Information is Only as Good as Its Source
Have you heard of the movie "The Wolf of Wall Street" or the movie "The Boiler Room", or possibly seen
them? While they may not be the greatest
pieces of cinema, they do serve one valuable purpose. They are realistic looks
at the tactics of a fraudulent operation, which may occur in the realm of
SmallCap and MicroCap stocks.
How realistic are they? The "Wolf of Wall Street" is based on
Jordan Belfort's memoir of the same name. Belfort was convicted of
fraud crimes related to stock market manipulation and running a penny stock
While Ben Younger, the
writer/director of "The Boiler Room", actually interviewed at a "boiler room" firm and
the movie has been praised by SEC regulators as a cautionary tale.
The warning to be found in
these movies is be sure of where you get your investment information from,
particularly when dealing with unregulated MicroCap and SmallCap companies.
Many small companies are exempt
from filing reports with the SEC. This lack of reliable, readily available
information can open the door to fraud. Allowing for the manipulation of
stock prices to the detriment of investors.
Here are some methods of
disseminating false information:
- Questionable Press Releases -
Releasing "news" containing lies about a company's sales,
acquisitions, revenue projections, or new products and services.
- Internet Fraud - Distribution
of junk e-mail or "spam" over the Internet, or the use of
bulletin boards and chat rooms, to tout a company and/or provide
"inside" information. A common method is to have the recipient
believe they were not intended to receive the information and therefore
are in possession of some "exclusive tip".
- Boiler Rooms and Cold Calling -
Dishonest brokers set up "boiler rooms" where they use a small
army of high-pressure salespeople to make cold calls to as many
potential investors as possible. They are sometime selling stock in
"shell" or non-existent companies or performing a "Pump
& Dump" (see below).
- Paid Promoters - Many MicroCap
and SmallCap companies pay stock promoters to assist in their companies
promotion via investment newsletters, research reports, or radio and
television shows. This is an acceptable practice and when properly done,
the investors get the benefit of the research done by the promoter.
Reputable promoters only place their recommendation on companies they
believe in, as their value to the investor is only as good as the
companies they promote.
The federal securities laws
require promoters to disclose who paid them, the amount, and the type of
payment. But, many fraudsters fail to do so and mislead investors into
believing they are receiving independent and unbiased advice. Usually this
advice is fraudulent, meaning to deceive the investor, and only benefit
the promoter and the promoted company.
The people behind this
misinformation are running fraud schemes. Two of the most popular are:
- "Pump & Dump" - It
is just as it sounds, fraudsters provide false information on stocks
they have some investment in. They drive (pump) the stock's price up
as high as they can, then sell (dump) the stock. Once they sell, they
stop promoting it, which usually sees the stock's price fall and
investors losing their money.
- "The Off-Shore Scam" -
Under a rule known as "Regulation S," companies do not have to
register stock they sell outside the United States to foreign or
"off-shore" investors. In the typical off-shore scam, an
unscrupulous MicroCap company sells unregistered Reg S stock at a deep
discount to fraudsters posing as foreign investors. These fraudsters
then sell the stock to U.S. investors at inflated prices, pocketing huge
profits which they share with the MicroCap company insiders. The flood
of unregistered stock into the U.S. eventually causes the price to
plummet, leaving unsuspecting U.S. investors with enormous losses.
Because of their low cost and
potential for great growth, MicroCap and SmallCap stocks are very
attractive, particularly to the novice investor. And, while most companies
are honest and follow proper guidelines and regulations, you must be
careful. There are frauds out there! Know the source for all your
information, and if something does not seem right, check further before
investing. Keep in mind, while the "BB" in OTCBB means Bulletin
Board, it can just as well mean "Buyer Beware".