The Technical Register
By Mr. Chartist
August 11, 1998
STOCK FRAUD #101
Your Insurance Policy in High-Risk Investing
There are ten overt actions required to fleece the investing public.
All these actions have more than the tacit consent of a company's
management. No bonafide company official has been left in the dark, when
such crimes are committed. Management is not just condoning the fraud,
they are secretly, but actively, participating in this deceptive
confidence game.
1. The company will sell hundreds of thousands or millions of stock,
options and/or warrants to the retail investor through the back door.
This is done under the pretense of financing the company's objectives or
making a market in the stock. Actually, such back-door offerings are
made to pay a company's overhead, especially lucrative management
salaries, at the expense of the retail investor. Insider trading reports
are filed after the fact and may not become public knowledge until after
a fraudulent promotion has surfaced.
2. Through their position in a company, management will sell company
shares to themselves at below market prices and then resell them to
investors at a higher price, utilizing a series of promotions. Private
insider sales will not be accompanied by disclosure to the retail
public, prior to such sales.
3. Management will buy an intellectual or physical property with shares.
This is called a property vend-in that places a value to the shell
company. The shell is worthless without the property. Often the property
has little value, other than it can be promoted.
4. There will be no legitimate underwriting of the company by an
independent brokerage firm. Management will use available loopholes to
avoid filing a rigorous U.S. registration statement in order to sell the
shares. Frequently, they will use an S&P or Moody's designation or
Section 504 registration to deceive an unwitting retail public into
believing a complete registration statement has been filed.
5. At best, management will place a figurehead on the board of directors
to satisfy technical-expertise requirements, occasionally dictated by a
lesser stock exchange or more often to persuade the retail public that
the project has the blessing of an independent director with such
technical expertise. This insinuation exists to convince retail
investors that the company is being run by, or funded by, professionals
or experts in their field. Management will have none of the basic
technical requirements for a position in such companies, i.e. an
accountant, attorney, relative, drinking buddy, or mistress found on the
board of directors.
6. Management will withhold or downplay the inherent risks of investing
in that stock. From the paid hack writing a tout sheet to the investor
relations employee, scant commentary will be devoted to the enormous
risks found in such shell companies. Broad statements are used instead:
"There are no guarantees in a speculative investment."
7. Management will supply a large number of news releases, apprising the
retail public of its progress. In lieu of abundant news releases,
Internet stock forums and newsletters will offer rosy projections and
potentially lucrative outcomes, to prevent retail investors from taking
profits. Such hidden promotions are not readily transparent to the
novice, retail investor until after the promotion has ended, if ever.
8. Management will cultivate an atmosphere of deceptive product claims,
through paid newsletters, advertising, "investment" conferences, bribed
stockbrokers or "analysts," its investor relations staff, and others who
might benefit from the scam. Such deception requires forward-looking
earnings projections, product or property misrepresentation or omitted
defections therein, outrageous extrapolations of a basic fact without
the likelihood of consistency, comparisons to other industry leaders,
potential takeovers, possible future funding at higher levels, spurious
alliances hinted-at, and other similar exaggerations. It is not unusual
to find a single unrealistic slogan that defines the promotion, "visual
gold in the core" or "the next Microsoft." Management will breed a
network to create an atmosphere of retail stock buyers, through the
Internet, special Fax Alerts, telephone rooms, magazine advertisements,
secret investment groups, shareholder "action" committees, private
forums, anonymous posters in public forums, and other promotional
outlets.
9. Management will refuse to publicly issue "warning statements" or
cautionary remarks, during the promotional phase, about its market
valuation or artificially inflated stock price. Often, during the peak
of the promotion, key management may be unavailable for comment, on
vacation, or in important meetings.
10. Management will not lift a hand to stop the rush of buying, during a
promotion, to investigate and smash any fantastic promotional statements
or overly optimistic rumors, unless or until securities regulators, or
highly critical media comments, insist they do.
The retail investor rarely benefits by the listing exchange or its
securities commission, during a fraudulent stock promotion. The four
main culprits include the Vancouver and Alberta stock exchanges, the
Canadian Dealing Network, and the unregulated US over-the-counter
electronic bulletin board and pink sheets. The Vancouver exchange has
reformed many of the hideous and fraudulent practices, still found
elsewhere, but is not immune to such frauds.
stockhouse.com
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