Old scams never die. They just get new names and snare fresh victims. ADVERTISEMENT
That vicious cycle is powering a renaissance in pump-and-dump schemes on the Pink Sheets, the Wild West of Wall Street that is a breeding ground for penny-stock scams.
Pink Sheets used to literally be pink sheets of paper that brokers used to trade stocks that didn't meet the listing requirements of an exchange, such as the New York Stock Exchange. Now, it's the label for a computerized network that allows investors and brokers to buy and sell stocks without getting near an actual stock exchange.
The scant regulatory oversight that allowed penny-stock scams to rise in the first place is enabling their comeback. And they're surfacing with a vengeance because of technology that makes it easy to reach millions of investors via e-mail and instant messages on cellphones.
Five years of ho-hum returns from legitimate stocks such as Microsoft and General Electric are adding to the conducive atmosphere. People who want high-octane investments are more receptive to these get-rich-quick schemes pitching trendy investments ranging from fitness centers to alternative energy plays such as wind farms and biodiesel.
Last year, the number of companies listed on the Pink Sheets hit a record 4,570, and trading volume hit 820 billion shares - more than quadruple the level the year before, according to PinkSheets.com. This year is on track for another record, with 4,781 companies listed and a dollar volume of $47.4 billion through Nov. 9, on pace to beat last year's $50.7 billion volume.
Not all Pink Sheets-listed stocks are scams. But amid that flood of activity on the Pink Sheets is an increasing number of scamsters trying to lure fresh prey with promising pitches, say securities lawyers and watchdogs. "I've been seeing more of them," says Hartley Bernstein, of StockPatrol.com. "I get a dozen a day."
A typical pump-and-dump scheme involves somebody making falsely optimistic claims (the pump) via a press release or an e-mail about a shell company whose shares trade for a few cents. Unsuspecting investors buy the "penny stock," causing its price to double, triple or more. Then, scamsters sell shares (the dump) at a profit, leaving other investors holding what turns out to be nearly worthless stock.
Regulators shake their heads at the lengths some go to snare victims. "Some of these bad guys rig the Internet. You can rig the Internet to lure investors into a false sense of security," says Cameron Funkhouser, NASD's senior vice president of market regulation. For instance, some create a fake message board where it appears dozens of investors are gushing about a company's hot prospects.
Technological advances might have made the scams more effective, but many wouldn't work if it weren't for the Pink Sheets. Unlike stock exchanges such as the NYSE, the Pink Sheets system is an informal computerized network that allows brokers to trade stocks and compare quotes. When an investor wants to buy a stock on the Pink Sheets, they contact a broker, who can use a computer to see what the stock is trading for, then contact another broker who facilitates buying and selling in that stock.
Stocks on the Pink Sheets system fall between the cracks of regulation. The NASD regulates brokers, not the stocks they trade. The Securities and Exchange Commission, with few exceptions, regulates only companies with more than $10 million in assets and more than 500 shareholders. Virtually no stocks traded on the Pink Sheets clear that bar.
"As a practical matter, smaller companies tend to fall below the SEC's radar and state regulators'," says John Coffee, securities law professor at Columbia University. "They're too small."
That means a lot of latitude for anyone who wants to abuse the system. Only when a penny-stock scam runs blatantly afoul of the law or violates anti-fraud provisions can the SEC get involved.
The SEC has not released the number of penny-stock scams it has found on the Pink Sheets this year, which makes the boom hard to quantify. But a few of the SEC's recent enforcements show the range of tactics used to lure investors:
Questionable correspondences.
In July, the SEC charged Joshua Yafa, a stock promoter in Florida, with fabricating a fax that appeared to be a private letter from a broker urging a client to buy shares of Pink Sheets-listed stock AVL Global because it was poised to triple in value. The fax was transmitted to thousands in late 2004. The shares jumped 25% on heavy volume after the fax went out, and the SEC's lawsuit alleges that gave Yafa a chance to sell at a $300,000 profit. Yafa's attorney did not return calls for comment.
