Pink Sheets Runs New Warning Sys Up Flagpole
By Chuck Jaffe
A Dow Jones Column
The skull and crossbones is both the sign of the pirate and the symbol for
poison. Pirates are portrayed as being both dangerous and romantic; poison is
deadly.
So when the Jolly Roger flies on certain stocks, there is little doubt it
will attract some investors just as much as it pushes others away. Moreover,
like a surgeon general's warning on a pack of cigarettes, it may just be
ignored.
But when it's the operators of the trading platform issuing the warning about
stocks it services, it will be interesting to see whether investors take
notice. And starting next month, Pink Sheets LLC - the electronic-trading
platform that is the favorite venue for many stock manipulators - will be
issuing some warnings about stocks. One of those cautions will come in the form
of the Jolly Roger.
"We're not a regulator, and this is not a regulation. It's just a statement
about the condition of the company," says Cromwell Coulson, chief executive for
Pink Sheets. "It will take time for our categories and the buyer-beware flag to
get out through the market data providers, but in time, we think it will make a
real difference in a lot of ways."
The flag system is part of a market-tiering process that Pink Sheets is
creating for its stocks, a process not that dissimilar from changes Nasdaq
Stock Market Inc. (NDAQ) made a while back in naming the various segments of
its markets. The biggest difference comes in the warning labels.
In the old days, pink sheets were colored slips of paper you might find lying
around a brokerage office floor; a small company that did not trade on the big
exchanges or that fell off those markets because it no longer met regulatory
standards was said to be trading "on pinks." By the late 1990s, the service was
little more than an outdated phone-book-style listing of over-the-counter
stocks.
Today, the paper is gone, and Pink Sheets represents a centralized quotation
service collecting and distributing market-maker quotes for securities traded
in the OTC market. Technically speaking, Pink Sheets is not an exchange. That
said, a majority of trades for OTC Bulletin Board stocks are made through the
Pink Sheets system, and the new Pink Sheets standard will apply to all stocks
that use the modern-day version of trading on pinks.
There are more than 8,000 Pink Sheets companies today, and they run a wild
gamut: fallen angels that are headed to zero, bankruptcy cases hoping for a
rebound, international companies that are listed on a foreign exchange but
don't want to go through the listing process for the big American exchanges,
small startup businesses that find the costs of Sarbanes-Oxley regulatory
compliance excessive, inactive shell companies and virtually every company
touted in a spam email message.
Unlike the big exchanges, which have rigid standards for listing a stock,
Pink Sheets does not. While there are companies giving financial guidance and
providing audited financial statements, there are also those that provide
virtually no information whatsoever.
Couple that potential lack of information with the prevalence of
pump-and-dump touting, and you've got the basis for the changes the system is
undergoing.
The change started with the creation of a top tier of Pink Sheets stocks,
called the OTCQX, which effectively is limited to quality companies that have
good disclosure but do not meet the listing requirements of a bigger exchange.
There is also an International OTCQX.
Calling Out The Culprits
Beginning Aug. 1, the data feeds on Pink Sheets (and OTCQX) stocks will
include a pink check mark to tell investors the company is current on its
financial disclosures, either in filings at the Securities and Exchange
Commission or with Pink Sheets itself.
Companies that have made those disclosures but have failed to keep them
current - meaning the information is six months old - will be marked with a
"Yield" traffic sign, signifying "limited information."
And stocks where the information pipeline has run dry will be tagged with an
old-fashioned stop sign, noting that no information is available.
And then there's the Jolly Roger. The skull and crossbones will be an
additional tag on any security deemed a "public interest concern," which is a
nice way to say that the stock has been touted in a spam email pump-and-dump
campaign.
Coulson says the tag is likely to stick on a stock for six months and will be
applied whether management was somehow involved in the tout or was just the
victim of some speculator trying to make a quick buck.
The idea is not just to protect investors but to discourage the frauds. Once
the Jolly Roger is in place, brokers easily can track the trading in the
affected stocks, which will provide information on who is behind the touting,
and which may make regulatory cases much easier to prosecute.
"Since the beginning of the stock markets, there have been promoters dumping
overpriced stocks into the heart of the market," Coulson says. "This isn't
going to stop it, but it will help brokers see what is happening and will make
it easier for regulators to file cases, which will discourage the bad guys."
Effectively, Pink Sheets has gone to a system like ancient maps, where the
uncharted territories were marked with phrases like "Here there be monsters."
Says Coulson: "We can't call them monsters, but we hope this will make it
clear that you really need to know what you are doing before you get involved
in trading stocks that aren't giving information, that are part of a spam
campaign or both."
Investors will love the change if it simply reduces their volume of junk
email. But it will be a lot more helpful if, at some point, investors decide
that they don't want to have their portfolio poisoned by pirates and they use
the warning system to keep away from the dark and murky corners of the stock
world that only a few insiders truly understand.
(Chuck Jaffe is a senior MarketWatch columnist.)
-By Chuck Jaffe; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
07-11-07 0955ET
Copyright (c) 2007 Dow Jones & Company, Inc.
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