Ponzi Scheme

One of the most infamous stock fraud schemes in history is the Ponzi scheme, which operates by using funds from new investors to pay returns to earlier investors. Typically, new participants are recruited through referrals from existing investors, who are unaware that they are part of a fraudulent system. What makes Ponzi schemes particularly deceptive is their illusion of legitimacy, often backed by a history of seemingly consistent returns. These schemes can persist for years, sometimes even decades, before collapsing.

A notable example is Bernie Madoff, whose Ponzi scheme lasted over two decades. His financial firm was so successful that it became a leading market maker in the stock market, and he even served as the chairman of NASDAQ. However, Ponzi schemes inevitably fail because they rely on a constant influx of new investor money to sustain payouts. Common red flags associated with Ponzi schemes include phrases like “guaranteed income,” “offshore investment,” “exclusive hedge fund,” or any sales pitch that sounds “too good to be true.”

Pump and Dump (P&D)

Pump and Dump schemes are a classic and ongoing form of stock fraud, often appearing legitimate at first glance. In a P&D scheme, fraudsters promote a low-cost stock as a lucrative investment opportunity, often labeling it a “multi-bagger” (a stock with the potential for massive returns). Investors may hear claims that the stock is an emerging leader in its sector or the “next Apple or Amazon.”

These stocks are usually publicly traded on regulated exchanges like NASDAQ and priced between $1.00 and $10.00. The scam works as follows: fraudsters buy the stock at a low price, aggressively market it to drive up demand, and then sell their holdings once the price surges. This leaves unsuspecting investors holding devalued shares while the scammers walk away with substantial profits.

Penny Stock Scams

Penny stock scams are among the oldest forms of stock fraud, frequently intertwined with pump and dump schemes. These scams promote low-priced stocks as “hidden gems” with the promise of extraordinary returns, luring investors into what is essentially a get-rich-quick scheme.

While “penny stock” traditionally referred to stocks worth just a few cents, today the term broadly applies to low-value stocks that are often traded outside major exchanges like the NYSE. Modern penny stock scams frequently involve OTC (Over The Counter) markets or Pink Sheets, where stocks are not subject to the same regulatory scrutiny. Unlike stocks traded on major exchanges, these securities are often purchased directly from the issuing company or through unregulated brokers, increasing the risk of fraud.