Search Results for: "promoted stock"

Like a Cardinal, The Price Action Will Be Red

Like a Cardinal, The Price Action Will Be Red

Posted on by David Merkel
Photo Credit: Jen Goellnitz
Photo Credit: Jen Goellnitz

Okay, let’s roll the promoted stocks scoreboard:

Ticker Date of Article Price @ Article Price @ 1/20/15 Decline Annualized Dead?
GTXO 5/27/2008 2.45 0.011 -99.6% -55.6%
BONZ 10/22/2009 0.35 0.000 -99.9% -72.5%
BONU 10/22/2009 0.89 0.000 -100.0% -82.3%
UTOG 3/30/2011 1.55 0.000 -100.0% -92.0% Dead
OBJE 4/29/2011 116.00 0.069 -99.9% -86.3% Dead
LSTG 10/5/2011 1.12 0.004 -99.7% -82.5%
AERN 10/5/2011 0.0770 0.0000 -100.0% -93.4% Dead
IRYS 3/15/2012 0.261 0.000 -100.0% -100.0% Dead
RCGP 3/22/2012 1.47 0.003 -99.8% -89.5%
STVF 3/28/2012 3.24 0.360 -88.9% -54.2%
CRCL 5/1/2012 2.22 0.004 -99.8% -90.2%
ORYN 5/30/2012 0.93 0.013 -98.6% -80.1%
BRFH 5/30/2012 1.16 0.466 -59.8% -29.2%
LUXR 6/12/2012 1.59 0.002 -99.9% -92.3%
IMSC 7/9/2012 1.5 0.910 -39.3% -17.9%
DIDG 7/18/2012 0.65 0.003 -99.6% -89.1%
GRPH 11/30/2012 0.8715 0.021 -97.6% -82.5%
IMNG 12/4/2012 0.76 0.010 -98.7% -86.9%
ECAU 1/24/2013 1.42 0.000 -100.0% -98.4%
DPHS 6/3/2013 0.59 0.003 -99.5% -96.0%
POLR 6/10/2013 5.75 0.001 -100.0% -99.5%
NORX 6/11/2013 0.91 0.008 -99.1% -94.7%
ARTH 7/11/2013 1.24 0.200 -83.9% -69.7%
NAMG 7/25/2013 0.85 0.013 -98.5% -94.1%
MDDD 12/9/2013 0.79 0.022 -97.2% -95.9%
TGRO 12/30/2013 1.2 0.056 -95.3% -94.5%
VEND 2/4/2014 4.34 0.655 -84.9% -86.1%
HTPG 3/18/2014 0.72 0.008 -98.9% -99.5%
WSTI 6/27/2014 1.35 0.150 -88.9% -97.9%
APPG 8/1/2014 1.52 0.035 -97.7% -100.0%
1/20/2015 Median -99.3% -89.8%

It is truly amazing how predictable the losses are from promoted stocks, and that is why you should never buy them. Today’s loser-in-waiting is Cardinal Resources [CDNL]. ?The promoters purport that this company will provide cheap clean fresh water to the world, and will make a fortune off of that. ?Now let’s look at some facts:

What commends this stock to you? ?Is it:

  • That it has never earned any money?
  • That the firm has had a negative net worth for the last four years?
  • That their auditors doubted on the last 10-K that this company would be a “going concern?”
  • That the company 12 months ago was known as JH Designs, which was in?the “home staging and interior design services business?”
  • That the writers of the promotion got paid $30,000 to write the speculative fiction of the promotion?
  • That affiliated shareholders of CDNL paid another $670,000 to publish speculative fiction about the company to unwitting people in an effort to raise the stock price, so that they can sell their shares?

Here, have a look at part of the disclaimer written in five-point type on the glossy ad they sent me in the mail:

Resources Kingdom Limited was paid by non-affiliate shareholders who fully intend to sell their shares without notice into this Advertisement/market awareness campaign, including selling into increased volume and share price that may result from this Advertisement/market awareness campaign. The non-affiliate shareholders may also purchase shares without notice at any time before, during or after this Advertisement/market awareness campaign. Non-affiliate shareholders acted as advisors to Resources Kingdom Limited in this Advertisement and market awareness campaign, including providing outside research, materials, and information to outside writers to compile written materials as part of this market awareness campaign.

