Mafia Wires Money Through Penny Stocks?
Take a look at the below stock chart:
(thank you BigCharts.com for providing the above chart)
Obviously this is not the chart of Apple (NASDAQ: AAPL) or Google (NASDAQ: GOOG). No, this chart is typical of thinly-traded penny stocks, or stocks that have low worth, limited revenue, and low awareness in the investment community.
Just like most companies.
Although investors mostly follow a limited number of stocks (such as the 500 stocks in the S&P 500 index), there are literally thousands of small companies that have stock history charts like the one shown above. Over-the-counter markets, for example, trade about $350 million of stock per day, whereas the New York Stock Exchange trades over $153 billion of stock per day.
When looking at the price history of these smaller stocks, it is not uncommon for almost no trades to occur for days, weeks, or months. Literally no trades: no buys, no sales, nothing happens. The companies just operate, and no ownership shares exchange hands. A market, after all, is a place for buyers and sellers to transact. If there are no buyers and sellers, there is no market.
These "thinly traded" stocks have long been subject to scrutiny by the high-tier investment community. Claims about the risks of trading in penny stocks abound: they do not verify their financial condition, they do not verify their operations, their statements are not audited, they are subject to pump-and-dump operations, and the list goes on. Well, today, add one more accusation to this list:
Maybe the mafia wire money through penny stocks.
Allow me to explain. Say, just for the sake of example, that you are a mafia member. Say you have $200,000 that you'd like to send to Johnny who is "on business" in Mexico. And say that you are interested in getting this money to him quickly and with minimal risk.
You consider the options: trucks, escorts, planes, ships... and then you pull up a chart of a penny stock.
You notice that no transactions have occurred for two weeks. You notice that the best offer for selling the stock is $2.50 and the best bid to buy the stock is $2, and it has been that way for weeks. No transactions. No buyers will to go higher, no sellers willing to go lower. Stalemate.
Excellent, this is your opportunity. You call up Johnny and tell him that tomorrow you'd like him to set up an international brokerage account and get ready to shortsell XYZ. (Shortselling is legal in many stocks above $2 and is a way to "borrow" the stock to sell first, with of course the promise to buy the stock back later to return to the lender.) Likewise, you set up a brokerage account and fund it with $200,000.
Johnny gets his account set up and asks his broker for 100,000 shares (100,000 x $2 = $200,000). His broker only has 30,000 shares free, so Johnny calls and asks if you can make your "payment" in installments. You respond "no problem" and remember to change your pending order to 30,000 shares.
Then, at a pre-determined time, you and Johnny log in to your account and get ready to submit an order: you an order to buy 30,000 shares at $2.30 and Johnny an order to shortsell 30,000 shares at $2.30. This is in-between the $2 bids and $2.50 offers, a no-mans land called the "spread" which always exists when transactions are not occurring in a stock market.
So, game time. You and Johnny agree that at exactly 2:37pm tomorrow you will both submit your orders To avoid complications, you agree on this precise time to avoid other people interfering with your transaction.
Tomorrow comes. No transactions occur in the stock. Bidders are still sitting at $2. Sellers are still offering at $2.50. No buys, no sales, just quiet. 2:35pm. No transactions.
Then suddenly, at precisely $2.37pm, 30,000 shares transact at $2.30. Poof. You have bought 30,000 shares and Johnny has shortsold them. You spent $69,000 and Johnny has received a credit in his account for $69,000 (30,000 x $2.30).
Congratulations! You have just wired money through a penny stock. You deposited and sent $69,000, and Johnny has a credit of $69,000.
Whenever Johnny wants to return the shares to his lender, you can either mail your shares certificates to him or he can simply buy them back later.
(Disclaimer: There is little, if any, proof that this or any similar type of transaction has actually occurred. Moreover, the above stock chart is only used as an example and no accusation of fraudulent activity in its company should be inferred. This article was merely written to describe a possible fraudulent trade that could be used for illegal purposes, not that a specific crime has actually occurred at a specific time. Finally, this example is obviously a simplified version meant to explain a general conceptual possibility, not as an actual example of a real-world transaction. Liquidity, short locates, share certificate redemption policies, and international regulations would further complicate this example beyond what was necessary to illustrate the concept.)
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