At the same time, the SEC charged Michael O'Brien Pickens, son of oil tycoon T. Boone Pickens, with using a version of Yafa's tactic to pitch three stocks, two of which traded on the Pink Sheets. The SEC claims the younger Pickens also pocketed $300,000 on the alleged scam. He might never have come to regulators' attention if the fax service he used hadn't unwittingly sent it to one of the SEC's California offices. Pickens' attorney did not return calls for comment.
Multimedia assaults.
In February, the SEC charged Donald Oehmke, Bryan Kos and five partners with putting out false press releases, faxes, e-mails, voice mails, websites and videos to promote two Pink Sheets-listed penny stocks. One claimed to be a Latin American staffing company and the other, a fitness center operator. The SEC said the press releases were false and that the president of the Latin American recruiting firm was in on the scam. The SEC also said the second company didn't own a single fitness center.
Even so, buzz created around the stocks drove them up and allowed the men to profit by more than $27 million, the SEC alleges. Oehmke's attorney declined to comment. Kos' attorney says his client was fooled by the company's management and believed the statements he made about the stock were correct.
Bogus "research reports."
Scamsters often enlist the help of firms that create bogus research reports designed to look like they're from legitimate brokerages. Other times, the fraudsters make the "reports" themselves and disguise that key fact from investors.
That's what the SEC in September charged two people with doing when they promoted what was described as a website construction company. The SEC accused George Bogle and Peter Emmanuel with putting out a report that appeared to be from an independent stock analyst and that said the stock was "our most aggressive stock buy recommendation." But it was based on false information, the SEC says. Nonetheless, the stock jumped 120%, and the two profited nearly $500,000 by selling the shares amid the good buzz, the SEC says.
Emmanuel thought he was just repeating reliable already public information on the stock, his attorney says. Bogle's attorney didn't return calls.
Anyone who isn't confident promoting a Pink Sheets-listed stock can get help. Take Jonathan Lebed, who was fined $285,000 in 2000 by the SEC for buying stocks mainly listed on the NASD's "Bulletin Board" market, spreading false messages to promote the stocks, then dumping them. Lebed paid the fine without admitting or denying guilt. Now, he concentrates his efforts on promoting Pink Sheets-listed stocks. He discloses on his website that he gets paid by companies, often $25,000 a month, for "investor relations" contracts to promote certain Pink Sheets-listed stocks. He often sends e-mails touting events at the company. Several e-mails sent to Lebed were not answered, and no phone number could be found for him or his offices.
Reverse mergers.
It's easy for anyone to "take their company public," thanks to the fact that there are hundreds of shell companies trading on the Pink Sheets that exist on paper but have no assets.
Consider Wind Farming, created when William Telander bought a Pink Sheets-listed company called Applied Research. Applied had no assets, just a Pink Sheets listing, according to an SEC complaint filed this year. After buying Applied, Telander changed the name to Wind Farming, which allowed him to avoid regulatory scrutiny because he took over another company rather than issuing new stock. Starting as far back as summer 2004, Telander began issuing trumped-up and "false" press releases extolling Applied's success, the SEC complaint says, including fabricated business contracts. Trading volume soared from basically nothing to more than a million shares a day, the SEC says, allowing Telander and a group of partners to make hundreds of thousands selling shares. The attorney representing Wind Farming declined to comment.
Problems don't occur only on the Pink Sheets. Enron traded on the NYSE. WorldCom was on the Nasdaq. But companies on the Pink Sheets get greater freedom because there are no listing requirements and there's no dedicated regulator. Companies don't have to meet any standards to be on the Pink Sheets and don't have to put out financial statements. Even Sarbanes-Oxley rules designed to clamp down on corporate games don't apply to Pink Sheets-listed companies.
