The Penny King's Free and Clear M&A Fund

[thepennyking]

Internet Makes Stock Scams Easy `Pump and dump' now a high-speed hustle
by Harry Domash - SF Gate


The Web improves the productivity of many kinds of businesses, giving them the tools to produce and distribute their products faster and at lower cost than ever before.

One type of enterprise that benefits greatly from the efficiencies brought about by the Internet is fraudulent stock promotion.

Before the Net, these promoters hired squads of telemarketers to push their stocks on unsuspecting investors. Now, it's as easy as blasting out e-mail, or if they're industrious, maintaining a Web site.

The technology is much improved, but the basic concept known as ``pump and dump,'' hasn't changed much.

It goes like this. A promoter acquires control of a large block of stock in a small, unheard of, possibly dormant, public company. The promoter's only requirement is that the company's stock is already approved for trading somewhere.

Companies that don't have any real business and don't file quarterly reports with the Securities and Exchange Commission can't be traded on major exchanges, such as the New York Stock Exchange or Nasdaq®. They can, however, be traded on the OTC Bulletin Board (BB) exchange.

BB-listed stocks can be bought and sold via Web brokers in the same way as stocks listed on major exchanges. The promoters usually acquire the stocks for less than $1 per share. BB-listed stocks trading for less than $5 per share are often called ``penny stocks.''

Once in control of a company, or its stock, the promoters issue press releases announcing the company's entry into a variety of promising businesses. Their new lines of work often boast a cure for cancer, or a technological breakthrough such as a single, low-cost computer chip capable of replacing all of the components in a personal computer.

The current fashion is to announce the discovery of a new, inexpensive method of sending broadband signals over telephone lines at speeds far exceeding existing technologies.

The promoters issue a constant stream of press releases chronicling development breakthroughs, marketing agreements and endorsements of the technology from qualified scientists.

Meanwhile, the stock is featured in free e-mail newsletters and on Web sites of services specializing in alerting investors to ground-floor, undiscovered opportunities to make a killing in the market.

Optimistic posts then begin appearing on Internet stock message boards, such as those maintained by Yahoo and Raging Bull. Because few have heard of the new company, the promoters plant messages on other heavily frequented boards -- Qualcomm's, for instance. These mention the new stock, tout its hot prospects and suggest that investors check it out.

If the promoters do a good job, and the market is strong, the stock price can soar from a few cents a share to $10, or in some cases, much more. Eventually, the share price collapses after the promoters sell out and quit pumping.

HELPFUL WEB SITES

The mission of Stock Patrol (www.stockpatrol.com) is to inform investors about stocks that look suspiciously like they are being pumped.

Once a suspect is spotted, Stock Patrol usually runs a series of articles describing the suspicious behavior in detail. The site typically highlights one or two new suspects each month. Recent articles are listed on their home page. Click on ``Stock or Schlock?'' to see the complete list. You can sign up for a free newsletter with rundowns on recent updates.

The Napeague Letter (www.napeague.com), a free newsletter published by Bob Davis, is another good source of tips on possible pump-and-dump stocks.

Davis' newsletter is not just about stock scams; it also recommends small-company stocks for purchase. It's worth checking out his picks. He says that as of May 31 his portfolio was up 9 percent for the year, compared with a 3 percent loss for the overall market for the same period, as measured by the S&P 500 Index.

Click on ``Stocks that look suspicious'' on the Napeague home page and scroll down to see his list of suspect stocks. The list apparently includes all of the stocks covered since Davis started it in 1998, but only about a dozen are still active. He adds new stocks as he finds them. He added two in February, four in March and none since.

Click on the link under the date in the Initial Review column to read Davis' write-up on each suspect. Most of the write-ups provide extensive details, while some include only a short introductory paragraph. Click on ``Anatomy of a pump & dump'' on the upper right for a case history of a pump-and-dump operation.

An essential part of promoting a pump and dump is to arrange for the stock to be featured in a legitimate-looking advisory newsletter or Web site.

It's easy to make that happen because certain sites and newsletters charge a fee to recommend stocks. Falling Short lists a few such operations at www.fallingshort.com. You can see the list by clicking ``Research Awareness'' on the home page.

The SEC has three worthwhile publications describing how to detect stock fraud. They are:

-- Microcap Stock: A Guide for Investors (www.sec.gov/consumer/microbro.htm).

-- Tips for Checking Out Newsletters (http://www.sec.gov/consumer/newslchk.htm).

-- Internet Fraud: How to Avoid Investment Scams (www.sec.gov/ consumer/cyberfr.htm).

USE YOUR NOODLE

The sites I've described can help you avoid scams, but a little common sense goes a long way. There are thousands of stocks listed on the New York and American stock exchanges, and on Nasdaq®. All stocks listed on those exchanges must be legitimate companies with real money in the bank, and they must submit to SEC supervision. You'll avoid most stock swindles by confining your investing to companies listed on the major exchanges.

You can find out where a stock is listed by getting a detailed quote on Yahoo (quote.yahoo.com). Enter the ticker symbol in the box to the left of the Get Quotes button and select ``Detailed'' from the dropdown menu before clicking on Get Quotes. The listing stock exchange is shown after the company name at the top of the quote.

Another way to lessen your chances of buying a pumped stock is to check its annual sales total on Quicken (www.quicken.com).

After getting a quote, click on Fundamentals, and then scroll down to the Growth Trends section. Look under Latest Annual Revenue to see the company's total sales over the past 12 months (millions). A listing of ``NA'' means the company didn't have any sales. Avoiding companies with less than $20 million annual sales will greatly diminish your chances of falling for a scam.


Founder: The Free and Clear Foundations of Earth, Chairman & CEO Penny King Productions, The Free and Clear Bancorporation, Senior Trustee; The Free and Clear Fund, and Janitor for the Global Morass of Debt Instruments.