It’s nice when investors start taking notice of your company – unless it’s the result of a stock manipulation scheme designed to pump and dump (or short and distort) your stock. Microcap scalping campaigns can cause your company’s value to reach new heights only to crash and burn.
What Is a Microcap Scalping Campaign?
A microcap scalping campaign is strategy that uses short-term investments in microcap companies to profit from small increases in value.
Although there’s nothing inherently wrong with buying cheap securities and then selling them at a profit, these schemes venture into fraud when scalpers rely on fabrications and misinformation to artificially boost the value of the securities they’ve targeted. Allegations of stock manipulation and misrepresentation are also possible if the scalper has ties to the company and fails to disclose this or uses other means to manipulate prices.
When illegal stock manipulation is employed, a microcap scalping campaign can be considered a type of pump-and-dump stock scheme that targets microcap companies. These schemes may be carried out by company insiders, but they can also be organized by outside investors who have targeted the company simply because it meets certain criteria.
Here’s how it often works:
1. The scalpers buy up cheap securities.
2. The scalpers then try to boost the price of the securities, for example, by encouraging others to invest.
3. Once the price has increased, the scalpers sell their securities to make a profit.
According to Morrison Foerster, a jury in the United States District Court for the Southern District of New York found an Ohio-based trader accused of scalping liable for securities fraud and market manipulation.
Short and Distort Schemes
A “short and distort” scheme follows a similar pattern to a microcap scalping campaign, but with a goal of causing the value to drop.
According to Investopedia, in this scheme, stock manipulators short a stock and then spread rumors and misinformation to drive the price down. These schemes are illegal and can result in fines and jail time.
Which Companies Are Vulnerable to Microcap Scalping?
Stock scalpers typically target microcap companies with a small number of investors and a limited amount of publicly available information.
The SEC explains that a company must file reports with the SEC if it meets certain criteria, such as having 2,000 or more investors (or 500 that do not qualify as accredited investors) and $10 million or more in assets. As a result, large public companies typically file reports with the SEC, so information is readily available to potential investors. Very small companies may not need to file, so it can be hard to find information on microcap companies. Fraudsters take advantage of the lack of information to spread false information.
At the same time, the low share value and small pool of investors can make it easier to manipulate prices. This is why so-called penny stocks are often targets of microcap scalping.
How the Internet Fuels Pump-and-Dump Schemes
Stock manipulation and fraud is nothing new. However, the internet has made it easier and faster for fraudsters to carry out pump-and-dump schemes or other types of securities fraud.
· Apps targeting retail investors make it easy for the average person to invest money in the stock market on a whim. Fraudsters can also target retail investors with their stock manipulation schemes.
· Social media makes it easy to spread false information. Fraudsters can turn to sites like Reddit to post false information, often while hiding their identifies.
Protecting Your Microcap from Stock Manipulation
Many microcap scalping campaigns are carried out by insiders, including owners. To avoid accusations of pump-and-dump schemes, company leaders can make sure they understand SEC rules, be careful to avoid misrepresentations and provide adequate disclosures.
However, it’s also possible for third parties to target microcap companies for stock manipulation schemes. While it is harder to control what third parties do, company leaders can try to stay on top of information about their company, for example, by keeping an eye on trading activity and by monitoring the internet for false rumors.
D&O insurance is also critical. If your company is hit with a securities lawsuit, D&O insurance can shield both your company and your leaders from financial liability – but only if you have the adequate coverage in place.
NSI Insurance Group helps microcap companies like yours secure the D&O coverage they need to protect their risks. Contact NSI for a complimentary review of your D&O coverage.
