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SEC Issues Alert About Stock Promotions

The Securities and Exchange Commission has issued an alert to investors regarding the fraulent promotion of stocks to drive up the stock price and then sell their own shares at the inflated price at investors’ expense. The SEC warns that stock promotors are often paid or company insiders who stand to gain by selling their shares after creating a buying frenzy and pumping up the stock price. The SEC alerts investors to more specific schemes that fraudsters uses including:

Social Media: Fraudsters may promote a stock in seemingly independent and unbiased sources including Social Media. Fraudsters may use social media to promote a stock anonymously or while pretending to be someone else.

Investment Newsletters: In some cases, an investment newsletter may promote a particular stock because the newsletter publisher has been paid to do so.

Online Advertisements: Fraudsters may purchase pop-up ads or banner ads that are targeted to a particular group based on demographics or interests. Ads may be fraudulent even if they appear on legitimate websites, including on the online financial pages of news organizations.

Email: Email spam may indicate an email scam.

Internet Chat Rooms: Fraudsters often use aliases in Internet chat rooms to hide their identities and post messages urging investors to buy stock in microcap companies based on supposedly “inside” information about impending developments at the companies.

Direct Mail: Fraudsters may send you high-end glossy mailers promoting certain stocks.Microcap stocks (low-priced stocks issued by the smallest of companies), including penny stocks (the very lowest priced stocks), are more susceptible to stock price manipulation. Publicly-available information about microcap companies often is scarce, making it easier for fraudsters to spread false information. In addition, it is often easier for fraudsters to manipulate the price of microcap stocks because microcap stocks historically have been less liquid than the stock of larger companies (“liquid” investments are those that can be sold easily). Be especially cautious regarding stock promotions if there are any warning signs of microcap fraud including if the SEC suspended public trading of the security or other securities promoted by the same promoter. Increase in stock price or trading volume linked to promotional activity. Some microcap stocks are quoted on OTC systems including OTC Bulletin Board and OTC Markets. Press releases or promotional activity announcing events that ultimately do not happen (e.g., contracts expected to produce revenue that never get finalized). No real business operations (little or no assets; minimal revenues; false press releases). Company issues a lot of shares without a corresponding increase in the company’s assets. Frequent change in company name or type of business. Read recent reports that the company has filed with the SEC.

When considering any potential investment, be aware of these red flags of investment fraud: Aggressive stock promotion. Exercise extreme caution if there appears to be greater promotion of the company’s stock than of the company’s products or services. Guaranteed high investment returns. Be highly suspicious if the promoter promises you a high rate of return on your investment. Pressure to buy RIGHT NOW. Be wary if the promoter pitches the investment as a “limited time only” opportunity, especially if the promoter claims to base the recommendation on “inside” or confidential information.Unsolicited stock recommendations. Be skeptical regarding information provided in new posts on your wall, tweets, direct messages, emails, or other communications you did not ask for that promote a particular stock (even if the sender appears connected to someone you know). Even if a promoter makes specific disclosures about being compensated for promoting a stock, be aware that fraudsters may make such disclosures to create the false appearance that the promotion is legitimate. Additionally, the disclosures may not reveal that the underlying source of the compensation is a company insider or affiliate. Do not take comfort because the promoter encourages you to buy the stock through your own brokerage account. Even if you do not give the promoter any money directly, your stock purchases may enable the organizers of the promotion to offload their otherwise valueless shares. The promoters may have gotten their shares privately at a very low cost with the intention to profit from their promotion rather than to invest in the company. Before investing in a company based on a stock promotion, carefully research the investment (read Ask Questions) and keep in mind that the promoter may be trying to get you to buy into the hype in order to sell his or her own shares at your expense.

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