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
"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
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. …