The Fifth Estate and Fraudulent Stock Promotions

Stock Promotion and the Fifth Estate

I have been writing about the Fifth Estate, discussing the ways in which networked individuals, enabled by the Internet, can hold other actors more accountable. Reacting to this work, a colleague spoke with me about the ways in which the Internet is providing a means for investors to network with other individual investors to identify potential fraudulent stock offerings.

As he put it, ‘regulators are simply not proactive enough and are usually there to shut the door after the horse has long gone and the fraudsters are rich’ (anon.) He noted that there are sites online that enable individuals to share information about stock promotions that could be fraudulent, particularly a discussion forum on this subject, called A Fool and His Money at the Motley Fool’s UK website, which not only warns people but also usually is several steps ahead of our official regulators. See: Its called an ‘Investors’ Roundtable’.

I’ve recommended that he start his own blog, but he is not confident that he fully understands the legal and personal risks of doing so. Let me encourage others to pursue this area as a potentially dramatic example of the Fifth Estate, but also an area that can have a major impact on many people.

Specifically, the Internet enables investors to network and share information that can help them more rapidly identify such suspect stock offerings. In addition, the Internet provides an independent source of information to validate or examine claims. For example, red flags should be raised when you look into the people involved and the nature of the company whose stock is being promoted and find worrisome facts (or lack of facts!). My colleague’s examples of findings that should raise red flags include:

– the company’s advisors have a history of bringing poorly performing companies to market
– the company is merging into a ‘cash shell company’ created by past stock promotions where the previous company failed
– the company’s stock is being listed on lightly regulated markets
– in the UK these are AIM and PLUS
– in the US these are US Pink Sheets, Over the Counter Bulletin Board or US Regulation S stock where US companies can sell unregistered stock to overseas investors
– company directors, founder investors and stock promoters all stand to gain significant financial reward from a rising stock price
– the company is linked to corporations in US corporate haven states of Delaware or Nevada
– the company’s directors / investors have links to brokerage firms, are connected to previous listed company collapses or have been named in regulatory investigations
– the identify of major stockholders is hidden behind nominee companies either onshore or offshore for example in Dubai, Panama, Virgin Islands, Channel Islands, and Switzerland

– the company whose stock is being promoted has never traded, or has only ever made losses
– the company operates in a ‘flavour of the month’ business sector; China, renewable/alternative energy, mining exploration, biotechs are current favourites
– the company’s stock valuation relies on the success of a patent application, drug license, mineral discovery or other ‘jam tomorrow’ scenario
– unexplained assets in the company’s accounts, such as ‘intangibles’ or ‘unlisted investments’
– transactions between the company and its directors/investors or other companies they control
– a large quantity (in the hundreds of millions) of low value (less than 10p) stock being issued
– the company is paying its advisors and suppliers in stock not cash
– the company has had financial reporting problems such as no or qualified audit reports, going concern warnings, changes of auditors, or a history of delinquent filings with regulatory bodies

– the company’s stock is being sold by telesales teams either from an illegal overseas ‘boiler room’ targeting UK investors, or from an FSA-regulated brokerage specialising in penny shares
– stock promoters talk of an imminent listing of the company via an Initial Public Offering (IPO) or another corporate event with potential to make the stock price rise
– extravagant claims are made about potential returns, usually upwards of 50%
– PR releases appear at the same time as sales pitches are being made making false or exaggerated claims about company prospects (some PR firms/outlets are identifiable as serving the penny stock sector)
– the stock promoter’s website is registered anonymously, or uses text copied and pasted from other genuine (and sometimes other fraudulent) websites
– the stock is being promoted via spam email or is being talked up on discussion board postings

The more red flags the more likely a particular stock offering is going to be fraudulent.

My colleague can reel off a list of companies that meet significant numbers of these criteria, based on his research over the Internet. As he argues, ‘they should not be on public markets and are likely to end up collapsing with losses of millions to investors, creditors and employees. It is costing the economy in the £billions as well as causing distress to the victims.’

Is this an area in which the Internet is enabling networked individuals to exercise greater social accountability? From my perspective, it helps validate the potential for the Internet enabling individuals to network in ways that will hold fraudulent promoters more accountable, but it also underscores the importance of anonymity online. Being able to post material anonymously is enormously important in this area in particular.

I’d be delighted to hear your comments, thoughts on other valuable sites for sharing information about suspected fraud, or any other reaction you might have to this post.


Comments are most welcome