Sorry about that formatting.
Also that link didn't seem to take, so here is the text:
>>>>>>>>>>
Paper: Houston Chronicle
Date: MON 07/13/98
Section: BUSINESS
Page: 2
Edition: 2 STAR
OTC Bulletin Board has image woes
By JAY GREENE
Orange County Register
Meet Dragon Energy Group, a small Irvine, Calif., company that owns 80 percent of a power plant in
China.
Last fall, Dragon didn't exist. The company was known as Vialux and it had just agreed to buy
undeveloped property near Monterey, Calif.
A year before that, Vialux didn't exist. Then, the company was called Allied Biotechnology and it sold
products to enhance hair regrowth.
Make your head spin? The OTC (over-the-counter) Bulletin Board, the backwater stock -quotation
system where Dragon's shares can be found, is home to hundreds of such chameleons. Company
histories get rewritten daily. Futures often are vague at best. It's a virtually unregulated market, fraught
with everything from heavy losses to investment fraud. There's also the occasional financial jackpot.
Dragon may well become a great success. But it's hard to imagine a company such as Dragon surviving
on one of the large stock exchanges. Indeed, their rules generally prohibit trading of companies that, like
Dragon, don't report financial results or meet certain trading requirements. The Bulletin Board, though,
welcomes the Dragons of the world with open arms.
As informal as the Bulletin Board sounds, it is exploding. Today, nearly 6,400 companies are quoted on
the Bulletin Board, up 9 percent from a year ago. What's more, investors traded nearly $5.5 billion of
Bulletin Board stocks in March, up 69 percent from March 1997.
To some, the Bulletin Board is pure capitalism - a place where companies with barely a hint of a
financial plan persuade investors to take a chance. To others, the system is a breeding ground for fraud
- an invitation for hucksters to take advantage of naive investors hoping for the big hit.
The Bulletin Board is a loosely regulated service that posts real-time stock quotes, last sale prices and
volume information. All it takes for a stock to trade on the Bulletin Board is a sponsoring brokerage
firm, which generally then controls the market for that stock .
Unlike their counterparts that trade on the New York and American stock exchanges or the Nasdaq
market, Bulletin Board companies need not file periodic financial information with the Securities and
Exchange Commission for investors to inspect. And half the Bulletin Board companies don't.
But as the Bulletin Board has grown, regulating it has become increasingly unwieldy. And investors get
lulled because they can call up a stock quote or find a research report of a Bulletin Board company just
as they would companies that trade on the Nasdaq or the New York Stock Exchange.
"For many investors, it has the look and feel of the regulated markets, such as the Nasdaq, the New
York and the Amex," said Barry R. Goldsmith, executive vice president of enforcement for the National
Association of Securities Dealers' regulatory division. "People don't necessarily understand what it is."
As the Bulletin Board has grown, so have the small-stock scams . The SEC believes that investors
were bilked out of $6 billion last year in small-stock fraud, with a large chunk of that coming from
Bulletin Board companies.
The most common Bulletin Board stock scam is a so-called "pump and dump" scheme. First, those who
would defraud accumulate a large block of a company's stock , then start hyping it through misleading
news releases and bogus postings on Internet bulletin boards. That's the pump.
Investors get suckered into buying the stock , either believing the hype or jumping in to catch a ride on
the stock 's momentum. As the shares soar, the perpetrators of the fraud sell. That's the dump.
Scams often start with cold-calling. A young broker with a script working from a boiler room phones
potential investors with a high-pressure offer to get in on "a great investment opportunity." They rarely
take no for an answer.
The SEC said cold-calling abuses represent the fastest-growing category of complaints, jumping more
than 23 percent last year.
If this is a market where many investors get stung, why is it growing so rapidly? Because it plays off the
optimism in the overall stock market, said Goldsmith.
Add the Internet to the mix. It provides a convenient way for stock touts to hype stocks that otherwise
couldn't find buyers. Finally, the Bulletin Board plays to the lottery dreams of investors who hope for a
quick killing.
In perhaps the most publicized small-stock fraud case, regulators shut down A.R. Baron & Co., a New
York brokerage, for rampant unauthorized trading in customer accounts. The SEC accused the firm of
manipulating the stocks of two companies and swindling customers out of $17 million. The case is still
pending, but a few former Baron executives have pleaded guilty and agreed to help prosecutors.
To be sure, the Bulletin Board isn't a complete cesspool. Many small community banks and some
established foreign companies' American depositary receipts - or ADRs - are listed on the Bulletin
Board. And there are the occasional diamonds in the rough.
Though hardly a Microsoft, Fireplace Manufacturers of Santa Ana, Calif., was a home run for an
investor who bought the fireplace maker in its early days. The company muddled along for several years
before a fake-log maker, Desa International, agreed to buy it for $23 million in March. That's a 20-fold
gain for investors who picked up the stock two years ago.
But the real dream for most reputable Bulletin Board companies is to move to the Nasdaq or the
American or New York stock exchanges. Endocare, an Irvine maker of devices to treat prostate
disease, began its life on the Bulletin Board when it was spun out of Medstone International in 1996. A
year ago, it graduated.
With so many dubious companies trading on the Bulletin Board, some investors simply shy away from
all OTC companies for fear of getting burned. The bylaws of many institutional investors, for example,
bar Bulletin Board stock ownership.
In some investors' eyes, Endocare wasn't any different from its more speculative - or even corrupt -
Bulletin Board brethren. So while the Bulletin Board gave Endocare a springboard to the public
markets, it also limited its access to investors.
"Our institutional ownership has really grown quite dramatically since we moved to the Nasdaq," said
Endocare's chairman and chief executive, Paul W. Mikus.
Bulletin Board companies fall pretty much into three groups - the small potatoes, companies without
enough business to rank on the major stock exchanges; the works-in-progress, firms with ideas but no
sales; and the fallen angels, companies disgraced by bad news.
Perhaps what's most ironic about the skullduggery on the Bulletin Board is that the Bulletin Board itself
was created to curb fraud. The system's roots run directly to the SEC's Penny Stock Task Force,
created a decade ago to stem fraud in small-company stocks.
Previously, investing information about small-company stocks could only be had from the so-called
"Pink Sheets," daily lists of bid and offer prices for stocks that were often outdated by the time they hit a
broker's desk. The Bulletin Board became the automated alternative to the Pink Sheets, offering
real-time price and volume information. In addition, the Bulletin Board gave regulators the ability to
monitor trading more closely.
SEC Chairman Arthur Levitt told a securities trade group in April that the agency would have "zero
tolerance" for brokers who abuse Bulletin Board stocks.
"These rogue firms are professional only in the sense they have mastered the art of hucksterism, of
preying on investors' lack of sophistication," Levitt said. "When one of their brokers picks up a phone,
it's almost as dangerous as when a drunk gets behind a wheel."
Copyright notice: All materials in this archive are copyrighted by Houston Chronicle Publishing Company Division,
Hearst Newspapers Partnership, L.P., or its news and feature syndicates and wire services. No materials may be
directly or indirectly published, broadcast rewritten for broadcast or publication or redistributed in any medium.
Neither these materials nor any portion thereof may be stored in a computer except for personal and non-commercial
use.
<<<<<<<< |
