Study to Reveal How Penhy Stock Brokers Comply with Rules

By Doyle, John M. | THE JOURNAL RECORD, September 22, 1993 | Go to article overview
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Study to Reveal How Penhy Stock Brokers Comply with Rules


Doyle, John M., THE JOURNAL RECORD


Associated Press

WASHINGTON _ If you thought the plague of penny stock fraud ended when Congress passed the Penny Stock Reform Act of 1990, giving stock market regulators authority to crack down with tough new rules _ think again.

Fraud in the market for low-cost, high-risk, penny stocks once cost U.S. investors an estimated $1 billion a year, according to a 1989 study by the North American Securities Administrators Association, a state-level regulators' group.

In recent years, the number of investor complaints and the number of firms trading penny stocks has dropped.

However, to keep on top of the situation, federal, state and industry regulators launched a joint effort this summer to determine if penny stock brokers are complying with new Securities and Exchange Commission rules aimed at protecting investors.

"The people in this industry are not going to give up easily. The smell of money will bring them into areas where they can maneuver," Joseph Goldstein, head of the SEC's Penny Stock Task Force, said Tuesday.

Regulators aren't giving up either, he added.

In a private meeting at SEC headquarters Monday, they discussed the results of this summer's simultaneous examination of more than 100 penny stock brokers. The findings are expected to be made public later this year.

Joining the SEC in the study were the National Association of Securities Dealers (NASD), which operates Nasdaq, the electronic stock market system; the New York Stock Exchange, and 40 state securities commissions working through the securities administrators association.

Penny stocks are highly speculative securities that sell for $5 or less. They are usually issued by new or small companies with an untested earnings history.

While penny stocks are not illegal, they are vulnerable to fraud, especially price manipulation, because of the difficulty in obtaining up-to-date information about them. By definition penny stocks are not listed on national stock exchanges or automated price quotation systems like Nasdaq.

The source of most information about penny stocks comes from the few brokers who trade in them.

Before reform legislation was passed, a stream of investors testified before Congress about how they had lost thousands of dollars _ sometimes their life savings _ because unscrupulous penny stock brokers defrauded them or merely fast-talked them into risky investments.

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Study to Reveal How Penhy Stock Brokers Comply with Rules
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