The Transparent Flamingo

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Posted 11/10/2005 9:59 PM Updated 11/11/2005 2:55 AM

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.

http://www.usatoday.com/money/perfi/general/2005-11-10-pink-sheets-mym_x.htm


Only 14! Translation. If you find one that actually goes....then you can bet it's going to be a great investment.