Penny Stock Cases

Penny stocks are securities issued by smaller companies that trade at less than $5 per share. Generally, penny stocks are not listed on a prominent market like the Nasdaq or New York Stock Exchange. Rather, penny stocks trade through over-the-counter transactions including on ‘Pink Sheets’ and the OTC Bulletin Board. The Securities and Exchange Commission considers penny stocks to be high risk, speculative investments that allow for all or even more than your investment. Malecki Law’s securities fraud lawyers have represented a number of investors who have lost large sums of money from penny stocks invested in their brokerage account.

There are a number of risks inherent in penny stocks that make this investment unsuitable for the majority of investors. Investments unlisted on major stock exchanges are not bound to the same stringent requirements set forth by the SEC’s rules and regulations. Consequently, penny stocks do not have nearly as much regulation nor information about the issuing companies for investors to make proper decisions. Companies that issue penny stocks can still be private, in development, or even lacking assets. Additionally, the quotation system contributes to penny stock’s high volatility due to the difficulty of obtaining an accurate price.

The low price of penny stocks allows their value to be easily manipulated through pump and dumps or other frauds. Brokerage firms and brokers sometimes commit these price manipulation schemes to profit from their ownership of the shares or to help a client. Pump and dump schemes are a common investment scheme where fraudsters purchase penny stocks in bulk and artificially inflate the value for their own benefit. The perpetrating person or identity will aggressively market the product using sensationalized stories, fake press releases and other deceitful information. Once the price rises, the pump and dump schemer will sell all of the products and end the efforts that fostered the penny stock’s value.

Our securities attorneys remind investors to take any success stories of large profits from penny stocks posted online with a grain of salt. Even if the particular person did happen to get rich off penny stocks, such a stroke of luck would be hard to come by given the high amount of risks inherent in the product. Far more investors in penny stock experience colloquial losses rather than the rags to riches stories spread around.

Fortunately, investors who have lost money from having penny stocks within their portfolio have legal remedies to recover their money. Brokers and broker dealers are legally required to comply with the extensive rules set forth by securities regulators to protect investors. The SEC has rules and regulations regarding disclosure requirements set forth by Section 15(h) of the Securities Exchange Act of 1934.

Under Section 15(h) of the Securities Acts brokers must provide the customers with the following before executing a sale in penny stocks:

1. (1) approval for the specific penny stock transaction and retrieve a written agreement to the transaction.
2. (2) a disclosure document that describes the risks of investing in penny stocks
3. (3) disclosure of the current market quotation, if any, for the penny stock
4. (4) disclosure of the amount of compensation the firm and its broker will receive for the trade.
5. (5) monthly account statements reflecting the market value of each penny stock in the account after each sale.

On top of this, broker-dealers must seek written confirmation of the customer approving the transaction. Additionally, customers must be sent monthly account statements reflecting the market value of each penny stock held in their account after each sale. Although brokers and brokerage firms are required to disclose certain information to the investor, many unjustly fail to do so. On top of this, Penny stock recommendations to investors must also follow FINRA rules which include assurance that penny stocks are suitable. Chiefly, our securities lawyers have found that penny stocks are generally unsuitable recommendations for most investors.

If you lost money from your brokerage account after investing in penny stocks, find a securities attorney with the knowledge and experience to help recover investor losses. Malecki Law’s securities fraud attorneys have leveraged laws, rules, and regulations to help investors with claims related to penny stocks along with other unsuitable investments. For a free consultation to discover your rights, call or email our top New York City securities fraud law team.