Saturday, April 03, 2004 8:50:17 PM
A Penny for Your Stock
Hartley Bernstein sunk his first career in the fraud-infested world of the penny-stock market. He's starting a new one unmasking and revealing the techniques of the fraudsters.
INTERVIEW Hartley Bernstein hasn't always been one of the good guys. As a securities lawyer in the 1990s, he represented a number of now-notorious penny-stock manipulators. When Bernstein became aware of some insider trading at a client company, he kept that knowledge to himself. In 1998, he discovered that the government intended to charge him with failing to disclose that incident. He agreed to enter a guilty plea and cooperate with their investigation. He was sentenced to two years probation. Through that process, Bernstein discovered that he had a knack for unearthing stock market fraud. It led him to found StockPatrol.com, an online investigative finance journal that he runs out of his Manhattan apartment. We spoke to Bernstein about fraud, his rehabilitation and the future of his stock-snooping company.
CSO: Why is the penny-stock market so ripe for fraud?
Hartley Bernstein: A lot [of fraud] can be seen in the penny-stock industry, but it's not limited to it. The same practices take place no matter what the size of the company. For years, a lot of penny-stock fraud was perpetrated by so-called boiler rooms—huge telephone banks where [brokers] intimidated customers into buying stock. In the 1990s, they were replaced by the Internet. One way it's used is by sending out spam by the hundreds of thousands. Those e-mails promote companies, and the promoters hire investment advisory firms to say that they're wonderful companies. They never tell you any of the problems, but those are easy to find if you know where to look. That's what I do.
How did you get the idea for StockPatrol.com?
The impetus came from my experience representing firms that didn't do right by investors. I wanted to be on the other side, to use my insight to expose stock frauds. What I discovered is that there are so many frauds out there that a day doesn't go by that I couldn't write about a new one. It sounds scary, but when you realize that there are 3,700 companies trading on the over-the-counter market alone and another 3,900 on pink sheets, in addition to the companies traded on the organized exchanges, there are well over 12,000 public companies. Only a few hundred may be doing wrong at a given time, but that's still significant to the people losing money.
What are some indicators of potential penny-stock fraud?
When companies file reports, that information is easily accessible. From looking at that, I can at least get a picture of whether a company is struggling and can't pay its bills, or if it's likely to be able to develop a business plan. A lot of it is looking at who's been getting stock. I look at stock volume and check the daily volume for unusual spikes—especially for spikes that come in advance of news. That smacks of insider trading.
Has it been hard for you to convince potential clients and regulators that you've turned over a new leaf?
When I said what I was going to do, many took a wait-and-see attitude. However, a lot of regulators and prosecutors have become very supportive. The regulators at the SEC are very active readers of StockPatrol.com. I've done my best to establish credibility, and many incidents of fraud have been prosecuted by the SEC or NASD after I brought them to their attention.
PHOTO OF HARTLEY BERNSTEIN BY MICHELE ASSELIN
http://www.csoonline.com/read/050103/briefing_stock.html
Hartley Bernstein sunk his first career in the fraud-infested world of the penny-stock market. He's starting a new one unmasking and revealing the techniques of the fraudsters.
INTERVIEW Hartley Bernstein hasn't always been one of the good guys. As a securities lawyer in the 1990s, he represented a number of now-notorious penny-stock manipulators. When Bernstein became aware of some insider trading at a client company, he kept that knowledge to himself. In 1998, he discovered that the government intended to charge him with failing to disclose that incident. He agreed to enter a guilty plea and cooperate with their investigation. He was sentenced to two years probation. Through that process, Bernstein discovered that he had a knack for unearthing stock market fraud. It led him to found StockPatrol.com, an online investigative finance journal that he runs out of his Manhattan apartment. We spoke to Bernstein about fraud, his rehabilitation and the future of his stock-snooping company.
CSO: Why is the penny-stock market so ripe for fraud?
Hartley Bernstein: A lot [of fraud] can be seen in the penny-stock industry, but it's not limited to it. The same practices take place no matter what the size of the company. For years, a lot of penny-stock fraud was perpetrated by so-called boiler rooms—huge telephone banks where [brokers] intimidated customers into buying stock. In the 1990s, they were replaced by the Internet. One way it's used is by sending out spam by the hundreds of thousands. Those e-mails promote companies, and the promoters hire investment advisory firms to say that they're wonderful companies. They never tell you any of the problems, but those are easy to find if you know where to look. That's what I do.
How did you get the idea for StockPatrol.com?
The impetus came from my experience representing firms that didn't do right by investors. I wanted to be on the other side, to use my insight to expose stock frauds. What I discovered is that there are so many frauds out there that a day doesn't go by that I couldn't write about a new one. It sounds scary, but when you realize that there are 3,700 companies trading on the over-the-counter market alone and another 3,900 on pink sheets, in addition to the companies traded on the organized exchanges, there are well over 12,000 public companies. Only a few hundred may be doing wrong at a given time, but that's still significant to the people losing money.
What are some indicators of potential penny-stock fraud?
When companies file reports, that information is easily accessible. From looking at that, I can at least get a picture of whether a company is struggling and can't pay its bills, or if it's likely to be able to develop a business plan. A lot of it is looking at who's been getting stock. I look at stock volume and check the daily volume for unusual spikes—especially for spikes that come in advance of news. That smacks of insider trading.
Has it been hard for you to convince potential clients and regulators that you've turned over a new leaf?
When I said what I was going to do, many took a wait-and-see attitude. However, a lot of regulators and prosecutors have become very supportive. The regulators at the SEC are very active readers of StockPatrol.com. I've done my best to establish credibility, and many incidents of fraud have been prosecuted by the SEC or NASD after I brought them to their attention.
PHOTO OF HARTLEY BERNSTEIN BY MICHELE ASSELIN
http://www.csoonline.com/read/050103/briefing_stock.html
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