7 New Penny Stock Scams

Scams in Penny Stocks Are as Common as Ever, but With a New Twist

Business Man in Prison
Business Man in Jail. Darrin Klimek

Things were easier when penny stock scams did not go far beyond the standard "pump & dump" scheme. As bad as those dishonest tactics were (and are), there has recently been an insidious rise of some new and modern methods.  

It would seem that promoters haven't gone away, but rather were just evolving. These weasels are now applying new tactics to try and trick you out of your money, and with some of these approaches you may not even spot or recognize the set-ups.

While many of these new tactics are not technically illegal (unlike many of the conventional scams you may have heard about at times in the past), they are still just as dishonest, disingenuous, and misleading. While you are probably savvy enough to avoid these tricks, the vast majority of people around you may find themselves excessively vulnerable to these new (more-subtle) tactics.

Until recently, it felt like we had been getting on top of many of these weaselly pump and dump scams (which stole millions of dollars from well-meaning investors). Perhaps we had won, we might have thought. Perhaps we had finally crushed these promoters once and for all!  

Unfortunately, that is apparently not the case. As if by necessity for survival, most of these dishonest promoters have been trying many of these newfound new generation tactics. In fact, maybe that need to keep their scams and frauds going is why these techniques have arisen in the first place.

The Old Pump and Dump Scam

It was easier back in the day, where a dishonest promoter would buy millions of shares in some obscure, almost bankrupt business, for a fraction of a penny. They then would lie to their network, bragging from the rooftops about the virtues of the underlying business, explaining how it's going to be the next great investment.

They would keep the promotion going through free online newsletters, message boards, email lists, and even unsolicited faxes. Once they had driven the price up significantly, they would sell their holdings at many times the price they originally paid. 

Typically, at this point, it would indicate the end of the promotion. The scam artists would stop pushing the shares higher with their lies, and the stock would drop down suddenly and rapidly, back towards a more realistic price.

In other words, the shares would crash down towards a fraction of a penny. Naïve and trusting shareholders would watch their entire investment get wiped out in a single moment.

Most people are familiar with pump and dump schemes by now, and in fact, if you find yourself getting tricked or trapped by one, you probably have only yourself to blame. However, some of the modern tactics are much more subtle, and are not at all obvious.

Some of these new scam tactics include, but are not limited to the following.

Inflating Social Media Followings

It is easy to fake out surfers by dramatically increasing your social media following account. For small amounts, such as a few hundred bucks, there are services which will add tens of thousands of what looked like "unique users" to your following.

This is why many people's social media accounts ballooned from 1000 or 2000 to hundreds of thousands seemingly overnight. Actually, it was within hours, not days. We know this because we watched in real time, and recorded everything.

This is why when you look at the demographics of that increased base of fans, you will see at first that they are all 12-year-old boys from Asia, or 10-year-old girls from the Middle East. They are in fact not legitimate followers, but rather are like an army of digital zombies used only as "room meat" to push the numbers higher.

Soon after the original "popularity purchase," the perpetrator (or the service they used) is able to clean up their followers. No more 8 year-olds from Siberia — their fans start looking more like actual people.

When it comes to social proof, prospects will see that thousands of other people are interested in the particular product or service.

This means the dishonest tactic of paying for followers is effective for the majority of prospects.

If you are on the fence about putting out some cash for the particular wares being promoted by the specific website or service, and then you see 200,000 people who are following on Facebook or Instagram or Twitter, you may be more likely to make a purchase. After all, if 200,000 people like it, then this service must be good... right?

Driving Up Video Views

Another way to enhance the social proof of a service is to drive up the number of views of a YouTube video. The total watch count can be pushed up by the thousands, or even the hundreds of thousands, if the publisher is willing to pay for the additional dissemination.

There is a dead giveaway to know if the video views have been artificially enhanced. Specifically, look for the engagement among people who watch the video.

