Articles Tagged with pump and dump

shutterstock_103476707In a memo available online, Dawson James Securities, Inc. (Dawson James) stated that it acted as the sole underwriter for a February 25, 2015 offering for Great Basin Scientific, Inc. (Great Basin) (stock symbol: GBSN). Great Basin is a molecular diagnostics company that commercializes technologies that improve ease-of-use and delivers sample-to-result molecular diagnostic testing. According to Dawson James, at the time of the offering, Great Basin traded at $2.55 and had a market cap of approximately $15 million. Despite having only a market capitalization of only $15 million Dawson James rose $24 million of up to 2,724,000 units at $8.80 per unit price of Series E preferred stock and eight Series C warrants. Each share of Series E preferred stock was to be convertible into four common stock shares.

The Dawson James offering has many signs of a classic pump and dump penny stock scheme. After the offering the stock price for the company reach a high of almost $5 in April 2015. However, since that time the price of Great Basin has collapsed to about only $.06 per share wiping out shareholders. Back in April 2015, Dawson James claimed that Great Basin had announced a strong quarter and updated investors on their progress and receiving of a significant patent award.

In a Seeking Alpha article, a writer stated that the Dawson James offering gave cause for concern due to Dawson James’ past regulatory infractions and its association with one of its previous brokers who was arrested in connection with a nationwide Ponzi Scheme. In addition, the Seeking Alpha article cited other instances where Dawson James has had other investment banking relationships with other stocks that considered to be pump and dumps as well as with a Chinese company accused of fraud whose registration was revoked by the SEC. Importantly, prior to the Dawson James offering Great Basin had only 5 million outstanding shares and that the February 2015 secondary offering created convertible preferred stock and warrants that will allow an additional 35 million Great Basin shares that would undoubtedly flood the market and collapse the company’s stock.

A “penny stock” is defined by the Securities and Exchange Commission (SEC) as a security issued by a very small company, micro-cap or less than $100 million in market capitalization, and trades at less than $5 per share.  Penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board or OTC Link LLC.  However, not all penny stocks trade over-the-counter and many trade on securities exchanges, including foreign securities exchanges.  In addition, the definition of penny stock can also include private companies with no active trading market.

Penny stocks are inherently risky due to several contributing factors.  First, penny stocks may trade infrequently, meaning that it may become difficult to liquidate penny stock holdings once acquired.  Second, it may be difficult to find accurate quotes for certain penny stocks.  Therefore, it may be difficult or even impossible to accurately price certain penny stocks.  Due to these risks, penny stock investors may lose their whole investment.  When penny stock investing is combined with margin borrowing the results can be catastrophic for the investor.

If the inherent risks of penny stocks were not great enough, penny stocks are often used and manipulated for fraudulent purposes.  One common scheme is the “pump and dump” scheme. The idea behind a pump and dump scheme is to create unfounded hype for a penny stock the pumper already owns.  As the pumper’s victims buy into the hype additional purchases drive up the price of the stock artificially.  The pumper then sells his shares for a large profit while those the pumper recommended the penny stock to quickly lose their money as the stock’s value decreases precipitously.

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