By Kendra Locke
The Associated Press

Most investors take e-mails advertising a 300 percent return on penny stocks and relegate them to the trash bin. But those Internet promotions are still irresistible for some beginners lured by the promise of making a killing.

The Securities and Exchange Commission is increasingly taking legal action against individuals and companies that falsely promote penny stocks online. In one of its recent cases, involving Ives Health Co., the SEC reported a final judgment against the company's former president, M. Keith Ives, for disseminating misleading information on the Internet.

A federal court ordered Ives to compensate investors a total of $1.25 million for, among other things, falsely claiming the effectiveness of T-factor, an HIV medication the company developed.

Defined by the SEC as stocks that sell below $5 a share, penny stocks have always been considered speculative and easily manipulated. But stock market experts, seeing an increase in penny stock promotion online, say investors should be wary of swindlers.

"When markets are going up, people are more apt to dabble in stocks. So when you receive this information - no matter where it's coming from - if it's a bull market, you may be more willing to listen to it," said Peter Wysocki, assistant professor of accounting at the Massachusetts Institute of Technology Sloan School of Management.

Penny stocks generally trade on over-the-counter markets, such as the Pink Sheets or the OTC Bulletin Board, where, because of their size, they are not required to meet listing standards set by the SEC. In addition, many smaller companies do not have to file reports with the SEC, making it relatively simple to spread false information.

By influencing investors with misleading data on a company, fraudulent brokers or companies can hype up the price of a stock, then sell their own shares once the price reaches a certain level. This scam, known as "pump and dump," is practically as old as the stock market.

Experts say that since the earliest days of the Internet, promoters, phony research groups and unscrupulous brokerage firms have used spam mail, message boards, chat rooms, Web sites, and newsletters to lure novice investors into believing a given penny stock was the next Microsoft.

Often, they do not actually explain why a company is so successful or what it actually does; they distract readers with fancy financial charts and details of their successful track record, said J. Randall Woolridge, professor of finance at the Smeal College of Business at Penn State University.

There are many truthful, legitimate companies that issue penny stock. But major increases in trading volume or sudden changes in a stock's price, especially when limited financial data on the company are available, may indicate that some sort of fraud is taking place, said John C. Edmunds, professor of finance at Babson College in Wellesley, Mass.