If five percent or more of people who view a video click on the "like" button, then it is more likely that the viewers are actually real people. However, when you see a video with thousands or tens of thousands of views, and the number of people who engage by clicking "like," or even "dislike," that is less than two percent of the total, you can feel confident that the video is being promoted for pay.

While you can pay to increase the number of people who view the video, you cannot pay to increase the number of people who engage with the video. Any publisher can have 500,000 people watch their publication as long as they pay enough money, but they can not convince four percent or five percent of those people to actually take any kind of action.

In other words, it's simple to get a lot of garbage views from disinterested individuals. It is actually not simple at all to create a video which encouraged five percent to 10 percent of the people to engage by clicking "like."

Lying About Media Appearances

This is the first dishonest tactic that any punk kid in their great-grandmother's basement will apply. This is also why every financial newsletter on the Internet seems to claim that they have been on NBC, CBS, CNBC, and a whole host of other top media sites.

Whether or not they have actually gotten any of those media appearances is unrelated to whether or not they say, "as seen on top media." Most of them have not, but that does not stop them from claiming they have.

You can see, and listen to, some of the media appearances by Peter Leeds on his media page. The "pretenders" will not have links to any interviews, because the interviews themselves never took place, nor do they exist.

Unsubstantiated Exaggerations

As well, one of the favorite tactics of the new generation of scam artists is to make incorrect claims about their credentials. For example, calling a book a "bestseller," when it is anything but a bestseller. Check the book on Amazon.com and see how many reviews it has generated and the star rating. Any real bestseller will actually be on the shelves of your local bookstore as well as online.

Gasping for Air

This is one of the new dishonest tactics that represents desperation. When the smaller players are running out of oxygen, they try to promote their own service through popular hubs.

When publications are running low on cash, they will suddenly have their minions make brief comments on popular social media pages. Their hope is that this will result in people following the new comments and checking out the "alternative" page or website which gets mentioned.

As a result, popular social media pages  keep a close eye on this type of activity, and ban people when they try to promote other services through their channels.

Latent Misinformation

The more desperate that the promoters become, the more aggressive their tactics. Eventually, it all ends up in the same place — they will blatantly lie to you about any penny stock company, in a way that is intended to trick you into buying shares of the stock.

Most prospective investors do not conduct enough due diligence to make sure about the shares into which they intend to invest. Perhaps it is similar to people not looking into the lottery tickets that they buy —​​ why would they?

The approach of most people is that either your $2 investment becomes $1 million, or you lose your money. It is not worth your time to gauge whether or not the two dollars will become four dollars.

Paid Advertisements

In most cases when you read about a penny stock, it is actually a paid advertisement in disguise. Legally it is quite easy to get around the fact that the underlying company actually paid the promoter money in exchange for their efforts to drive up the share price.

In many cases, the costs of the promotion can reach into six, or even seven-figure amounts. The problem for investors like you is that the only legal requirement for the company getting paid to talk about a stock is to mention that they were possibly compensated.

The scammer will actually make sure that 99 percent of the people who read their article will never find out that they have been paid by the company. All they are required to do is mention it somewhere deep in their multi-page disclaimer.

This is why they will publish it in a small font that is barely legible. The legally-required claim about being paid for their coverage is often several paragraphs deep in the middle of a 2000 word statement. They are banking on the fact that you're not going to bother reading carefully, and they are almost always correct.

In Penny Stocks, "Buyer Beware!"

Perhaps this all guides you towards the concept of buyer beware. The regulatory agencies which are tasked to enforce honesty and integrity among all products, online publications among them, are completely overstretched. In general, most of the enforcers have scant resources to combat this growing wave of theft.

Much like previous penny stock scams, they will catch only a few bad players. Those people may end up going to jail, or at least walking away from investing completely, after paying massive fines. Unfortunately, most of the scam artists will probably walk away unscathed, usually driving a fancy car and wondering why they can't fill that hole in their life even when their scams "work out" exactly to plan.

The better way when it comes to penny stocks is to educate yourself. Also, get high-quality, low-priced penny stock picks from a service or individual who combines honesty and integrity with a leading track record.