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Published Sunday, August 29, 1999, in the Miami Herald
'Bargains' abound on the Bulletin Board, but investors beware
By JAMES McNAIR
Herald Business Writer
Taking stock of the stock market (33K graphic)
INVESTING TIPS AND RED FLAGS
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While all investments involve risk, micro-cap stocks are among the most risky. Bulletin Board stocks, in particular, don't always file regular reports to the SEC, are easily manipulated and are often so thinly traded that you may have trouble unloading them.
Of course, there are some legitimate investing opportunities, but you must be willing to research each opportunity carefully. For investing in any micro-cap stock, here are some steps to follow, provided by the Securities and Exchange Commission:
1. Find out whether the company has registered its securities with the SEC or Florida's securities regulators.
2. Make sure you understand the company's business and its products or services.
3. Read carefully the most recent reports the company has filed with its regulators and pay attention to the company's financial statements, particularly if they are not audited or not certified by an accountant. If the company does not file reports with the SEC, be sure to ask your broker for what's called the ``Rule 15c2-11 file' on the company. That file will contain important information about the company.
4. Check out the people running the company with your state securities regulator, and find out if they've ever made money for investors before or if they have had run-ins with regulators.
5. Make sure the broker and his or her firm are registered with the SEC and licensed to do business in Florida, and whether he or she has ever been disciplined or has complaints on file. You can do this online at www.nasdr.com/2000.htm or call 1-800-289-9999.
In addition, watch out for these ``red flags:'
SEC trading suspensions. The SEC has the power to suspend trading in any stock for up to 10 days when it believes that information about the company is inaccurate or unreliable. You'll find information about suspensions on the SEC's Web site.
High pressure sales tactics. Beware of brokers who pressure you to buy before you have a chance to think about and investigate the ``opportunity.'
Assets are large but revenues are small. Micro-cap companies sometimes assign high values on their financial statements to assets that have nothing to do with their businesses. Find out whether there's a valid explanation for low revenues, especially when the company claims to have large assets.
Odd items in the footnotes to the financial statements. Many fraud schemes involve unusual transactions among individuals connected to the company, such as unusual loans or the exchange of questionable assets for company stock.
Unusual auditing issues. Be wary when a company's auditors have refused to certify the company's financial statements or if they've stated that the company may not have enough money to continue operating. Also question any change of accountants.
Insiders own large amounts of the stock. When one person or group controls most of the stock, they can more easily manipulate the stock's price.
Other red flags. Don't deal with brokers who refuse to provide you with written information about the investments they're promoting. Never tell a cold caller your Social Security number or numbers for your banking and securities accounts.
For more information: www.sec.gov/consumer/microbro.htm. You can also get SEC publications on investing wisely and on detecting micro-cap fraud by calling 1-800-732-0330 or going to www.sec.gov.
Deltona Corp. -- 35 cents a share!
Cosmo Communications -- 15 cents!
Havana Republic -- 14 cents!
Sun City Industries -- 1 cent!!!
Step right up to the sale rack of the stock market, the OTC Bulletin Board, home of everyday low prices on has-been retailers and never-was biotech companies. Where distress sales, going-out-of-business sales and ground-level opportunities swirl into one great, financial flea market.
A dollar has real spending power in this purgatory of stocks that don't meet the minimum listing specs for the Nasdaq Stock Market or the New York Stock Exchange. Most of the Bulletin Board's downtrodden issues sell for pennies. Add up all the trades and, going by July's numbers, you have $276 million changing hands on a typical day -- twice the daily rate in 1998.
Unfortunately, it doesn't always mean you'll get that dollar back. For among the honest and solvent companies listed on the Bulletin Board are those that are bankrupt, are on their last legs or have dropped from sight. Worst of all, when the securities police do one of their occasional roundups of stock swindlers, the stocks involved are invariably plucked from the Bulletin Board.
``We don't recommend Bulletin Board stocks,' said Geoffrey Simon, a senior vice president with the Robert W. Baird brokerage firm in Tampa. ``They tend to be illiquid and easily manipulated. They're under-followed by respected analysts, and too often people have gotten burned by not having adequate research on these companies.'
The OTC Bulletin Board was created in 1990 and is run by the Nasdaq Stock Market to provide an electronic, real-time price quote system for stocks not traded on the larger exchanges. Today, more than 6,300 stocks are listed on the Bulletin Board. Three quarters of them trade for less than $5 a share, affixing them with a moniker that exudes both cuteness and notoriety -- penny stock.
By June of next year, the Bulletin Board population should be down considerably. In January, the Securities and Exchange Commission approved a proposal by the National Association of Securities Dealers to require Bulletin Board-listed companies to file regular financial reports with the SEC or banking agencies -- as the major exchanges do -- or else be demoted to the Pink Sheets.
Roughly half of the 6,300 Bulletin Board companies don't file reports now, leaving their shareholders in the dark about their revenue, profits -- or, more likely, their losses -- and other basic information about their business. Often the omission is deliberate, as many companies would rather keep their investors informed through rosy or bogus press releases.
The disclosure requirement aims to protect investors from such rogue stocks but isn't expected to do away with fraud entirely. The NASD just wants investors, when they are contemplating the purchase of Bulletin Board stocks, to be able to examine current -- and audited -- financial results.
Braving the Bulletin Board
The Bulletin Board is a strange confluence of companies. Its listings include such blue-chippers as Publix Super Markets and Kohler Co., which are essentially private companies. It includes many issues born of mergers with publicly traded shell companies and issues not worthy of initial offerings on the Nasdaq or New York exchanges. Many of its companies fell from higher perches and, because they were no longer financially up to snuff, were delisted by the larger markets.
