(or Variations on the Theme of "I Hate Spam")
|By A.D. Freudenheim||
8 February 2004
These days, over-the-counter is a phrase best recognized in the context of medicine: over-the-counter drugs are those that can be acquired without a prescription provided by a doctor. However, the phrase originated as an investment term, referring to stocks not listed or available on an officially recognized stock exchange but traded in direct negotiation between buyers and sellers. Such stocks are also often called penny shares or penny stocks, suggesting how cheaply they can be acquired. Just because they are cheap, though, does not mean that they are risk free.
Last Sundays New York Times Sunday Styles section carried an article on a man who (along with several of his business associates) has been charged with what was described as running an old-fashioned pump-and-dump scheme involving penny stocks. In other words, they cheaply purchased large numbers of a companys shares, and then promoted those companies to an audience of potential investors, driving up the stock price and enabling them to sell their own shares at a profit. The article caught my eye because, in early-December, I started paying a little attention to over-the-counter (OTC) stocks myself not as an investor or pump-and-dump promoter, but as the unhappy recipient of spam consisting of free advice about OTC investments.
Spam about Viagra and other drugs or sexual aides is all too common, and is presumably all junk; would you buy Viagra (or any other medicine) from someone too scared to provide their real name, location, or contact information? Hot investment tips, however, whether received by e-mail or by fax, could be another thing entirely: the companies whose stocks were being promoted should exist, have products, have filed papers with the government, and, at the very least, have shares available for purchase. In other words, they should be real, more real than the Viagra salesman working from his garage. Do these stocks offer safe, quality investments? Or do they rely on sales bubbles created through promotions similar to those mentioned in the New York Times article to push share prices higher, and allow some traders (and, presumably, the promoters themselves) to make money in the rush, while other investors suffer losses because their timing is poor? You cannot believe everything you read but were any of these companies worth the investment?
I decided to investigate, focusing on 12 companies whose promotional spam arrived in the first two weeks of December 2003, and tracing their share price to the close of the market on Friday, 6 February. Among the spam I received were the following promotional blurbs:
Some promotions noted specific target prices for their shares, as with Mobile Reach International Inc.; this companys fax spam correctly listed the closing share price at $0.51, and set a target price of $1.90, nearly 4 times higher than its current trading level although it was careful not to say when that target price would be met (and has yet to meet it). The Successful Investor Newsletter spam promoted Tasker Capital Corp. as a strong buy, noting that while the price of TKER stock has been holding strongly @ around $.20 per share, it is our opinion that in the short term this stock could easily start moving up to a target price of $1.00; its share price is currently at $0.16. Others refer to new products (such as Environmental Technologies Kinder Finder child location device) or to new markets that they expect to enter (OTC BB:SMNC Enters Huge Chinese Cosmetics Market). These companies checked out, at least in so far as most had web sites or papers filed with the government and available through news sources like Yahoo! Beyond that, it is hard to tell, barring an in-person visit to each firms offices and labs. But to be clear: I am not casting doubt on the authenticity of the companies or their products, only calling into question the invasive methods they have chosen to promote themselves.
As for the companies doing the spamming, they are even more elusive prey than the high share prices their advertisers seek. All of these promotions carry warnings that they are advertising, and that (in varying language) they should not be construed as an offer or solicitation to buy or sell any security, which seems quite contradictory to the screaming headlines and hot news shown above the fine print. Some of these promoters list numbers to call to have ones fax number removed, but the numbers often dont work and this is often the only contact info listed. Two different promotions Wall Street News Report and Stock Alerts LLC - carry the same phone number. Stock Alerts LLC, can be traced on the web to a company with a similar name that pointedly disavows any connection to the guilty fax-spammer. Another has the helpfully-direct name of Stocks To Watch; a Google search on that phrase turns up more than 50,000 hits. Moreover, as if one didnt have reason enough to be wary, the fine print on some spam even makes clear that the spammers may also be investing in the company being promoted, or that they have received shares in exchange for their advertising service, which might give further credence to claims of share price manipulation.
And as you might have expected, the hype is just that: if you invested equally in these 12 companies, your portfolio would be down 5.74% between purchasing these stocks on the day of their promotion and the close of the markets on 6 February. That 5.74% may not seem like a large number, but it is an average mitigated by strong price swings in both directions over the last two months: As Table A shows, only four of these 12 companies have share prices higher than the closing share price on the day of their promotion an average of 31.87% higher while the eight stocks whose price has fallen dropped an average of 24.55%. If an investor chose with a great amount of luck, investing more heavily in the four companies whose price went up than in the eight others, this drop in portfolio value might have been mitigated. Few likely have such foresight. Moreover, if the one company whose share price moved upwards more than 50% is excluded from these calculations American Multiplexer Corporation the average loss grows from -5.74 to -12.85%.
Other results were more surprising. In line with the concept of pump-and-dump promotions, one might have expected that there would be notable jumps in share price at the time of the promotion or the day thereafter, as hungry investors purchased shares in response to the news, raised the share price, and then watched as the price subsequently fell through the floor. This does not seem to have been the case. Instead, as shown in Table B, shares in four of the companies fell outright the day of the promotion from the price positions they held before the promotions (PLRS.OB, AMUT.PK, PCFG.OB, MBRI.OB); five companies shares either remained exactly the same, raised only the low-end trading price, or merely widened the high-low spread (ICOA.OB, SMNC.PK, TKER.OB, EMTL.PK, NMMG.OB); and three showed increases, mostly slight (GKIG.OB, TRHL.OB, DMTY.PK, ) If these companies were subject to pump-and-dump schemes, wouldnt there have been a more noticeable upward bounce prior to the decline? Even looking for that upward bounce within the high price of the days trading reveals little evidence that some mastermind was making money from these share price movements. High and low share prices over the 52 weeks of 2003 also do not reveal price manipulation tied to these promotions; for example, PLRS.OB hit a high of $2.40 per share in May 2003, months before I received their spam.
What all this suggests is that it may be more difficult to manipulate over-the-counter stocks than one might think; merely sending out promotional spam announcing an imminent corporate windfall is not likely to cause a bump in the market for a particular companys shares. Which raises one big question: why bother? I do not have an answer, but I do have a suggestion for people fighting spam, and for the Federal Communications Commissions efforts to cut down on unwanted and unsolicited fax, phone, and e-mail communications: target the companies who choose spam as their form of advertising. Companies that perform undesirable services like spam advertising should be prosecuted for breaking the law. But much as the person who hires someone else to commit a crime is also guilty of a criminal act, so should the companies and individuals who choose spam as their form of advertising be prosecuted. If you want a good place to start, twelve targets are listed above.
 The American Heritage Dictionary
of the English Language: Fourth Edition, 2000; definition found
on the web at: http://www.bartleby.com/61/60/O0196000.html
 A Little Detour From Life in the Fast Lane, by Warren St. John, The New York Times, 1 February 2004
 This is not a large sample, but I wanted to select only companies whose promotions arrived as spam not those whose news or ads I might have found through the various investor-oriented web sites that exist. I also wanted to allow sufficient time between the arrival of the spam and my reporting for the share prices to have responded to investor action.
 See this link for copies of the promotional spam from which these quotes, and all other quoted references, were taken
 See http://stockalerts.com/Help/Policies/WeDontSendFaxes
 If spam was received on a weekend, share prices shown are those of the nearest prior or subsequent business day, according to category.
Copyright 2004, by A.D. Freudenheim.
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This page is part of: The Truth As I See It.