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85 Nw. U. L. Rev. 676 (1990-1991)
Penny Stock Markups and Markdowns

handle is hein.journals/illlr85 and id is 694 raw text is: Copyright 1991 by Northwestern University, School of Law               Printed in U.S.A.
Northwestern University Law Review                                       Vol. 85, No. 3
PENNY STOCK MARKUPS AND MARKDOWNS*
Joseph L Goldstein,**
and L. Delane Cox***
I. INTRODUCTION
According to the North American Securities Administrators Asso-
ciation, the American public has invested approximately $10 billion an-
nually in penny stocks, which are low-priced equity securities traded in
the U.S. over-the-counter (OTC) market.2 A substantial portion of
these investments, however, never reaches the actual capital markets.3
Many penny stocks are utilized by disreputable broker-dealers in fraudu-
lent, manipulative schemes. These include selling to nominee accounts to
artificially support the price of the stock; allowing insiders to sell at in-
flated prices; making false representations about a company whose stock
a firm is touting; and churning customers' accounts.4 Additionally, be-
cause a penny stock often is traded in a market dominated and controlled
by a single market maker, the market maker may be able to artificially
influence the price of the stock by setting a wide spread between its bid
and ask prices and charging excessive markups, without fear of compet-
ing prices from other brokers.5 These fraudulent activities generate large
profits for firms and their salespersons, with top brokers at some penny
* As a matter of policy, the Securities and Exchange Commission disclaims responsibility for
any private publication by any of its past or present employees. The views expressed in this Article
are those of the authors and do not necessarily reflect those of the Commission or any of its staff.
** Associate Director, Division of Enforcement, Chairman of the SEC's Penny Stock Task
Force, Securities and Exchange Commission, and a member of the District of Columbia and Penn-
sylvania Bars.
*** Staff Attorney, Division of Enforcement, Securities and Exchange Commission, and a mem-
ber of the District of Columbia and Florida Bars.
1 North Am. Sec. Adm'rs Ass'n Report to the Subcomm. on Telecommunications and Fin. of
the House Comm. on Energy and Commerce 5 (Sept. 1989), in Penny Stock Market Fraud, 1989:
Hearings Before the Subcomm. on Telecommunications and Fin. of the House Comm. on Energy and
Commerce, 101st Cong., Ist Sess. (1989) [hereinafter NASAA REPORT].
2 Penny stocks are usually quoted in the pink sheets published daily by the National Quota-
tion Bureau, Inc.
3 An estimated $2 billion of investors' monies are lost each year due to fraud and abuse in the
penny stock markets. NASAA REPORT, supra note 1, at 5.
4 Id. at 6.
5 SEC News Release, Remarks of Securities and Exchange Commission Chairman David S.
Ruder, 21st Annual Rocky Mountain State-Federal-Provincial Securities Conference 8 (Oct. 21,
1988) (Denver, Colo.) [hereinafter Remarks of David S. Ruder].

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