SEC tries to rein in stock promoters
Stock hypers appear to flaunt tougher regulations that prohibit accepting stock for promotion
OPINION
By Christopher Byron
MSNBC CONTRIBUTOR
(c) 1999
May 26 — On April 7, a long-standing — and
largely ignored — Securities and Exchange
Commission rule was underscored by the
Commission in tough new interpretive language
designed to protect investors from fraud and
abuse in the penny stock market. Unfortunately,
the very companies that the rule targets most
directly seem to be ignoring it most flagrantly —
making a mockery of the SEC's continuing efforts
to crack down on securities fraud involving
microcap stocks.
THE RULE IN question bans companies from using
their own stock to pay stock promoters and investor relations
companies for promotional services rendered on behalf of the
companies themselves.
The new interpretive language for the rule, issued in late
February in connection with several amendments to Rule 701
of the Securities and Exchange Act of 1933, was designed to
prevent companies that have little or no value as investments
from conjuring that value out of thin air. The gimmick: hiring
stock promoters to hype their companies to the public, while
paying them with shares of the very companies being hyped.
Such Ouiji board-type promotions are a common
practice among companies on NASDAQ's so-called Over
The Counter bulletin board market, where companies are
either so small or worthless that they are exempted from
having to file audited financial statements with their
stockholders and the SEC.
The exemption from SEC filing requirements invites a
type of abusive practice in the penny stock market that has
become commonplace in recent years. The non-filing penny
stock companies simply hire stock promoters to make
outlandish claims for the companies, knowing that because
the companies are non-filers, there is no way for investors to
check out the claims before handing over their money.
According to an
SEC spokesman,
companies found
in violation of the
rule will be
required to buy
back the stock in
question for cash,
and must carry the
obligation as a
balance sheet
‘contingent
liability' until it is
discharged.
In such situations, the SEC normally acts only
after-the-fact, when an abusive or misleading stock
promotion has already driven up a stock's price and
investors have been victimized.
Now, the SEC's decision to issue tough new
interpretive language for Rule 701 of the 1933 Act has put
companies on clear notice that they cannot use their stock
as payment for the services of stock promoters and
investors relations operators.
According to an SEC spokesman, companies found in
violation of the rule will be required to buy back the stock in
question for cash, and must carry the obligation as a balance
sheet “contingent liability” until it is discharged. The official
said offending firms also are subject to civil enforcement
actions by the Commission.
What's more, said the official, there are no
“grandfather provisions” in the rule, meaning that any
promoter who received stock for his services before April 7
cannot continue engaging in the services afterward.
BREAKING THE RULES
Unfortunately, a survey of investor relations and
microcap company Web sites reveals that nearly two
months after the rule was reinterpreted and toughened up,
few — if any — investor relations or stock promoters on
the Web are abiding by the ban. Here is a sampler of what
we found:
On April 21, two weeks after the rule took effect, a
Weston, Fla., stock promotion firm called Capital Research
Group, distributed a press release announcing that it had
“initiated coverage” of a Florida-based Over The Counter
bulletin board stock named Exclusive Cruises & Resorts
Inc. Capital Research operates a Web site under the name
www.thesubway.com, on which it discloses that in return
for its stock promoting services, Capital Research has
received 8,000 shares of Exclusive Cruises & Resorts
stock. The Capital Research Web site lists three other
bulletin board companies for which the firm has recently
issued similarly effusive investment recommendations and/or
press releases in return for stock compensation from the
companies involved.
On April 18, more than a week after restatement of Rule
701, a Web site calling itself www.bullmarketstocks.com
issued a report on behalf of penny stock company Worldnet
Casinos.com. The site discloses that bullmarketstocks.com
received 37,000 shares of stock in the company in August
of 1998 and another 15,000 this last April for helping bring
about this run-up. The report on Worldnet Casinos claims
the company had revenues of $13 million in 1998 and is “on
target” for $100 million of revenues in 1999. But Worldnet,
a Costa Rica-based, non-filing company, has not released
audited financial statements for either period, so there is
really no way of verifying the claims. The company traded
for pennies per share as recently as last December. It
currently trades for roughly $2.40 per share.
