Photographer: Michael Nagle/Bloomberg

Murky Corner of U.S. Stock Market Takes Step to Clean Up Fraud

  • OTC Markets Group adds new policies on stock promotion
  • SEC cracked down on fraudulent stock promotion in April

A corner of the U.S. stock market where fraudsters often lurk has taken a step toward cleaning up.

OTC Markets Group Inc., which runs markets for over-the-counter trading in more than 10,000 securities, released a new policy on Tuesday to stem fraudulent stock promotion -- or ginning up positive attention for a security, while being compensated in secret by the company itself. Companies were reminded they need to make timely disclosures about important developments, which includes dispelling anything misleading spread by promoters.

Earlier this year, the U.S. Securities and Exchange Commission went after 27 individuals and groups that promoted stocks, including on investing websites like SeekingAlpha.com. The SEC said the fraudulent promoters gave the impression they were providing independent analysis while secretly taking payments for their work. The SEC agreed to several settlements, including one of almost $3 million.

“This is a problem, so for us to show leadership on improving transparency is a good thing,” Cromwell Coulson, president and chief executive officer of OTC Markets, said in an interview.

To address the issue, OTC Markets says it will start flagging dubious securities that are being promoted in the first quarter of 2018. It will also start asking some companies that are the subject of stock promotions to notify investors. If OTC Markets deems them a threat, they’ll be labeled with a skull-and-crossbones icon on its website. (That buyer-beware signal is already used on the site, but this broadens the use.)

SEC Alert

The SEC in April issued an investor alert on stock promotion, with a warning that stock promotion scams can come in the form of social media posts, investment newsletters, online advertisements, and chat rooms as well as in newspapers, magazines, television and radio.

“Microcap stocks, some of which are penny stocks and/or nanocap stocks, may be particularly susceptible to stock promotion schemes and other forms of market manipulation,” the SEC said in its alert.

New SEC Chairman Jay Clayton has made protecting individual investors a priority of his tenure at the securities watchdog since coming on in May.

OTC Markets offers companies not listed on a stock exchange like the New York Stock Exchange or Nasdaq Stock Market a place to trade. One of the most famous penny-stock scams was immortalized in “The Wolf of Wall Street” by Jordan Belfort, who was sent to prison for a boiler room operation he ran in the 1990s.

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