The SEC usually gets involved only if scamsters get so greedy that they issue additional shares rather than just pumping and dumping existing shares, says Gidon Caine, securities lawyer at Dechert LLP.
Meanwhile, Pink Sheets stocks have the appearance of being like any other stock. Even mainstream websites, such as USATODAY.com and Yahoo Finance, provide quotes on Pink Sheets stocks that give them the appearance of being regular exchange-traded shares.
Some are hopeful that Pink Sheets scams can be curbed. The SEC has been moving to clean up the Pink Sheets where it can, especially by targeting dormant listings of shell companies. For instance, in July it suspended trading in three Pink Sheets-listed stocks, Asia4Sale.com, Vision Group and Idoleyez, saying they were not providing accurate financial data.
The SEC also tightened rules by forcing shell companies to release regulatory filings after being taken over.
These moves will help clamp down on these companies. But the spate of recent enforcement actions, for one, should serve as a reminder to investors to do their homework. "If you can't get a full picture of what a company is doing, you should stay away from it," says Cromwell Coulson, CEO of PinkSheets.com.
USA TODAY
-------------------- Invest with your brain not with your heart. Posts: 4405 | From: Bristol, Tn, USA | Registered: Aug 2004
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article just accidentally 'forgot' to mention even one success story of a pink sheet! Reminds me of the 'terror level' indicator - just frighten the masses without giving them tools to protect themselves...
Posts: 213 | Registered: Oct 2005
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14 out of almost 5000 have success stories to tell. Most of the rest of them are scams. Greed is the problem. IMO
-------------------- If I give you bad information, please feel free to sue me. I have nothing left anyway. Ed Posts: 1772 | From: Oxford, PA, USA | Registered: Oct 2004
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Ric... Thanks for the heads up article...Will print off and keep with all the other DD...
Posts: 2660 | From: Pennyland USA | Registered: Jun 2004
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quote:Originally posted by marcinek: HAha I'd like to see the author get in on HISC...he would think differently.
I think maybe one pink out of a thousand actually does fairly decent,RFDL just had a nice run lately but I still won't put a dime in it or any other pink unless I actually see some real SEC info (something most pinks avoid)
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Without a doubt it's best to stay away from them. If you can afford to lose the money you invest in them go ahead, otherwise stay away. Every once in awhile I will find one and I'll get in, when I do win its more luck than talent. To me they're more like playthings.
Posts: 280 | From: w.sacto.ca. u.s.a. | Registered: Feb 2004
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No you gave it to them,you more than likely thought you could get rich quick. If you treat trading like ajob,you can make money,get greedy you lose.
Posts: 280 | From: w.sacto.ca. u.s.a. | Registered: Feb 2004
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GOOD ARTICLE RIC ABOUT ALL I SEE ON THIS WEB SITE IS SOMEONE PUMPING ONE STOCK OR ANOTHER. ARE ALL OF THE OTCBB ON THE PINK SHEETS OR ARE THEY TAKEN OFF AFTER THEY ARE LISTED ON OTCBB
Posts: 41 | Registered: Sep 2005
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How to stay away from scams: Stop buying on hype and start buying on results: when the company actually starts making money, buying back shares, and paying cash dividends. Before buying a stock, find out whether it's healthy or not: Check out my thread that categorizes stocks into healthy/unhealthy categories. Staying away from a stock because it's a pink sheet stock is nonsensical IMO. In fact, more money trades daily on the pink sheets than on the OTCBB. Never buy a penny stock you can't prove exists; always find an independent source that proves the existence of the company you want to buy: mention of company on government website, mention of company by another well-known company, talk by posters of using company's products, etc.
Posts: 1468 | Registered: Jul 2005
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quote:The SEC usually gets involved only if scamsters get so greedy that they issue additional shares rather than just pumping and dumping existing shares, says Gidon Caine, securities lawyer at Dechert LLP.
lol, gvrp/mamg ring a bell?
This info should be used to force action by the SEC...
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