South Florida, no overnight venue to the dregs of investing, is a breeding ground for all manner of Bulletin Board material. Of the more than 430 Bulletin Board stocks based in Florida, 125 reside in Miami-Dade or Broward counties. The list includes fixtures of the local landscape, such as Miami Subs, Dry Cleaning Depot, Peaches Entertainment and Florida Gaming, owners of Miami Jai Alai. You won't find any of these stocks listed in The Herald; newspapers don't carry Bulletin Board issues.
Most striking about South Florida's contingent of Bulletin Board stocks is the presence of those that had obviously better days.
Atlantic Gulf Communities, Florida's pre-eminent home builder when it was known as General Development, is still in business, but its stock can be had for 38 cents.
Weitzer Homebuilders, another South Florida builder: $1.50 a share.
Havana Republic of Weston, owner of cigar emporiums, latched onto the cigar-smoking craze in 1997, and it was a $5 stock. Its three South Florida stores are open, but its shares now trade at 14 cents.
L. Luria & Son, the former chain of catalog showrooms, filed for bankruptcy, but its stock still trades, closing Friday at 1 cent.
Levitz Furniture, once the nation's leading chain of furniture stores, is also trying to claw its way out of bankruptcy. For now, the stock is worth 12 cents a share.
Forcenergy of Miami is very much in business, with $125 million in revenue the first six months of 1999. But it, too, filed bankruptcy, and its shares now trade for 81 cents.
For the companies suffering the compound misery of financial distress and ouster from a major exchange, the OTC Bulletin Board is a heck of a place to perfect a rebound.
Major brokerage firms, institutional investors and equity capital funds generally shun Bulletin Board stocks. That forces those companies to raise money under sometimes onerous terms from lenders, vulture funds and investors offshore. Many companies, starved for investor interest, hire public relations firms to promote their stock, often paying the PR bill with stock because they don't have the cash.
Banished from the big time
Other companies accept their fate and do the best they can. Like Terrace Food Group of Pompano Beach. Last September, Terrace was banished from the Nasdaq Small Cap exchange for failing to maintain a minimum net worth. Its stock was manipulated by a brokerage house that has since been fined and shut down. Trading for 30 to 40 cents a share, Terrace effected a 1-for-10 reverse stock split in March, taking the stock to its current $3 price.
William Rodriguez, Terrace's chief financial officer, said the Bulletin Board status has no effect on day-to-day operations. But if the company, which had $31 million in sales in 1998, wanted to engage in something big, it would help to have a Nasdaq listing, he said.
``It's something that we would very much want to do,' he said, ``but the first thing to do is continue the growth in volume and significantly increase our profits.'
Spencer Kromholz, CEO of Liteglow Industries in Pompano Beach, shares Rodriguez's business-first attitude. The maker of under-car lighting products has nearly doubled its year-to-date sales to $2.7 million and posted a $325,940 profit. Yet the stock closed Friday at 47 cents, a price level achieved only with the help of an eye-popping 1-for-60 reverse split in January.
Kromholz is optimistic. Liteglow hired auditors to prepare the SEC financial statements needed to remain on the Bulletin Board. The initial registration was filed 10 days ago.
Scam artists abound
``A number of bigger investors and financial-type institutions have said, `You're too small for us,' or said they don't invest in Bulletin Board stocks,' Kromholz said. ``I tell them I'd love to be on the New York Stock Exchange. We're small. We can only go up.'
But investment advisers have seen too many scams masquerading as Bulletin Board stocks to risk the gamble.
Twice in the past year, the SEC's Office of Internet Enforcement has filed civil fraud charges against Bulletin Board-listed stocks and their promoters online. Such cases often take the form of ``pump and dump' schemes, in which promoters pump up a stock's value with lies or exaggerations, then dump the stock along with any confederated insiders.
``Unfortunately, there are unscrupulous people out there running boiler rooms and promoting penny stocks to people who don't know what they're buying,' said Simon of Robert W. Baird & Co. ``It's a risky game. It's bad enough when you own a good company that's fallen on hard times. It's worse when you invest in a business that wasn't much of a business in the first place.'
Mal Berko, a vice president with Advest in Boca Raton, is inexorable in his avoidance of Bulletin Board listings.
``There may be diamonds in a snake pit, but to reach down and get them, you're going to get bit,' he said.
The combination of Bulletin Board and South Florida, in Berko's view, makes the stock to be avoided all the more.
`All sorts of nasty things'
``This area is just a haven for greed and all sorts of nasty things,' he said.
In many instances, operators of fraudulent Bulletin Board companies rip off investors and are never prosecuted. When they are, they are typically fined, banished from the securities industry and made to promise not to break the rules again. Sometimes, securities regulators are simply unaware of frauds until the damage is done.
``It has always been impossible for the SEC to prevent all securities fraud, all the time, and the Internet has only raised the degree of difficulty of that challenge,' said Bruce Carton, a Washington attorney and former senior counsel in the SEC's Enforcement Division. ``The SEC simply does not have the manpower to investigate every lead. The SEC is a lean agency with only a few hundred enforcement attorneys, and it must be highly selective in the cases in pursues.'
The new rule that will require all Bulletin Board companies to file financial reports with the SEC was spurred by the increase in fraud. It won't be a panacea to fraud but is meant to help investors obtain information about companies other than from promoters and dubious sources, said Barry Goldsmith, chief of enforcement at the National Association of Securities Dealers.
``To investors, the Bulletin Board had the look and feel of a regulated market,' he said. ``We wanted to make sure that if securities were bought and sold on the Bulletin Board, fundamental information was available to investors.'
e-mail: jmcnair@herald.com
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