fools comentary and it did very well for me.

I appreciate your commentary and would like to learn the ins and outs of ETF trading.  Maybe you could do another blog for us.  Specifically currency trading.

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#6) On January 26, 2009 at 3:16 PM, Tastylunch (28.61) wrote:


Well I hate to be a killjoy but I have to say you probably got lucky with that one, while they ahve a real business CHNG.OB does seem to have some shady business pratices including contracts that rebid every 6 months. It fooled me at first as well, but I never did invest in it.

Glad you mad esome money in it anyway

As far as ETFS go Anchak wrote a very excellent blog about the dangers of the levered ETFS  which cna be exceedingly dangerous if you aren't careful which you can see here.

oherwise they trade just like stocks, they can be shorted,bought on margin etc. Thye do usually have a nominal management fee.

But keep in mind they are derivatives so it pays to know how each indvididual one is backed before investing.

There are also ETNs, which I personally don't know as much about. 

As far as currecny goes I don't do forex so I cna't really help you there. although you cna buy Currency ETFs pretty easily if you exposure to it, but again it's a derviative not an actual invetsment so keep that in mind.


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#7) On January 26, 2009 at 3:22 PM, socialconscious wrote:

Yeah absolutely right.Good post! I would add "uses stock pictures on their website." I used my own properiatary screen to find this ground breaking ,ground floor opportunity to not invest in penny stocks that have "stock" pictures. IMHO

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#8) On January 26, 2009 at 3:33 PM, EverydayInvestor (< 20) wrote:

My first investment was ALMOST a pink sheet stock. Read about how it turned out. The CEO of that company had previously been involved in an alchemy scheme.

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#9) On January 26, 2009 at 3:40 PM, Tastylunch (28.61) wrote:


agreed.If their website looks like a joke why should you take them seriousl? ADXM.ob was my favorite of that type. An advertising "company" that uses a bad blogging template trading at 250 million. nice.


Hah I forgot that!

alchemy eh? I guess he wasn' entirely lieing after all he did turn investors gold into stock lead...

hahah the humor value alone makes reading their filings worth it. :-)

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#10) On January 26, 2009 at 3:45 PM, Tastylunch (28.61) wrote:

Everyday has a good chart of what your future looks like investing in these POS stocks Report this comment
#11) On January 26, 2009 at 11:15 PM, kstarich (28.89) wrote:


Thank you for the link to Anchak's ETF101.  Thank you Anchak for taking the time to put that info out. 

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#12) On January 27, 2009 at 1:56 AM, XMFSmashy (99.68) wrote:

I'm sure there's more where my recent torrent of turds came from, Tasty. I do hope that by drawing attention to these scams on CAPS, we can either accelerate their demise or at least save a dude or two from getting snookered. That, or at least rack up some sweet CAPS points.

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#13) On January 27, 2009 at 2:08 AM, Tastylunch (28.61) wrote:


Until the SEC actually steps in and does something to these guys in a timely manner, I think Penny stock fraud is unstoppable and may even exceed early 08 levels once fear subsides in the market. Frankly I don't think the Pinks and the OTCBB should let these guys list without some minimal standards.

The internet makes these scams easier than ever to perpertrate. The nigerians have conclusively proven that ease of coummuncation has a downside in that fraud is easier to perpertrate.

What I'm amazed by is you have some found some other source than the ones I've been using to find the ones I've been adding to CAPS over the last year. I think PXCE.OB is the only one I saw indepedenntly of the ones you mentioned lately.. For the most part my sources have been drying up, Perhaps they are on to me :-)

Yeah I agree this should be a selling point for CAPS actually, it helps investors (especially newer investor who come to the Fool for advice) stay away from scams.  I think that's the worthwhile part of having these clunkers in CAPS. SOme people may complain about easy points etc, but if the point of CAPs is education and ratings then adding these to get rated may help save some innocent people their savings.


no prob


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#14) On January 27, 2009 at 2:34 AM, XMFSmashy (99.68) wrote:

What do you know.. I've got 2 more on tap for tomorrow. Stay tuned.

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#15) On January 27, 2009 at 8:10 AM, GraemesPSP (99.74) wrote:

Do you know of any good sources for finding shortable pump&dumps?  I made a lot of money from '97-'02 shorting these.  Especially during the internet era it wasn't unusual to find p&d's with upward of a billion dollar valuation.  By '03 they all but ceased to exist (prices or capitalizations were to low to short).  But I'm interested in looking for candidates in my real life portfolio again. 

