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The SEC is cracking down on the market that gave rise to Jordan Belfort and The Wolf of Wall Street. Too bad it's only a few decades late.

Thousands of companies could disappear next week from the Pink Market, an over-the-counter stock exchange historically linked to investor fraud. That's because the SEC is forcing companies listed on the exchange to perform a very difficult task: basic accounting.

A Chain Only as Strong as Its Weakest Pink

The Pink Market — named for the color of paper it once published share prices on — is where investors trade stocks over the counter rather than on a major exchange like the NYSE. Most of these are so-called "penny stocks," selling for less than five bucks per share. Some really do only cost a cent.

While certain retail investors love the rollercoaster experience, trading in pink sheets is considered highly speculative (because many of the companies are in bad financial shape) and dangerous (because, as the SEC has warned, the off-exchange market is rife with fraud and manipulation).

The biggest problem is the market's anemic disclosure standards, which the regulator is now trying to fix:

  • Companies on the Pink Market aren't currently required to publicize accurate, up-to-date financial information. Hard to imagine in a world where the finances of countless companies are available with just a few taps.
  • But the SEC is closing that loophole next week. OTC Markets Group, which operates the Pink Market, says about 2,000 of its 11,000 companies could be removed as a result.

How Penny Fraud Works: Take Jordan Belfort, the infamous Wolf of Wall Street. The financial advisor ran a "pump and dump" scheme by selling penny stocks to his clients — and charging them fees for it — but didn't bother to tell them prices were going up because he was buying the shares and creating fake demand. After dumping large sums of shares and crashing the stocks, Belfort eventually left 1,500 clients with $200 million in losses.

Crime Pays: Belfort — who had to pay restitution to his victims — was also "punished" with a $500,000 advance book deal from Random House and a Martin Scorsese-helmed film adaptation of his memoir starring Leonardo Dicaprio.