One of 2014's biggest penny stock scams happened almost one year ago today. Shares of CYNK Technology Corp. (OTCMKTS: CYNK), a tiny and unfamiliar Belize-based company with no revenue or assets, suddenly skyrocketed a stratospheric 24,000% last summer - so the U.S. Securities and Exchange Commission came calling. Then law enforcement also got involved.
The SEC halted trading of CYNK shares on July 11, 2014. CYNK stock, which had surged from a few pennies a share in 2013 to $21.95 by mid-2014, plunged to around $0.20 a share following the halt.
Tuesday, Gregg R. Mulholland, aka "Stamps" and "Charlie Wolf," was arrested in Phoenix. Mulholland was charged with conspiracy for his alleged role in a scheme to manipulate the price of CYNK and several other stocks, including Vision Plasma Systems Inc. (OTCMKTS: VLNK). Mulholland was also charged with money laundering of illicit profits in the amount of $300 million.
According to federal prosecutors, Mulholland, a dual citizen of the United States and Canada, covertly owned Legacy Global Markets SA. Based in Panama and Belize, Legacy Global Markets is implicated in an alleged $500 million conspiracy. The firm, along with a consortium of executives, is charged with cheating investors, laundering proceeds, and hiding assets from tax authorities.
Mulholland is no stranger to the SEC. In 2001, he was ordered to pay more than $5.3 million for his involvement in a pump-and-dump manipulation of a sports drink company founded by Daniel "Rudy" Ruettiger, the inspiration behind the film "Rudy." Mulholland never paid the fine, according to the SEC.
Part of Mulholland's alleged plot involving CYNK was the "classic pump and dump," according to the complaint.
Prosecutors said in a May 2014 phone conversation recorded by U.S. investigators, Mulholland told another schemer he held "all the free trading shares of CYNK." Shortly after that phone call, CYNK's share price sharply spiked amid a series of trades in May and June.
It was downhill from there. By the time of the SEC halt in July, shares had fallen from an all-time high of $21.95 to $13.40. After the halt, shares were quoted for as little as a penny a share.
As far as penny stock scams go, the classic pump and dump is one of the most common, according to the SEC.
How the Pump-and-Dump Penny Stock Scam Works
It's become common to see messages posted on the Internet urging investors to buy a stock quickly before the price rises or to sell before the price goes down. Often scammers do cold calling with the same sort of pitch. Frequently, these promoters claim to have "inside" information about an impending development or claim to use an "infallible" combination of economic and stock market data to select stocks.
In reality, they are most likely paid promoters who are poised to pocket big profits by dumping their shares after the stock price is pumped up by the buying interest they've generated. Once these fraudsters sell their shares and stop hyping the stock, the price usually falls.
Investors, meanwhile, are left with losses - sometimes totaling their entire investment.
The newest variation of the pump-and-dump scheme involves a "misdialed" call from a stranger, the SEC cautions. The stranger leaves a "hot" investment tip for a friend on an answering machine. The message is designed to sound as if the speaker didn't realize he or she was leaving the hot tip on the wrong answering machine.
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A message like this is not a wrong number, the SEC warns. Instead, it's from someone being paid to leave these messages.
Penny Stock Scams to Watch Out For
While plenty of penny stocks go on to become lucrative investments, it's the penny stock investing scams that garner the most headlines.
That's why Money Morning has taken steps to educate readers on penny stock scams. The five biggest penny stock scams to watch out for can be found here.
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