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Don't get carried away by Pink Sheets stock scams
By Matt Krantz, USA TODAY
If you've ever gotten an e-mail or fax tipping you off to "a hot stock that will double tomorrow," thought about buying it but passed, you can probably count your blessings.
More times than not, the unsolicited stock pitches are thinly disguised schemes to pump up the price of a stock that trades for a few cents a share — known as a penny stock — so the people hyping the stock can dump their shares to you and move on.
Many of these scams involve stocks that trade on the Pink Sheets, which is an ideal place for such things because it is a nearly unregulated computer network that matches buyers and sellers. As authorities have clamped down on stocks listed on the New York Stock Exchange and the Nasdaq, it has driven more scammers to the Pink Sheets.
MOVING AROUND
Number of Pink Sheets companies moved to the New York Stock Exchange, Nasdaq or American Stock Exchange:
2000 8
2001 19
2002 11
2003 10
2004 14
2005 8
Sources: Pink Sheets
The Securities and Exchange Commission has moved to make things more difficult for people who want to use the Pink Sheets to take advantage of unsuspecting investors. It is seeking out dormant stocks and delisting them. It also requires a public shell company, when it ceases being a shell company through a reverse merger (in which a shell company adopts an existing trading company's identity), to file with the SEC the same information that would be required if it were becoming a public company.
But that has only made people who promote penny stocks on the Pink Sheets more creative, says Hartley Bernstein, publisher of StockPatrol.com, a financial watchdog website.
Much of the responsibility of avoiding these scams is left up to you, the investor. Here's what you can do:
Know where the stock is traded.
To find this, all you need is a stock symbol or company name. Enter the symbol into most financial websites and you can see where the shares trade. If they're listed on the Pink Sheets, the stock symbol will have a "PK" after it. If it does, your defenses should immediately go up.
Securities lawyers, regulators and accountants are highly suspect of stocks that trade on the Pink Sheets. That's because there aren't many legitimate reasons for a clean company to list on the Pink Sheets, says Mike Starr, partner at accounting firm Grant Thornton. Starr says his firm won't touch them as clients. "We don't get involved with companies listed on the Pink Sheets. Frankly, there's too much risk, because there's a reason they're on the Pink Sheets."
For many companies, that reason is the lack of any disclosure requirements. With rare exceptions, these companies don't have to release earnings or annual reports, or reveal if officers and directors are dumping shares. Many Pink Sheets-listed stocks are "shell companies" that exist only on paper and have no assets, employees or products. This month alone the SEC has moved to shut down 15, StockPatrol.com says.
It's unfair to say all Pink Sheets stocks are shady. But the odds are much higher. Small companies do not have to list on the Pink Sheets. If they're willing to put out financial information they could list on the over-the-counter OTC Bulletin Board system, a quotation system that NASD oversees.
Companies that list on the Pink Sheets rarely move on to bigger and better stock markets. Last year, just 14 of the 4,570 Pink Sheets companies trading graduated to the NYSE, Nasdaq or American Stock Exchange, PinkSheets.com says. Meanwhile, 126 Pink Sheets companies were delisted, filed for bankruptcy-court protection or no longer trade, PinkSheets.com says. This year, 151 Pink Sheets stocks have been delisted or no longer trade.
See if there are financial filings.
If a company doesn't disclose financials, you shouldn't invest in it, Bernstein says. It's easy to find out if the company files financial statements by visiting the SEC's website (www.sec.gov). Click on "search for company filings," then "companies & other filers" and then enter the company's name. All the company's filings with the SEC will pop up on your screen. Look for quarterly filings (10-Qs) and annual filings (10-Ks). If these filings aren't there, don't invest in the stock, Bernstein says.
If they are there, take a close look. You might be surprised how flimsy the company really is. Take Vinoble, a company that was pitched in an e-mail Bernstein received in October and is listed on both the Pink Sheets and OTC Bulletin Board. Vinoble underwent several reverse mergers, conducted a 1-for-500 reverse stock split (reducing shares outstanding and increasing the stock's price) and now calls itself a homeland security company. The company's 10-K filing shows it has $38 in cash. Not $38 million or even $38,000. Just $38. Vinoble did not return calls for comment.
Look for more information.
PinkSheets.com operates the infrastructure many brokers use to get quotes on Pink Sheets stocks. It also maintains a public website that reveals all publicly available data regarding the shares. It's a handy and easy-to-use way to see what information, if any, is available.
Simply type the stock symbol into PinkSheets.com and you get the summary page. Here, you'll find the stock price, the stock high, the percentage change and other basics. The site will also list the company's earnings per share, or EPS. If those pieces of data aren't there, that means the company has not reported any financial information.
An even closer look can reveal other red flags. Under the "Company Notes" item, you can tell if the company has changed names. Typically, a name change means it was formed in a "reverse merger," which is a tactic some companies use to avoid regulatory scrutiny. Using this legal tactic, penny-stock operators keep morphing their "companies" into new entities with mergers so they have a new story to sell their stock.
So next time you think about investing in that sure-fire nanotechnology or alternative energy stock listed on the Pink Sheets, stop and follow the steps above. You might get cooled off fast. "A lot of those companies are hyping what they are and who they are," Starr says. "I refer to them as wannabes."
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