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10 Ways To Spot A Pump-And-Dump Scam

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peewee   Sunday, 04/25/10 05:23:27 PM
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10 Ways To Spot A Pump-And-Dump Scam

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Posted by: icucTrader Date: Saturday, April 24, 2010 10:20:57 PM
In reply to: None Post # of 16596

10 Ways To Spot A Pump-And-Dump Scam

1. Be Wary Of Reverse Mergers
A private company merges into a dormant public company but gets control, suddenly allowing for shares to be traded without the usual going-public registrations disclosing financial and other information. Reverse mergers using such shells are legal, but a lot of penny stock scams start with one.

2. Don't Go Pink.
Of the various U.S. marketplaces on which shares can trade, none is more dodgy or ill-regulated than the Pink Sheets, making it a fertile breeding ground for pump and dumps. Most of its 9,300 companies don't even have to be registered with the Securities & Exchange Commission or make regular filings.

3. Remember Filings Guarantee Nothing
There are plenty of examples of pump and dumps involving companies that do file reports with the SEC, particularly on the OTC Bulletin Board, which is the shaky next rung above the Pink Sheets. Despite what a broker might tell you, the OTCBB is not part of the better-regulated Nasdaq Stock Market.

4. Insist On The Full Financial Skinny
Even if the stock attracting your interest doesn't file with the SEC, call or e-mail the company asking for a full set of audited financial statements. This means a balance sheet, an income statement, a cash flow statement and all footnotes. Think hard if they show a negative net worth, huge losses or minuscule revenues. But also think hard if they show vast assets and minuscule revenues.

5. Check A Company's Vintage
Ask for the exact age of the company (in the case of a reverse merger, the age of the business that merged into the public shell) and the date of incorporation. Surprisingly often, these birth dates are less than two years earlier. It's extremely unlikely that such a youthful company will become full-bodied in the time frame its eager promoters suggest.

6. Spurn Spam
Accompanying many pump and dumps is the sending of massive e-mail spam and/or the creation of stock-touting Web sites, breathlessly making future predictions of greatness along with meaningless ratings like "strong buy." A little digging will show that in many cases, promoters holding huge chunks of the shares are paying for the promotion.

7. Beware Claims Of Breakthrough Technology
Tiny, never-before-heard-from companies make claims that follow the news; they tout new products they say will, for example, save the environment, cure an illness or enhance personal security. A close look often reveals the supposed new invention was simply licensed from someone else and is still unproven.

8. Make One Telephone Call
If the company doesn't file with the SEC, call the state securities regulator of the state in which it is located. A number of states require filings where the SEC doesn't. Ask for any information about the company and the people behind it, and whether the company has met state registration requirements.

9. Don't Ride A Wave
It's just not normal for daily trading volume in a stock to go from zero one day to hundreds of thousands or even millions the next. It's often a tipoff that the promoters behind the pump are trading among themselves and setting artificially high prices to create the appearance of substance and great things.

10. Don't Try To Time A Dump
So you know it might be a pump but figure you can get out before the dump? Good luck. Many pump and dumps run for only a matter of weeks, with a sudden dramatic run-up in price followed within days by a crash.

Source: http://www.forbes.com/2010/04/07/sec-stock-scams-fraud-personal-finance-signs-pump-and-dump_slide.html


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