Victim of Financial Fraud? Call Now
Securities Lawyer Jonathan Kurta
By: Jonathan Kurta Author

Did You Lose Money on a Penny Stock?

Every year, thousands of investors lose money as a result of fraudulent schemes perpetrated by stockbrokers and investment advisors. Unfortunately, many stockbrokers and investment advisors engage in deceptive practices to line their own pockets to the detriment of their clients. Penny stock fraud refers to just one form of investment fraud. When brokers recommend clients purchase penny stocks, they must comply with requirements laid out by the Securities and Exchange Commission (SEC). If you or a loved one suffered losses in a penny stock scam, contact our stockbroker fraud attorneys at Kurta Law today by calling 877-600-0098 or emailing

What Is a Penny Stock?

Penny stocks trade for less than $5 per share and typically aren’t listed on a national stock exchange. While some investors purchase penny stocks without the advice of a broker, there are many situations where a broker might recommend penny stocks. Typically, small start-up companies without stable financial histories issue penny stocks. As a result, investors find these stocks lack liquidity or buyers in the marketplace, making them risky investments. Only investors with a high-risk tolerance should consider investing in penny stocks. 

Microcap Stocks Vs. Penny Stocks

Similarly, Microcap stocks describe public companies with low capitalization. A company’s capitalization is determined by calculating the market price of one company share times the number of shares outstanding. The SEC indicates that companies issuing microcap stocks possess an average of $6 million in net assets, though many hold less than $1.25 million. The main difference between microcap stocks and penny stocks is that a microcap stock is determined by market value while the penny is calculated stock by the stock price. These similar types of stock are often instruments of the same kind of fraud.

Can Brokers Recommend Penny Stocks?

Because penny stocks are relatively inexpensive, stockbrokers often recommend investors purchase multiple shares of a company when investing. In most cases, brokers receive commissions on every securities transaction they perform in your account. Thus, brokers usually make more money when they recommend the purchase of more shares.

Because penny stocks aren’t listed on a national securities exchange, brokers typically do not possess the same amount of information they have on larger, household securities. Bigger public companies are subject to media scrutiny and provide plenty of online information about their business. They may also have different reporting requirements with the SEC. In contrast, companies offering penny stocks typically offer less information. Additionally, national securities exchanges require companies trading their stocks to meet stricter minimum listing standards. 

If brokers want to recommend a penny stock transaction, the SEC requires them to provide the customer with a risk disclosure document identifying the risks, describing the market, and informing the customer of their rights and remedies under federal and state law. 

How Does Penny Stock Fraud Work? 

Pump-and-dump” schemes are common penny stock frauds targeting millions of unsuspecting investors every year. In a pump-and-dump scheme, the scammer initiates the scheme by generating as much interest as possible in a certain stock. The scammers typically garner interest through online posts on social media, investment forums, or internet chat rooms. In a more complex scheme, the scammer could pay various brokers to recommend the shares to their clients. Once investors see the promotional information advertised by the scammer and purchase shares of the stock, the share price jumps significantly. Once the stock price jumps, scammers sell, or “dump,” their shares, earning a hefty profit. 

When you’re considering investing in penny stocks, several red flags should alert you to the presence of potential penny stock fraud, including:

  • Aggressive promotion of a certain stock;
  • Guarantees of high returns;
  • Pressure to purchase the stock immediately; and
  • Unsolicited stock recommendations from unknown sources. 

If any of these factors exist, take a step back and reconsider moving forward with the investment.

Signs of Microcap Stock Fraud

Microcap stocks, including some penny stocks, offer many opportunities to commit fraudulent schemes. This is because microcap companies typically don’t have lots of publicly available information, making it easier to spread false information. Warning signs of a microcap stock fraud include:

  • A history of SEC trading suspensions;
  • Increase in stock price or trading volume linked to promotional activity;
  • Press releases announcing events that never happen;
  • Frequent changes to the company’s name;
  • A lack of actual business operations; and
  • The issuance of a lot of shares without a corresponding increase in the company’s assets.

The lack of information available about microcap companies makes them a favorite target for fraudsters. If you realize that a company you want to invest in has very little public information available about its operations or assets, consider investing in lower-risk securities. 

Contact Kurta Law to Recover Your Stock Fraud Investment Losses

If you suffered losses as a result of a penny stock fraud, you could recover your losses through FINRA arbitration. FINRA rules require brokers to only recommend investments suitable for their clients after considering the investor’s age, risk tolerance, financial goals, investment horizon, and experience. FINRA also requires brokers to advise their clients of the risks associated with their investments. Violating FINRA rules can result in disciplinary action for the broker in addition to any arbitration actions. If your broker recommended penny stock purchases unsuitable for you, you could recover your losses through FINRA arbitration.

At Kurta Law, we have the experience necessary to help you recover your investment losses and navigate FINRA arbitration. Reach out to Kurta Law today by calling 877-600-0098 or by email at to get started on your case.

Securities Lawyer Jonathan Kurta
Written by: Jonathan Kurta

Jonathan Kurta is an accomplished securities attorney and a founding partner at Kurta Law.