The Securities and Exchange Commission recently announced an emergency action to stop a South Florida-based penny stock investment fraud. This scheme affected over 100 retail investors nationwide and in Canada.  According to the recently unsealed SEC complaint Defendants NIT Enterprises, Inc., NIT’s CEO Gary R. Smith, Jason M. Ganton, and James E. Cleary, Jr., made misrepresentations in order to raise $4.9 million from investors. Many of the investment fraud victims were seniors. Defendants Ganton and Cleary were previously barred by the SEC from acting as brokers and offering penny stocks to investors.

As alleged by the SEC in its complaint, NIT consists of three entities: NIT Delaware, NIT Enterprises, and NIT Florida, NIT’s principal place of business is in Palm Beach Gardens, Florida. Until March 2016, NIT Delaware was majority-owned by a Florida public microcap issuer. The SEC complaint alleges that the defendants represented that NIT was raising money to fund the company’s development of radiation protection products for medical and military use, which would generate significant investment returns. Instead, according to the SEC’s complaint, Smith misappropriated $1.25 million, or 25% of the total investor proceeds to pay his personal expenses. The SEC also alleges that  NIT and Smith have paid 25% of the proceeds as undisclosed commissions. The SEC’s complaint further alleges that the defendants falsely promised NIT’s future profitability and told investors that there would be a soon to come initial public offering (“IPO”). The Defendants allegedly told the investors that they could “double or triple” their investment. Defendants Ganton and Cleary also allegedly concealed their regulatory disciplinary histories and prior SEC actions and bars, in part done through Ganton’s use of an alias name when soliciting investors.

The SEC’s complaint charges all defendants with violating the anti-fraud and registration provisions of the federal securities laws and also charges the individual defendants for, either directly or indirectly, acting as unregistered broker-dealers and violating past Commission orders.

According to the SEC, the term “penny stock” generally refers to a security issued by a small company that trades at less than $5 per share. Penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board. Penny stocks may, however, also trade on securities exchanges, including foreign securities exchanges. Penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them creating a liquidity problem for investors who need access to their money. Moreover, because it may be difficult to find price quotations for certain penny stocks, they may be difficult, or even impossible, to accurately price. For these, and other reasons, penny stocks are generally considered speculative investments.

Because of their speculative nature, Congress prohibited broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of 1934 (“Exchange Act”) and the rules thereunder. These SEC rules provide, among other things, that a broker-dealer must (1) approve the customer for the specific penny stock transaction and receive from the customer a written agreement to the transaction; (2) furnish the customer a disclosure document describing the risks of investing in penny stocks; (3) disclose to the customer the current market quotation, if any, for the penny stock; and (4) disclose to the customer the amount of compensation the firm and its broker will receive for the trade. In addition, after executing the sale, a broker-dealer must send to its customer monthly account statements showing the market value of each penny stock held in the customer’s account.

Penny stocks are risky investments that are not suitable for many investors, particularly those with conservative investment profiles or who may need immediate access to their money. They are generally considered aggressive investments and thus are highly regulated by the SEC.

If you believe you have suffered a loss due to an unsuitable or fraudulently sold penny stock, or any other type of investment fraud, you may have the legal right to recovery for those losses. Former Wall Street Attorney Melanie S. Cherdack represents investors in the United States and the Caribbean in claims against brokers and brokerage firms for wrongdoing. If you believe you are the victim of a Ponzi scheme or other financial fraud you may have a claim for damages. For a free consultation, contact us by filling out our online contact form, or calling 888-768-2499.