Good Disclosure vs Bad Disclosure
stockdetective.com
Read The Disclaimer!
Financial publishers that accept payment from publicly-traded companies in exchange for discussing their stock are legally obligated to fully disclose this fact. According to Section 17(b) of the Securities Act of 1933, they are required to disclose the form and the amount of payment as well. The truth is, however, that almost no one in the stock promotion business exercises full disclosure.
MoneyWorld's disclaimer is fairly typical in the industry, stating that the advertisement for the identified company "is not a solicitation to buy or sell securities... investing in securities is speculative and carries a high degree of risk. Past performance does not guarantee future results." Nowhere in the disclaimer is the word "advertisement" used, and there is no mention of the particularly risky nature of the Nasdaq small-cap and OTC Bulletin Board companies that are virtually always the subject of such ads in the magazine.
The disclaimer goes on to say that the firm preparing the report "is retained by the [advertised] company as investor relations counsel. Officers, directors and employees... may from time to time have a position in the securities mentioned."
From the disclaimer, we can determine that some form of compensation was made -- surely it is safe to assume that the firm preparing the report was not "retained" for free -- and the compensation may (or may not) have consisted of shares of the advertised company's stock. Beyond that, however, the reader is left to find out for himself.
Here are some of the phrases contained in the disclaimers we found which indicate to The Stock Detective that the publisher has been paid by a company in order to write about it:
"the publisher received a fee from the company to write this report"
"may be paid a fee by the company referred to herein"
"serves as a special advisor"
"acts as a consultant"
"the publisher is a financial relations consulting firm"
"is retained as investor relations counsel"
"receives compensation for providing shareholder and broker communication"
"may provide investment banking services"
"personnel may be Directors of client companies"
"may offer broker relations services"
Before reading even a single word of any analysis of a small-cap stock, always read the disclaimer. Ignore it at your peril!
Good Disclosure vs. Bad Disclosure
In most publications of this kind, the disclosure is "identifiable" -- that is, the disclaimer accompanies the story about the specifically identified stock. But some publishers utilize only "blanket" disclosure -- a single disclaimer that applies throughout.
The Opportunist magazine, for example, takes the booby prize for generating the largest, most comprehensive vehicle for stock promotion seen anywhere in print media. While MoneyWorld at least offers some worthwhile info-nuggets alongside its paid small-cap company analysis, The Opportunist is a continuous stream of over 100 pages of paid ads with only a smattering of other content. On occasion, the publisher even places a photo connected to one of the paid advertisers on the magazine's cover.
Each of the several dozen companies profiled in The Opportunist carries a brief disclaimer with the usual language: "This is not a solicitation to buy or sell securities... This does not purport to be a complete analysis of [the company]," and so on. None of these disclaimers, however, includes any mention of compensation or even the word "advertisement."
A blanket disclaimer at the front of the magazine refers to various departments within the issue: "Profiles, Success Stories, Interviews, Fact Sheets and Research Reports of featured companies may be prepared by the companies... and the information they contain is not independently verified by The Opportunist, which receives a fee from the featured companies for publication."
No reference is made anywhere concerning the form or amount of payment. What's more, the vast majority of the actual "featured company" stories contain no department heading, so the reader cannot possibly determine which companies are considered Profiles, Success Stories, etc. Does that mean these featured companies are different? Are they considered unbiased editorial research or advertisements? We guess the latter.
The difficulty arising from blanket disclosures such as that found in The Opportunist is that the investor can't know for certain who's paid for and who isn't. When a disclaimer says the publisher has been paid (or "may have been paid," as some say) a fee, or that its employees and affiliates "may have positions in the securities discussed," and the publication profiles several securities, the reader doesn't know which ones apply. If three companies are profiled, none, one, two, or all three actually could be paid promotions.
For the individual investor, the wisest course is probably to assume that all are paid.
Arrowhead Financial High Growth Newsletter was guilty of offering the weakest attempt at disclosure out of all the stock promotion vehicles we reviewed. The sample issue we obtained reviewed 11 Nasdaq small-cap or over-the-counter bulletin board stocks, yet contained only one brief disclaimer. The publisher and "its employees, associates and/or affiliates may own securities, or options or warrants to purchase the securities of subject companies," a common practice, of course.
But the disclaimer goes on to state, "The opinions expressed are those of the authors." No mention is made that the "opinions" are advertisements of any kind, or that any form of payment was accepted. Taken together, the reader would understandably assume that the company profiles in Arrowhead Financial High Growth Newsletter are bona-fide editorial recommendations.
Yet in its investigation of Say Yes Foods Inc., a heavily promoted bulletin board stock, The Stock Detective was told by sources at both Say Yes Foods and Arrowhead Financial that payments were indeed made. The sources confirmed that Say Yes Foods paid between $7,500 and $10,000 for publication in each of six separate issues of Arrowhead Financial High Growth Newsletter. ("Just Say No to Say Yes Foods" - July 29, 1997)
Only a few publishers in the stock promotion business actually practice "full" disclosure, completely revealing the form and the amount of all compensation. Hot Stocks Review's George Chelekis, for example, receives cash from companies he "analyzes" but, in his disclaimer, he reveals the full amount (the fact that he was fined by the SEC probably provided plenty of incentive for him to do so). Personal Investing News, while sometimes compromising its integrity by running photos provided by advertisers on its cover, does reveal cash payment amounts in company-specific disclaimers. Inside Wall Street is a widely disseminated direct- mail promotional device, but the publisher fully states his compensation -- specifically "20,000 warrants and 40,000 shares of common stock which is available for public trading" in the issue we obtained.
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