New SEC Rules Target Small-Stock Fraud

Extending its fight against small-stock fraud, the Securities and Exchange Commission adopted rule changes aimed at choking off potential stock manipulation before ordinary investors lose money in such schemes. The new rules will increase the amount of information small companies are required to disclose to investors and make it harder for people to fraudulently promote stocks. Many of the schemes involve a practice known as “pump and dump,” in which promoters push up a stock’s price by making false claims about the company and later sell their own shares to cash in on the artificially high price. Under the rule changes, companies won’t be able to sell their stock to public investors through consultants who are improperly compensated by the companies. The SEC has cautioned investors to be wary of sales pitches for high-risk--or penny--stocks, especially those making exaggerated promises of big returns. “Stock-manipulation schemes provide the means to cheat investors out of their life savings,” SEC Chairman Arthur Levitt said before the vote.