Thus, we know who is sponsoring and profiting from this scam. ?It is existing shareholders who want to sell. ?I can tell you with certainty that you should not buy this, and that if you own it, you should sell it. ?There is one significant party that implicitly agrees with that assessment — the company itself, which issued shares at a price of ten cents per share in 2014, according to the recent 10-Q, if you look at the balance sheet and cash flow statements.

Avoid this company, and avoid all situations where stocks are promoted. ?They are bad news for all investors. ?Good investments never need promotion.

Is This Legit?

Is This Legit?

Posted on by David Merkel
Photo Credit: .SilentMode || Doubts that the deal is legitimate?
Photo Credit: .SilentMode || Doubts that the deal is legitimate?

I’ve written a lot about financial fraud at Aleph Blog. ?I try to encourage people to be skeptical, because it is genuinely rare when a deal is exceptionally good for an average person. ?Most of the time in life, you are doing pretty well if you are getting a fair deal, particularly when it comes to financial matters. ?Most people selling financial products know more about the product than the?prospective buyer.

Thus, Aleph Blog has written about a wide number of deals that are bad, and those that are outright fraudulent. ?(At the end of this article, there will be a sample of articles that I have written.) ?Not that anyone appointed me, but I regard this as one of my sub-missions, in writing this blog. ?Cleaning up the investment world should be a goal of many legitimate investors, because the cleaner things are, the better the culture of trust will be for legitimate financial products.

Now, Aleph Blog does this service on two bases: free and paid. ?Free is for the simple stuff. ?If you write an e-mail to me asking “Is this legit?” and it is simple enough for me to give a quick answer through a blog post, I will likely (but not certainly) write a post on it, or point you to one I have written. ?I may even answer the companion question, “Is it a smart thing to do?” ?Most of what I do here will fall into the free category.

The complex stuff is another matter. ?I have done analyses like these for prior employers, and on a freelance basis for wealthy individuals and corporations. ?Examples have included:

  • Analyzing whether the Permanent Portfolio idea works or not (and other investing theory questions).
  • Analyzing a complex tax avoidance deal that involved insurance, securitization, and other factors.
  • Analyzing whether a private business deal looks legitimate.
  • Analyzing whether a securitization deal looks legitimate.
  • Analyzing complex bonds or other securities for value.
  • Giving a second opinion on an investment question.
  • Giving a second opinion on a new investment product.
  • Giving a second opinion on a financial plan.

I like an occasional complex project because it keeps my skills sharp. ?I am a good financial modeler, and though I did not go to the finals the last two years in the Modeloff competition, I placed well in the first round the last two years, and in the second round in 2013 was in the top half, and though I qualified, this year I could not compete in the second round due to a schedule conflict (presbytery meeting).

If a project does not fit my expertise, I will turn it down. ?Why waste your?time and mine? ?If I don’t have slack time, I will turn it down — my investment clients come first. ?But if you have an interesting project that you think might fit me, email me, and let’s talk. ?I am willing to sign confidentiality agreements, and not publish the results if need be.

Beyond that, let’s make the financial world better, and eliminate as many scams as we can.

Articles

Hey, thanks for reading… 😉 and play it safe, please.

 

The Victors Write the History Books, Even in Finance

The Victors Write the History Books, Even in Finance

Posted on by David Merkel

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?It ain?t what you don?t know that hurts you, it?s what you know that ain?t so.?

