The Securities and Exchange Commission and the Financial Industry Regulatory Authority issued a joint alert Thursday for investors to watch out for scamsters peddling penny stocks of businesses that are companies in name only.
“Investors should be on the lookout for press releases, tweets or posts aggressively promoting companies poised for explosive growth because of their ‘hot’ new product. In reality, the company may be a shell, and the people behind the touts may be pump-and-dump scammers looking to lighten your wallet,” said Gerri Walsh, Finra’s senior vice president for investor education.
The regulators gave these tips for advisors and client to protect themselves:
• Research whether the company has been dormant – and brought back to life. You can search the company name or trading symbol in the SEC’s Edgar database to see when the company may have last filed periodic reports.
• Know where the stock trades. Most stock pump-and-dump schemes involve stocks that do not trade on the Nasdaq Stock Market, the New York Stock Exchange or other registered national securities exchanges.
• Be wary of frequent changes to a company's name or business focus. Name changes and the potential for manipulation often go hand in hand.
• Check for mammoth reverse splits. A dormant shell company might carry out a 1-for-20,000 or even 1-for-50,000 reverse split.
• Know that "Q" is for caution. A stock symbol with a fifth letter "Q" at the end denotes that the company has filed for bankruptcy.