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Updated Investor Alert: Fraudulent Stock Promotions

March 29, 2016

The SEC’s Office of Investor Education and Advocacy is issuing this updated Investor Alert to warn investors about fraudsters who promote a stock to drive up the stock price and then sell their own shares at the inflated price, making money at investors’ expense.

Fraudsters who conduct stock promotions are often paid promoters or company insiders who stand to gain by selling their shares after creating a buying frenzy and pumping up the stock price.  The promoters or insiders make profits for themselves while creating losses for unsuspecting investors.  

The SEC has brought charges against promoters for not disclosing the compensation they were receiving for promoting a stock. In SEC v. Smith, the SEC alleged that the defendants fraudulently promoted a data storage company through emails, online blogs, articles, and other media, without fully disclosing their compensation or that they would be paid more if they increased the company’s share price. According to the SEC’s complaint, the defendants made false and misleading statements to try to increase the trading volume and share price of the company’s stock, including falsely naming well-known companies as customers and making highly misleading projections about investment returns.

Fraudsters may promote a stock in seemingly independent and unbiased sources including:

  • Social Media: Fraudsters may use social media to promote a stock anonymously or while pretending to be someone else.  Read Updated Investor Alert: Social Media and Investing -- Stock Rumors.
  • Investment Newsletters: In some cases, an investment newsletter may promote a particular stock because the newsletter publisher has been paid to do so.  Read Investor Alert: Investment Newsletters Used as Tools for Fraud.
  • Online Advertisements: Fraudsters may purchase pop-up ads or banner ads that are targeted to a particular group based on demographics or interests.  Ads may be fraudulent even if they appear on legitimate websites, including on the online financial pages of news organizations. 
  • Email: Email spam may indicate an email scam.  Read Investor Alert: Don’t Trade on Pump-And-Dump Stock Emails.
  • Internet Chat Rooms: Fraudsters often use aliases in Internet chat rooms to hide their identities and post messages urging investors to buy stock in microcap companies based on supposedly “inside” information about impending developments at the companies.
  • Direct Mail: Fraudsters may send you high-end glossy mailers promoting certain stocks.

Microcap stocks (low-priced stocks issued by the smallest of companies), including penny stocks (the very lowest priced stocks), are more susceptible to stock price manipulation.  Publicly-available information about microcap companies often is scarce, making it easier for fraudsters to spread false information.  In addition, it is often easier for fraudsters to manipulate the price of microcap stocks because microcap stocks historically have been less liquid than the stock of larger companies (“liquid” investments are those that can be sold easily).  Be especially cautious regarding stock promotions if there are any warning signs of microcap fraud including:

  • The SEC suspended public trading of the security or other securities promoted by the same promoter.  Click here for a list of recent SEC trading suspensions.
  • Increase in stock price or trading volume linked to promotional activity.  Some microcap stocks are quoted on OTC systems including OTC Bulletin Board and OTC Markets.
  • Press releases or promotional activity announcing events that ultimately do not happen (e.g., contracts expected to produce revenue that never get finalized).
  • No real business operations (little or no assets; minimal revenues; false press releases).
  • Company issues a lot of shares without a corresponding increase in the company’s assets.
  • Frequent change in company name or type of business.

Read recent reports that the company has filed with the SEC.  For more information about investing in microcap stocks, read Microcap Stock: A Guide for Investors.

When considering any potential investment, be aware of these red flags of investment fraud:

  • Aggressive stock promotion.  Exercise extreme caution if there appears to be greater promotion of the company’s stock than of the company’s products or services.
  • Guaranteed high investment returns.  Be highly suspicious if the promoter promises you a high rate of return on your investment.
  • Pressure to buy RIGHT NOW.  Be wary if the promoter pitches the investment as a “limited time only” opportunity, especially if the promoter claims to base the recommendation on “inside” or confidential information.
  • Unsolicited stock recommendations.  Be skeptical regarding information provided in new posts on your wall, tweets, direct messages, emails, or other communications you did not ask for that promote a particular stock (even if the sender appears connected to someone you know).

Even if a promoter makes specific disclosures about being compensated for promoting a stock, be aware that fraudsters may make such disclosures to create the false appearance that the promotion is legitimate.  Additionally, the disclosures may not reveal that the underlying source of the compensation is a company insider or affiliate.  

Do not take comfort because the promoter encourages you to buy the stock through your own brokerage account.  Even if you do not give the promoter any money directly, your stock purchases may enable the organizers of the promotion to offload their otherwise valueless shares.  The promoters may have gotten their shares privately at a very low cost with the intention to profit from their promotion rather than to invest in the company.

Before investing in a company based on a stock promotion, carefully research the investment (read Ask Questions) and keep in mind that the promoter may be trying to get you to buy into the hype in order to sell his or her own shares at your expense. 

Additional Resources

Investor Alert: Zika Crisis May Give Rise to Investment Scams

Investor Alert: Investment Scams Involving Ebola-Related Companies

Investor Alert: Marijuana-Related Investments

Report possible securities fraud to the SEC.  Report a problem to the SEC.  Ask the SEC a question.  Visit Investor.gov, the SEC’s website for individual investors.

Receive Investor Alerts and Bulletins from OIEA by email or RSS feed.  Follow OIEA on Twitter @SEC_Investor_Ed.  Like OIEA on Facebook at facebook.com/secinvestoreducation.


The Office of Investor Education and Advocacy has provided this information as a service to investors.  It is neither a legal interpretation nor a statement of SEC policy.  If you have questions conce

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Modified: March 29, 2016