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#16) On January 27, 2009 at 1:21 PM, Tastylunch (28.61) wrote:


They are more difficult to short now unfortunately, since the SEC short ban over the summer most brokerage firms are more conservative with borrows. If you short these play small since the chances of your shares getting recalled now is high. This year is more like 2003 while the last two were like the height of the boom

as for sources I don't like to give away those (when I do short I don't wna to get crowded out).

But I will say most of my targets I don't find they find me. I imagine that was probbaly the same for you.

I seem to be on every pumper's mailing list, I get tons of spam email and my fax machine at work gets nailed.

I think that's still a reliable way of finding a lot of these. where Smashy gets his I couldn't tell you as I haven't picked up on a pattern of his finds yet

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#17) On January 27, 2009 at 1:23 PM, Tastylunch (28.61) wrote:

that and I'm looking for new sources as it is, as the volume of crap I get sent now is about 50% less than it was 6 months ago.

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#18) On January 27, 2009 at 1:37 PM, madcowmonkey (< 20) wrote:

I always hear the "mail you fail" from all the phone gypsy's is the one liner about newbies coming in to an outfit. I wonder if it more true during a recession for these penny stock guys. I imagine most of them mail out garbage like you have said and it is now 50% less. Must be the downturn in the stock market that really puts these guys on the downlow, I guess it is easier to "snooker" dudes when it is a bull market.

My email gets hit with close to 250 new messages a day, I can't even imagine trying to displace the bad ones from the needed ones with email. It is funny that some people hate the dreaded spammers, while people like you and Everyday get a kick out of it. Funny stuff.

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#19) On January 27, 2009 at 2:12 PM, Tastylunch (28.61) wrote:


oh yeah for sure the bera market is totally killing this, if nothing else the newsmedia has made seem stocks seem bad to the average joe so the public's appetite for this sort of scam is far less. Kind same deal wih the Madoff's of the world , just smaller scale and lower income brackets.

Also I think the credit crunch hurts as well as the "creative"financing a lot of thes guys can pull is a lot more limited.

Yeah I used to hate the spam, but then when I realizd it's comedy potential I realized investing could be hilarious. :-)

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#20) On January 27, 2009 at 2:32 PM, Mary953 (84.17) wrote:

Another dumb question from the newbie who doesn't mind looking silly.  What exactly does it mean when a stock ticker ends in '.OB' or '.PF'?  (and if you tell me .PF means preferred, I may go beat my head against the wall because it was so obvious, but I still will be clueless about .OB)

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#21) On January 27, 2009 at 2:48 PM, Tastylunch (28.61) wrote:


Hey Mary 

it's always good to ask questions no matter your experience. It's a character flaw of mine that I don't ask for help a lot of times when I should.

the suffixes tell you what kind of equity it is (and usually where it trades)

.OB means it trades on the OTCBB which is like a junior league for the NASDAQ. That being said it's a wild wild west on there, these stocks typically are of low quality as they cannot meet the listing standards to go on the regualr maerkets.Some things they have in common is that is they usually are poorly cpaitalized, don't use accountants, have very low market caps and share prices and are often late with their SEC filings if they do it at all. There are some companies on there that are worth looking at but most aren't.

.PK stands for the Pink Sheets it's another over the counter trading environment. They are often held in a little higher regard than OTCBB stocks since some are foreign companies who just don't wnat to deal with the tight filing rules. Nintendo is a .pK stock for instance, not beacuse they are illegitimate but because they do't wish to pay the accounting fees associated with Sarbanes Oxley. Still most of Americna companies on there are pretty suspect.

.DL means teh stock has been delisted and is basically no longer trading whether due to merger, bankruptcy etc.

Actually I'm not familiar with .PF, but i believe preferred shares don't have a  suffix  as far as I know

e.g. Huntington Bank Preferred shares

basic rule of thumb is that anything with a suffix should be treated with suspicion.

Does that give you what you were looking for? Hopefully that helps.


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#22) On January 27, 2009 at 10:21 PM, madcowmonkey (< 20) wrote:

hilarious is the key word eh! camistocks recent blog displays a great analogy for investing in penny stocks. I would be curious to go back and check on the players that pick the penny stocks (by way of the charm) and see how they have been fairing recently. If nothing else, maybe it will give me something to short. I am getting bored not adding anything new to caps, even though we have had a couple moderate days (2 or 3 at least).

