An excerpt from the testimony of Tom Gardner (The Motley Fool) in a Senate subcommittee hearing on securities fraud on the Internet, Mar. 22, 1999:
Senator Collins. Mr. Gardner, it is my understanding that
The Motley Fool created a fictitious stock and then hyped it to
show how easily investors can be sucked into the hype and to
make investment decisions. You mentioned it in your written
testimony, but because of time constraints did not in your oral
presentation. Could you tell us a bit about that and what
lessons you think can be gained from that experience?
Mr. Gardner. Certainly. When we started on-line in the
early 1990's, we walked into an environment where there was a
lot of loud promotion of what we consider to be very low-grade
investment opportunities, again, unlisted stocks in the United
States, over-the-counter stocks, or Vancouver Stock Exchange
securities. Unfortunately, Vancouver is a lovely city, but
their stock exchange stands out in my mind as a haven of very
low-grade businesses, or a number of them.
We tried, as best we could, as earnestly as we could, to
teach people about the very spike that we saw on the graph
earlier presented, and that there were small brokerage firms
and individuals and companies participating in the promotion of
their stock in an attempt to get a 30-cent share stock up to $2
over the next 2 weeks, and then they would turn and move to a
new company. As outrageous as some of the claims of the
companies were, there were enough inexperienced investors that
these were successful scams.
What we tried to do in teaching people was totally overrun
by, again, a very creative and very critical move against
education on-line at the time. So what we did was we created
our own penny stock, our own foreign exchange, the Halifax
Canadian Exchange----
Senator Collins. Which does not exist, correct?
Mr. Gardner. Which does not exist. We created this whole
scenario on April 1, 1994, and walked through it over about a
6-day period, and during that period, we probably got 1,000 E-
mails, a number of them from people saying, I cannot buy the
stock. Where is this exchange? I have asked my broker to locate
it. Then about 6 days later, we collapsed the entire story of
Zeigletics, and we did so to really show step by step what
happens when a thinly-traded micro-cap stock is promoted.
I think Senator Levin has correctly found one, and I also
agree that there are hundreds of examples, if not thousands of
examples, of this over the last 5 years. And if there is one
corner of the overall market to pinpoint to shed more light on
for greater clarity to guide individual investors on, it is
those companies that have the capitalization under $50 million
that are not listed on our exchanges for which there is not a
lot of public information.
But we created that April fool's joke. We believe that is
our national holiday at The Motley Fool, and we did so to
really educate people about why these investment options really
are options to be avoided.
Senator Collins. And Zeigletics sold what? What was the
product?
Mr. Gardner. Zeigletics was selling linked sewage disposal
systems around the world, and one can infer what we thought of
their product based on that description.
Senator Collins. With a concentration in Chad, as I
understand it.
Mr. Gardner. Exactly, and that is actually a critical
component of so many of these scams, is that they are a
business that is happening internationally that one could not
verify. You could not travel down to the company headquarters
very easily because they were doing business abroad. They were
located abroad. They were listed on a foreign exchange. That
kind of far-away nature and that remote, obscure business is
something that I think untrained investors who have a belief
that the way to make money off their savings is to gamble, and
that has been reinforced in a number of places in our society,
then think that they need inside information and a secret sauce
investment approach to do well, and, therefore, those are the
most attractive first options to them, unfortunately.
Senator Collins. The language you used also was very
typical of what you see with the hyping of these penny stocks,
saying that if you have not bought the stock yet, you are no
player at all, a lot of times implying that someone is going to
miss out on this exciting opportunity to, as our previous
witness said, to get in on the ground floor. It is stunning to
me that, given what you portrayed, that you had over 1,000 E-
mails from people who were unhappy they could not find this
fictitious stock. I think that suggests we have a long ways to
go on consumer education in this area.
Mr. Gardner. We certainly do.
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