On May 7th, a stock promotion firm operating a Web site
under the url of www.stockmaker.com distributed an
artfully worded press release that subtlety trumpeted client
Fifth Avenue Channel Corp., which runs a struggling
shop-at-home cable service and Web site headed by Ivana
Trump. A recent major shareholder in Fifth Avenue Channel
Corp. is a North Carolina stock promoter named Charles
S. Arnold, who puts on offshore investment seminars in
Costa Rica and is closely linked to the stockmaker.com
Web site, which promotes a number of his enterprises. A
disclaimer on the Web site reveals that stockmaker.com
was paid 50,000 shares of Fifth Avenue stock (known at
the time as Tel-com Wireless Cable TV Corp.) for
promoting the company.
Sometime in mid-to-late April (the exact date cannot be
determined from the Web site), a site with the url
www.pennystockpicks.com carried a report recommending
the purchase of shares in a bulletin board penny stock
company named UniTransact Business Solutions Inc. The
company appears to have no current revenues, and is
looking to raise $800,000 in startup financing, according to
the report. But, says the report, the company thereafter
expects to be collecting revenues of nearly $430 million by
the year 2004, with close to $108 million of net profits. A
disclaimer on the Web site reveals that
pennystockpicks.com was paid $25,000 in cash plus
25,000 in UniTransact shares to disseminate these claims to
the public.
On April 16th a stock promotion firm named The
Interactive Business Channel, and operating via a Web site
with the url www.ibchannel.com distributed a press release
that began as a kind of soft-feature news story on the merits
of investing in companies that have announced stock splits,
but quickly developed into a stock-hyping report on a
bulletin board stock bearing the name Intelliquis
International Corp. The press release acknowledged that
Interactive Business Channel had been paid 30,000 shares
of the company's stock in return for distributing the report.
The Web site for Interactive Business Channel reveals that,
to date, the firm has received fully 80,000 shares of
Intelliquis stock, along with $40,0000 in cash, for its
promotional services. The Web site lists 12 other
companies from which Interactive Business Channel has
received stock compensation for services it is presently
providing.
One firm, Beverly Hills-based Stockbroker Associates
Inc., operates a Web site under the name topstock.com.
The site lists four different OTC bulletin board stocks that it
is currently recommending for purchase. An official at the
firm says Stockbroker Associates only accepts clients that
are fully reporting companies with the SEC. But two of the
companies listed on its Web site turn out to be non-filers
with no audited financials on record at the SEC.
Nonetheless, Stockbroker Associates has recently issued
press releases on behalf of both companies — one (for Full
Power Group Inc., an Ohio bulletin board company) as
recently as May 24. The release does not divulge any
compensation deal between the company and the stock
promotion firm. But the Web site discloses that Full Power
has paid the firm 75,000 shares of its stock, plus $5,000
per month for nine months, in return for its services.
Altogether, a two-day search of investor relations Web
sites turned up a dozen different sites that currently list clients
that have used their own company's stock to pay for
promotional services that are now under way. Nearly every
stock promotion firm involved had issued press releases for
its clients on either the PR Newswire or the Businesswire, in
some cases as recently as just this week.
These type of activities have not only now been
specifically barred by the SEC since April 7 but are also
banned by the Standards of Practice of the National Investor
Relations Institute, the main trade organization for the
financial P.R. field.
Taking note of the
SEC action as early as
March 5, the Institute
issued an “Executive
Alert” to its members,
calling attention to the
restated SEC rule and stressing that “consultants who
provide investor relations or shareholder communications
services” may not be compensated in stock or options in
lieu of cash for their services.
Says the Institute's president and CEO, Louis
Thompson, “the companies that engage in this sort of thing
aren't investor relations firms at all. They're stock hypers
and promoters trying to hide behind a veil of respectability.
It's disgusting.”
Cleaning up this abusive practice is what the SEC's
action regarding Rule 701 was all about. But no cases have
been brought since its issuance, and an SEC official says the
Commission's staff has not yet even issued any individual
opinion letters on the matter.
Bottom line? For now at least, it's business as usual on
the Internet, where behind every press release about some
fast rising penny stock company may very well lurk the
impossibly conflicted self-interest of a stock promoter who
agreed to hype the stock only if given shares in the company
beforehand. That is how things have been done until now,
and nothing seems to have changed since April 7 in any
way.
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