Pierluigi Paganini
December 11, 2019
A penny stock is a security issued by a small company, generally for less than $5 per share. They’re also sometimes called micro-cap or nano-cap stocks. The low price per share makes penny stocks attractive.
However, what investors often don’t realize is that it’s hard to make money with penny stocks. They’re often not part of the big, well-known stock exchanges because they can’t meet the requirements.
So, penny stocks get traded through over-the-counter (OTC) transactions. Also, penny stocks often get associated with companies for which there’s little chance of financial success.
Although it’s not always the case, opportunities to invest in penny stocks are frequently scams. In one recent case, the U.S Securities and Exchange Commission (SEC) took emergency action to freeze the assets of a company involved in a penny stock scam.
Two Defendants Were Previously Barred From Offering Penny Stocks
According to the SEC, this case involves NIT Enterprises, a company in South Florida. Three defendants associated with the case raised $4.9 million from investors but misrepresented the purposes for those funds. Investors thought they were financially supporting efforts to develop radiation protection products that would eventually get marketed to the medical and military industries and generate substantial returns.
However, the SEC found that a quarter of the money raised went to pay personal expenses, while another quarter of the amount raised ultimately paid for undisclosed commissions. The defendants named in the case were NIT Enterprises’ CEO Gary R. Smith plus Jason M. Ganton, and James E. Cleary, Jr., and the SEC clarified that Ganton and Cleary were both previously banned by the SEC regarding selling penny stocks.
They got around that issue when Ganton used an alias while communicating with investors. Smith allegedly knew about that decision, too.
Another factor of this scam is that those involved told lies about the company that had no basis in reality. They did this to make the enterprise and its investment potential. For example, the defendants claimed that an initial public offering would happen soon and that people could expect to double or triple their investments. Investing in penny stocks is legal, but scams are commonly associated with them, and it’s difficult to tell what’s real.
Scammers Often Seek Seniors
The SEC’s information about this case indicates that about 100 retail investors got caught up in this scam and that many of the victims are seniors. Investment advisors play an important role in protecting older investors from scams. For example, those parties are often the first to notice that seniors may be part of a scheme that adversely affects their finances. They should speak up if they see warning signs.
It’s also vital that investment advisors follow best practices for cybersecurity and minimize cyberthreats. For example, they could safeguard their systems from hacks. If cybercriminals broke into a system containing personal information on investors, they could use it to carry out identity theft.
Investment advisors can also pass cybersecurity wisdom to their clients. If, during conversations, it appears that a person has fallen for an online investment scam or might soon, investment advisors can bring their concerns to light and try to encourage clients to think carefully before taking further action.
The FBI lists several reasons why seniors are especially likely to become scam victims. For starters, older generations often got raised on politeness, making them potentially less likely to hang up the phone or stand up to someone who’s being overly pushy. Older adults are also less likely to report scams. They may not know who to contact, think that people won’t believe them or feel embarrassed about the incident.
Scammers also know that older adults are often not ideal witnesses. They may find it hard to recall details or confirm what happened because of memory-related shortcomings that naturally occur with age.
What’s the Outcome of the NIT Enterprises Case?
The SEC’s investigation of NIT Enterprises is still in progress. However, the entity charged all defendants with anti-fraud and registration provision violations. Additionally, the defendants received charges for directly or indirectly assuming roles as unregistered broker-dealers. The way that two of the defendants continued to operate despite their previous disciplinary actions did not escape the notice of the SEC and also resulted in charges.
A Reminder of the Need for Caution
Almost anyone would love to be part of a company that’s “the next big thing.” It’d be even better if they could get on board by investing in a penny stock.
But, as this case shows, many chances to invest are not what they seem on the surface. With that in mind, it’s crucial for all investors to thoroughly research companies before taking action, plus watch out for things that sound too good to be true.
Kayla Matthews is a technology and
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