Heard on the Street
SEC Studies 'Momentum'
Stock-Pick Sites on the Web
By REBECCA BUCKMAN
Staff Reporter of THE WALL STREET JOURNAL
[...] But the enforcement division of the SEC says it is investigating a host of Web sites that offer daily or periodic stock recommendations designed to generate "momentum" in certain stocks from quick-fingered day traders and other investors. The often-artificial gyrations could in some cases be considered stock manipulation, SEC officials say, particularly if Web-site operators are profiting from the ups and downs themselves.
"We're aware of quite a few of these [sites], and we have quite a few of them under investigation," says John Reed Stark, chief of the SEC's office of Internet enforcement. "We're not blowing smoke."
Richard Walker, the head of the SEC's division of enforcement, adds that such sites "have enabled people to artificially impact the market in increasingly shorter periods of time ... this is an area of concern."
The SEC declined to name specific sites under investigation, but the commission is expected to soon bring enforcement actions against some momentum-trading operations. [...]
With all momentum sites, the main concern of regulators is that site publishers could buy shares of companies before they tout them, and then sell out once they generate enough momentum for the stocks to rise. This activity, of course, would leave other investors holding the bag.
Such a strategy is a variant on the classic "pump and dump" scenario. Then, stock promoters or insiders artificially bid up the price of a stock-perhaps by paying for a tout in a stock newsletter, or releasing a news release with false information -- and then dump their shares, taking hefty profits. Tiny companies with few shares outstanding are the easiest to manipulate.
But with the new momentum sites, companies and their promoters don't even have to be involved, Mr. Stark says. The flood of activity unleashed by the new breed of day traders buying the sites' picks can be enough to goose the stocks. It brings the chances for stock manipulation "to a new level," says Mr. Walker. [...]
Without commenting on any site under investigation, Mr. Stark says generally that "a disclaimer doesn't mean it's not a fraud." In their investigation, regulators are examining potentially false and misleading information issued as part of the recommendations, such as far-fetched growth prospects or bogus business deals, which in itself could constitute fraud. [...]
interactive.wsj.com
(The full article mentions a number of specific sites including one called "Arthur Levitt's Stock Picks" (a Yahoo stock club). Needless to say the chairman of the SEC is not affiliated with the site.)
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