TOP TEN INDICATORS THE MARKET FOR A STOCK MIGHT BE MANIPULATED
By Donald J. Enright
In this era of online investing and enormously widespread interest in the stock market, grifters and con artists have abandoned snake oil and other small-time scams for a new game with higher stakes. Whether you call it a "pump and dump", or just a regular old-fashioned stock scam, some unscrupulous people have adopted the small-cap and over-the-counter stock markets as the site of some of the most profitable frauds in history.
Although there are plenty of perfectly honest companies traded on the over-the-counter and small-cap exchanges, private litigation uncovers hundreds of frauds every year. Here is a list of "red flags" that should tip you off that the market for a company’s stock might be manipulated and that you should proceed with caution.
No statements contained in this article should be interpreted as specifically applying to any given company. All examples cited to herein are entirely arbitrary and do not represent any actual facts or circumstances peculiar to any given company. This article does not constitute investment advice, and should not be regarded as such.
1. Beware of High Pressure Cold Callers
Frequently, scam companies will bribe or otherwise cajole seedy retail brokerages – otherwise known as "boiler-rooms", "bucket-shops"or "chop-shops" – into promoting their stock by cold-calling potential investors and touting the scam company’s stock as a great investment in a small company that is about to make it big. Some of these "bucket-shops" have been sanctioned and even closed down by state or federal securities regulators. Nevertheless, these operations are like the mythological hydra: when regulators close down one, it seems like two more appear in its place.
2. Beware of Stock Touts Who Are Paid by the Companies They Profile
Honest executives with honest companies should not obsess over the short term price of the company’s short term stock performance. Where a company has paid a "tout-sheet" (whether it be online or in the form of a radio show) to promote the company’s stock, your question should be, "Why? Why does this company care so much about its short term stock performance?" The answer all too frequently may be that the insiders want to pump up, or artificially inflate, the stock price so they can sell out at a profit – at your expense.
3. Beware of Small-Cap Companies with "High-Tech" Developmental Products that No One Understands
A common ploy used by stock scammers is to hype a company based on a purported high-tech product which will revolutionize a particular industry. Thus, whether the purported product is a miracle cure for the common cold or a telecommunications gizmo which will supposedly revolutionize the Internet, if the Company is thinly capitalized and there hasn’t been independent confirmation of the facts, you should be skeptical.
4. Beware of Cute Ticker Symbols
The heading says it all: if a Company has chosen a ridiculously catchy ticker symbol, perhaps they are more interested in selling stock than in doing legitimate business.
5. Beware of Oil Wells and Gold Mines in Inaccessible Parts of the World
Again, the heading says it all: if the company claims to have found a tremendous deposit of valuable minerals (be it gold, oil, or anything else) in some corner of the world that most people couldn’t find on a map, be wary and proceed with caution. Boldly optimistic claims may be very difficult to substantiate – or debunk – when the underlying events take place in an inaccessible part of the world.
6. Beware of Unsubstantiated Hype on Online Message Boards
Thinly traded stocks do not need a huge increase in buying activity to spur significant increases in the company’s stock price. For this reason, some scamsters have resorted to posting messages on these boards containing false rumors of huge new contracts, dramatic developments in products, or strategic alliances with big-name companies. The best assumption a potential investor can make is, if it’s not corroborated by an independent source, take everything you read on online message boards with a grain of salt.
7. Beware of Shady Corporate Management
Before buying a significant amount of stock in a small-cap company, you should investigate the company’s management. If any significant insiders have been sanctioned, convicted, or even merely investigated for any kind of financial crimes, or fraud of any sort, you may want to reconsider your potential purchase.
8. Beware of Momentum Plays Where the Fundamentals Don’t Justify the Run-Up
Investors sometimes get caught up in the flurry of activity which represents the "pump" (or dramatic up-swing in a company’s share prices) in the "pump and dump". Don’t be fooled by a quickly climbing share price: just because the price is going up does not mean it will continue to do so. Look at the fundamentals and ask yourself, "do the numbers justify this price?" If not, the chances are good that false hype is making up the difference, and the run-up won’t last.
9. Beware of Companies That Get Involved in Sexy New Areas of Business, Despite the Fact that the Company Has No Expertise
A company looking to run up its share prices may suddenly announce that it has acquired a new subsidiary, or entered into a new area of business which is totally unrelated to the company’s core operations – if it has any relationship at all. For example, if you are considering investing in a food processing company which has suddenly acquired a half interest in a developmental "Y2K" software joint venture, you should ask yourself if this company is serious about this new venture, or if the company is just in it for the hype?
10. Be Aware of Insider Sales
Honest officers and directors in well-managed companies frequently sell stock in their companies for completely legitimate and honest reasons. However, if the officers and directors in a company appear to be engaging in a program of stock sales which does not comport with previous behavior – that is, if the officers and directors appear to be selling in unusual quantities or at unusual times – then you should wonder what, if anything, these insiders know that you don’t |