(Attributed to Mark Twain, Will Rogers,?Satchel Paige, Charles Farrar Browne,?Josh Billings,?and a number of others)

A lot of what passes for investment knowledge is history-dependent, and may not serve us well in the future. ?Further, a certain amount of it is misinterpreted, or, those writing about it, even really bright people, don’t understand the hidden assumptions that they are making. ?I’m going to clarify this by commenting on three graphs that I have seen recently — two that I think deceive, and one that I think is accurate. ?Let’s start with one of the two, which come from this article at AAII, interviewing Jeremy Siegel:

9298-figure-1

 

Leaving aside the difficulties with the data from 1802-1871, there is an implicit assumption of buying and holding that undergirds these statistics. ?Though the lines look really smooth now in hindsight, for those investing at the time they were often scared to death in bear markets, selling out at the worst possible time, and in bull markets, getting greedy at the worst possible time.

Now one might say to me, “But David, forget what happened to individuals. ?As a group, people must made returns like this, because every buyer has a seller — even if some panicked or got greedy, someone had to take the other side of the trade and benefit.” ?True enough, though I am suggesting that average people can’t live with that much volatility. ?Even if you cut 1929-32 in half by being 50/50 Stocks/Treasury Notes, how many people could live with a 40% downdraft without selling out?

But there is another problem: when does cash enter and exit the stock market? ?Hint: it doesn’t happen via secondary trading.

Cash Enters the Stock Market

  • An Initial Public Offering [IPO], secondary IPO, or rights offering leads people to give money to a corporation in exchange for new shares.
  • Employees forgo pay to receive company stock.
  • Shares get issued to suppliers in lieu of cash (common with scammy promoted stocks)
  • Warrants get exercised, and new shares are issued for the price of cash plus warrants.

Cash Exits the Stock Market

  • Cash dividends get paid, and not reinvested in new shares
  • Stock gets bought back for cash
  • Companies get bought out either entirely or partially for cash.

I’m sure there are other ways that cash enters and exits the stock market, but you get the idea. ?It means that cash is exchanged with the company for shares, and vice versa, not the trading that goes on every day. ?Now, here’s the critical question: when do these things happen? ?Is it random?

Well, no. ?Like any other thing in investing, n one is out to do you a favor. ?New stock tends to be offered at a time when valuations are high, and companies tend to be taken private when valuations are low. ?Thus back in the tech bubble, 1998-2000, a lot of cash got soaked up into companies with dubious valuations and business models. ?With a few exceptions, most lost over 90%+. ?Now consider October 2002. ?How many companies IPO’ed then? ?Very few, but?I remember one, Safety Insurance, that came public at the worst possible moment because it had?no other choice. ?Why else would the IPO price be below liquidation value? ?Great opportunity for those who had liquidity at a bad time.

The upshot is that because stock is issued at times that do not favor new investors, and stock is retired at times that do not favor existing investors, the dollar-weighted?returns for stocks in the above graph are overestimated by 1-2%/year. ?Stocks still beat bonds, but not by as much as one would think.

But here’s a counterexample, taken from Alhambra Investment Partners’ blog:

LR-140815-Fig-1

Note that buybacks don’t follow that pattern. ?Corporate managements often exist to justify themselves, and so a great number of them do not behave like value investors when they buy back stock. ?Part of this is that capital seems cheap during the boom phase of the market, and so they lever the company up, issuing debt to buy back stock at high prices. ?It increases earnings in the short-run, but when the bear market comes, the debt hangs ?around, and intensifies the fall in the stock price.

This is why I favor companies that shut off their buybacks at a certain valuation level. ?If they have to dispose of excess cash to avoid takeovers, pay out special dividends… leave the reinvestment issues to shareholders. ?If they buy back stock at levels that are too high, it does not increase the intrinsic value of the firm, though it might keep the price higher for a little while.

Here’s the other graph??from?this article at AAII, interviewing Jeremy Siegel:

9298-figure-2

 

What this graph is trying to say is that if you just buy and hold on long enough, results get really, really certain, and investing a lot in stocks reduces your risks, it does not raise your risks.

I’m here to tell you that is an amplification of the past, and maybe not even the best amplification of the past. ?This is where the victors write the history books. ?Your nation is blessed if:

  • You haven’t had war on your home soil.
  • There are no plagues or famines
  • Socialism is kept in check; expropriation is not a risk (note the many countries grabbing pension assets today)
  • