Consider the Source
"Early this year, the SEC brought a complaint against Steven Samblis, publisher of New Stock, an on-line investment newsletter based in Orlando, for failing to disclose that he received $20,000 to recommend two OTC Bulletin Board stocks. The SEC says Mr. Samblis sent thousands of e-mail messages over the Internet touting the companies. In resolving the case, Mr. Samblis signed an agreement promising to follow the disclosure laws, but didn't admit wrongdoing. "All we agreed to do was follow the law," says Norman Hull, an attorney for Mr. Samblis."
There's a Lot of Free Investment Advice On the Web. Sometimes, You Get What You Pay For
By JASON ANDERS
When Cashco Management Inc. wanted to attract investors to its stock, it turned to Global Penny Stocks, an on-line investment newsletter.
In exchange for a payment of $3,950, Global Penny Stocks' publisher, George Schlieben, issued a "special research report" on Cashco and gave it a "buy" rating. He predicted the company's stock -- trading at around 44 cents a share on the OTC Bulletin Board when Mr. Schlieben issued the report on April 20 -- would hit $2 to $2.50 a share in the next year, and $4 in two years. A few days after the report, the stock climbed to 51 cents a share, before beginning a steady decline.
Surfer Beware
That slick Web site you visit listing hot stock picks may be little more than a paid advertisement. See a sampling of some of the confusing message-board practices highlighted recently in our "Heard on the Net" column.
A disclaimer in small print above the research report said that Mr. Schlieben received a fee from Cashco to write the report, but didn't say how much. Also not clearly disclosed was that all the information in the research report, including the stock-price targets, came from Cashco, a tiny Philadelphia-based company with an unusual product mix. The company sells wood-based kitty litter as well as software to fix the Year 2000 problem.
Sites like Global Penny Stocks are part of the glut of free investment advice on the Internet, where users crowd on-line discussion forums and chat rooms to talk up their stock picks. But with so much information flying around so quickly -- and with the sources of that information often dubious or cloaked in anonymity -- the Internet can be a dangerous place for investors.
Voices Event
Join a live discussion with John Stark, head of Internet enforcement matters at the SEC, at 8 p.m. EDT Monday.
"People who believe everything or even most of what they read on-line are crazy," says John Stark, the Securities and Exchange Commission's head of Internet enforcement matters. His office is responsible for investigating on-line investment fraud and other violations of SEC regulations in cyberspace. And, Mr. Stark says, he has never been busier. "You've [had] the greatest bull market in history smack up against the greatest information revolution in history, and you've really got to be careful," he says.
Dubious Disclaimers
Lengthy or hidden disclaimers can make it difficult to tell whether a Web site or e-mail newsletter has been paid to promote a stock, even though the SEC requires such disclosure.
"The law is clear: You must disclose if you are being paid, how much and who you received it from," Mr. Stark says. "There are a lot of sites out there that aren't disclosing their compensation at all, and many of the ones with disclosures aren't compliant with the regulations."
Ray Bartkus
Mr. Schlieben of Global Penny Stocks, which recommends many other companies besides Cashco on its home page, says he would "prefer to keep confidential" the amount that he gets paid from the companies, adding that he doesn't believe that violates any SEC regulations.
"I think the thing the SEC would be concerned with is if I was paid in stock, which I am not," he says. "Who cares if [the fee] is $500 or $50,000? It's a cash fee, and it is paid up-front and done with."
Mr. Schlieben says he doesn't see anything wrong with accepting money in exchange for the recommendations, and he says users of the Web site understand that he was paid. The disclaimer "is the first thing they see when they look at the company," he says. Mr. Schlieben adds that he will promote only stocks that he believes have merit and has turned down some companies that have approached him because he felt they weren't strong enough.
Cashco spokeswoman Rhonda Windsor, who disclosed the $3,950 fee paid to Global Penny Stocks, says it was money well spent. "This is no different than putting an ad in a newspaper," she says. "They have the exposure on the Net, which is what we wanted." Ms. Windsor adds that she is confident that potential investors understand that Mr. Schlieben's "buy" recommendation wasn't based on research, but rather on information supplied by Cashco.
Mr. Stark won't comment specifically on the Global Penny Stocks site, but says promoting a stock with a research report that has been written by a paid stock promoter has become increasingly common.
"It's not unusual for me to see a Web site of a company, and it's most likely a microcap company, saying click here to see what this great analyst has to say about us," he says. But what isn't always clear is that the "analyst" usually is paid to promote the stock, he says, and in some cases is completely fictitious.
E-Mailing the Feds
The SEC receives about 120 e-mail messages each day about alleged violations in cyberspace, and, Mr. Stark says, the "overwhelming majority" come from users complaining about something they read in an on-line message board. "We get a lot of complaints from people who have been hoodwinked by smooth talkers in discussion forums," he says.
Discussion forums, or message boards, are akin to electronic bulletin boards, each devoted to a particular topic. There are thousands of boards -- on both on-line services and Internet Web sites -- devoted to investing and business-related topics. Users can simply browse through the messages that others have posted, in a format similar to e-mail, or they can join the discussion with a posting of their own. Some particularly popular message boards receive thousands of postings every day, while less-established boards receive just a handful each month.
Translation Required
Internet stock-discussion groups have a language all their own.
Users typically go by aliases on message boards, and in most cases, postings are completely anonymous. With daily volume exceeding tens of thousands of messages, moderators of the forums say they can't possibly monitor all the chatter.
"You should never, ever base an investment decision on what you read on a message board," says Mr. Stark. "You don't know what the person's background is, who is posting the message, or what their position is in the stock they're recommending.
"People will claim to have inside information from someone at the company, or quote a company official. For all you know they've been paid to do that."
Mr. Stark says being paid to promote a stock isn't illegal, so long as it is clear that the promoter was paid and how much they were compensated. But, he adds, fraud laws still apply, and disclosing compensation doesn't give promoters the liberty to give out misleading information about a company.
He also points out that it's easy to pretend to be someone you aren't on-line, or for one person to maintain multiple aliases on some systems.
Some forums try to rein in users who do nothing but hype stocks. "If someone isn't really participating in the discussion and is only posting things like 'go go go' over and over, that violates our terms of use," says Jill McKinney, a spokeswoman for Silicon Investor (www.techstocks.com), one of the most popular on-line discussion forums. "We want the boards to be a forum where people communicate with each other, not advertise or hype stocks."
Hard to Catch
She says there no doubt are users on Silicon Investor who are paid to hype companies, but it is hard to catch them. "They don't advertise that fact, obviously," Ms. McKinney says. "It can be hard to tell the difference between someone who is just positive on a stock, which is fine, and someone who is a paid promoter." She advises users to always do their own research, and to be skeptical of what they read on message boards.
Mr. Stark says many of the complaints to the SEC are related to small, often-speculative companies whose shares are quoted on the OTC Bulletin Board, a service run by the National Association of Securities Dealers, which is also the parent of the Nasdaq Stock Market. Stocks traded on the OTC Bulletin Board aren't subject to many of the regulations and disclosure requirements imposed on shares traded on Nasdaq or the other major U.S. exchanges.
These stocks, often microcaps with a small public float of available shares and low prices, are good targets, Mr. Stark says, for a "pump and dump" -- the practice of driving the price of a stock up through hype and then selling shares.
The SEC is supporting an NASD initiative that would require stocks traded on the OTC Bulletin Board to regularly report audited financial information. Also, brokers would be required to explain the differences between OTC securities and those traded on a listed market to potential investors.
Getting the Word Out
"These securities weren't a problem before the Internet. You had never heard of these companies, and couldn't invest in them," says Mr. Stark. "Now, these unknown companies can get the word out across the globe for very little cost. There are people who will put together a Web site for you, feature you in an investment newsletter and hype your stock on a message board, all for a fee."
Early this year, the SEC brought a complaint against Steven Samblis, publisher of New Stock, an on-line investment newsletter based in Orlando, for failing to disclose that he received $20,000 to recommend two OTC Bulletin Board stocks. The SEC says Mr. Samblis sent thousands of e-mail messages over the Internet touting the companies. In resolving the case, Mr. Samblis signed an agreement promising to follow the disclosure laws, but didn't admit wrongdoing. "All we agreed to do was follow the law," says Norman Hull, an attorney for Mr. Samblis.
Mr. Stark says the SEC is always investigating on-line sites, but doesn't always have to resort to legal action. "Many times a phone call from us or an e-mail makes these sites disappear," he says.
The SEC has also launched a campaign to educate investors about the pitfalls they face on-line, and has placed some safety tips on its Web site (www.sec.gov). Still, Mr. Stark acknowledges that much of the SEC's advice amounts to little more than common sense -- something he says many investors seem to have abandoned in the search for fast money.
"We're doing all that we can, but sometimes we wonder, are people getting the message?" Mr. Stark says. "During these bull markets, people aren't investing, they're gambling."
--Mr. Anders is a staff reporter for The Wall Street Journal Interactive Edition in New York. |
