TheStockAdvisor Advice

The 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 "boiler room".

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:

  1. "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.

  2. "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".

- The information contained in the documents in this website should not be construed as an offer to sell, or a solicitation to buy, any securities referred to herein. The information is considered reliable, but not guaranteed as to accuracy or completeness. TheStockAdvisor specifically disclaims any liability in connection with the documents and/or information contained within this website.  See complete Disclaimer, SEC Compliance and Privacy Policy.