If you’re facing charges related to microcap fraud, you might feel overwhelmed by the complexity of the allegations and the potential consequences. These cases involve small, thinly traded securities with less stringent regulatory oversight. The federal government can enforce violations in either civil or criminal court proceedings.
Philadelphia microcap fraud attorney Brian Zeiger understands the nuances of federal and state securities laws surrounding microcap stocks. He and his team can help protect your legal rights and build a strategic defense when the stakes are high. Contact The Zeiger Firm today for a free consultation.
What is Microcap Fraud?
Microcap stocks, sometimes called penny stocks, are shares of smaller companies, usually with market caps of under $250 million. They trade at relatively low prices, so investors who want higher returns in a less-established market may find them attractive.
These low-priced stocks increase the risk of fraudulent behavior behind the scenes. Some companies may try to superficially inflate a company’s stock price to realize a gain. When investors dump the stock later or learn about its actual value, the result may cause significant financial harm and pressure to prosecute.
Microcap stock fraud can involve company insiders, brokers, stock promoters, or executives who make false or misleading statements about a company’s assets, revenue, or prospects. They could also use shell companies to hide ownership and financial information. Even absent those two factors, an honest mistake could still draw public scrutiny and lead to a fraud investigation.
How a Microcap Fraud Defense Attorney Can Help
Once you learn of a microcap fraud investigation or charges against you, your top priority should be to find a defense attorney you trust. Your legal team can help you at every step of the process by:
- Intervening early – Your criminal defense attorney can communicate with investigators on your behalf and protect you from inadvertently incriminating yourself or harming your defense.
- Building a defense – Your lawyer can analyze evidence, witness statements, and relevant documentation to find weaknesses or inconsistencies in the government’s case. Each situation is unique, but a few common defenses in microcap fraud matters may include lack of intent, insufficient evidence, or that you reasonably relied on information others provided to you.
- Negotiating with prosecutors – If it’s in your best interest to negotiate a plea agreement in a criminal proceeding, your lawyer can advocate on your behalf for the best possible outcome given the circumstances.
- Going to trial – If your case goes to trial, your lawyer can cross-examine witnesses, challenge the government’s evidence, and make your case to the jury.
Types of Microcap Fraud Cases
Fraud involving penny stocks and small securities can take many different forms. With many microcap stocks being more volatile and often less transparent, regulators often devote substantial resources to rooting out fraud. The U.S. Securities and Exchange Commission (SEC) first launched a Microcap Fraud Task Force in 2013. It continues to investigate cases and recommend new regulations surrounding these stocks.
Here are a few of the most common types of microcap fraud cases and their unique characteristics:
Pump-and-Dump Schemes
Pump-and-dump schemes are among the best-known forms of microcap stock fraud. They involve artificially inflating a stock’s price by spreading false information in press releases, promotional materials, online advertisements, or internet chat rooms. Those involved in such schemes may purchase shares of the microcap company, making it look like a hot stock. Then, once the price reaches its peak, the organizers sell their shares, causing unsuspecting investors to lose money due to the inflated prices and sudden dumping of the less attractive stocks.
Market Manipulation
Market manipulation involves any conduct artificially affecting a microcap stock’s supply or demand. Matched trading is one common type of market manipulation, which occurs when buyers and sellers coordinate trades to keep a stock’s price steady. Wash trading can also occur, where a single individual or group buys and then sells a security to create false impressions of high trading volume.
Insider Trading
Insider trading occurs when someone with information on a company (other than publicly available information) such as future mergers, acquisitions, or product breakthroughs, trades on that data for profit. The SEC prohibits it under Rule 10b-5.
The SEC established the Fair Disclosure (FD) regulation in 2000 to discourage insider trading. Under the rule, if a company discloses nonpublic information to one person, it must also disclose that information to the general public.
Undisclosed Control of a Public Company
This type of microcap fraud scheme occurs when an individual secretly controls a company or holds a large number of shares, then conceals that fact from the public. The organizer could use shell companies to mask who holds power, making it harder for regulators to investigate and investors to make wise buying, selling, and trading investment decisions.
Unregistered Offerings
Sometimes, a company may face allegations of selling microcap shares without properly registering them with the SEC. There are some valid exceptions to Exchange Act registration requirements, but serious legal consequences can result if you’re required to register and do not do so.
Potential Penalties for Microcap Stock Fraud
Someone who commits microcap stock fraud may face significant civil penalties, criminal penalties, or both.
Criminal Referrals and Penalties
In more severe microcap fraud cases, the SEC may refer a case to the FBI or the U.S. Department of Justice for further investigation and prosecution. If a jury finds you guilty in a criminal trial, you may face possible prison time in addition to civil penalties.
Potential Civil Penalties
In less severe cases, the SEC can file a civil lawsuit in the U.S. District Court against someone suspected of insider trading or securities fraud. If the jury in a civil suit finds against you, you may face any of the following penalties:
- Injunctions – Injunctions are court orders prohibiting a defendant from engaging in future fraudulent actions. If someone violates an injunction, they could be held in contempt of court.
- Disgorgement – The court may order a defendant to repay ill-gotten gains, potentially including interest.
- Civil penalties – Civil penalties are paid to the SEC and escalate with the severity of the offense.
Contact Brian Zeiger for Your Free Consultation Today
If you’ve been accused of participating in microcap fraud, the team at The Zeiger Firm can fight for your rights and reputation. Microcap fraud lawyer Brian Zeiger has defended clients in Philadelphia and throughout the Commonwealth in state and federal proceedings. He takes an aggressive and detail-oriented approach to each case, earning him recognition both from legal peers and the broader community. Contact us today for a no-cost, no-obligation case review.