I forgot, was it Citi bank that was reporting tomorrow. Get ready for another roller coaster of a day. It has been too calm lately to not have one tomorrow:) 

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#23) On January 27, 2009 at 10:47 PM, Tastylunch (28.61) wrote:


haha yeah Is aw that . That German game show was funy stuff!

oh yeah totally man,where else can you see business model for Bio Luminiscent Bison , or advertising in korean nightclubs, video games about the rapture, The Mexican Lottery, soda pop that has negative calories  or just straight up alchemy?

 The OTC is full of hilariously bad ideas. :-)

I'm expecting a volatileday tmr, Obama's bad bank plan is supposedly coming out and like you said citi reports. Looks like we could have a big up day at open anyway.

if you want stuff to short ARTC.PK is a good one to check out although it may have some more legs.I'm adding EAT to my short list too, techincally challenged at 12 bucks and it has tripled off the bottom. The stem cell stocks dumped today (STEM and GERN), but they are too hot for me to mess with right now.

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#24) On January 28, 2009 at 1:13 PM, binve (< 20) wrote:

Tasty, great post man! Yeah, there is all kinds of junk out there right now. And it is more dangerous, especially now. Because everybody's portfolio is hammered. So I bet people are willing to take more risks right now to try and make up for their losses.

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#25) On January 28, 2009 at 1:28 PM, Tastylunch (28.61) wrote:


yeah especially since everybody figures that wall street is gaming the system they may actually be more likely to believe the get rich quick schemes ("i seen them wall street fellers double their money, I want to too!" actual words from a customer last week)

What make me mad is that the victims of these crimes are usually the people who can afford to lose the least amount of money. This is like Anti-Robin Hood, steal from the poor to give to the rich. :-(

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#26) On January 28, 2009 at 1:54 PM, XMFSmashy (99.68) wrote:

Don't know if it's a fraud or not, but see my new blog post.

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#27) On January 28, 2009 at 3:08 PM, madcowmonkey (< 20) wrote:

Tasty- I must have been living in a cave, because I just heard about the stem cell that Obama administration was working on.

Personally, I dislike stem cell, but at this time I am also confused on the pros and cons of the gig.

I thumbed down your suggestion this morning with a couple of others this morning. I also took a jab at the double short metals....not sure if I hit that one at a good time or not?

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#28) On January 28, 2009 at 3:15 PM, EverydayInvestor (< 20) wrote:

Tasty - I disagree with your comment on Pink sheet stocks beating OTC BB stocks. Pink sheets has different levels; stocks with 5 letter tickers ending in Y are foreign companies. These are fine. But the standard pink sheets stocks do not need to file current financial reports (which is why ARTC is there; they had been on the Nasdaq). You can go to and they explain on their website the different levels of companies. OTC BB companies need to have current financials with the SEC.

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#29) On January 28, 2009 at 3:20 PM, Tastylunch (28.61) wrote:


I don't think you missed anything by living in a  cave, watching MSM news will make you dumb or afraid. They are fear mongerers imho.

I don't have an ethical problem with stem cells but the stem cell stocks that are rallying are poorly run anyway. Plus their research wasn't as restricted as people think, embryonic stem cells were the only ones that were banned the other type was available for use.

I don't know man I redthumbed some gold miners myself as a trade,Gold doesn't seem to be breaking out of the downtrend like people think it should and the banks are rallying, figure it might work out for a week or so. :So i guess I read it the other way but I could very well be wrong. :-)Who knows anymore?

Shrting the dbl shorts should get you points no matter what, they all degrade over time so they should go down no matter what happens to metals if you wait long enough.

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#30) On January 28, 2009 at 3:25 PM, Tastylunch (28.61) wrote:


thanks for the catch, I should have been more careful what I meant (and should have said) is that they have the potential to be better than OTCBB stocks (especially if they are the foreign stocks that you mentioned ending in Y) but that they aren't necessarily and can be worse.

thanks again for the catch, I was sloppy in my explanation.


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#31) On February 03, 2009 at 12:35 PM, Mary953 (84.17) wrote:

Hey Tasty,

I updated the post that I put on CAPS once in a while to provide newcomers with ways to use the site. (Usually after we have a bunch of "I'm new, so how do I...type posts).  I put this blog up and suggested it as a warning about penny stocks and also a general idea of "hey, people around here take care of each other".  --

If you want it, here is the link -



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#32) On February 03, 2009 at 6:59 PM, Tastylunch (28.61) wrote:


cool! glad it was useful to you.

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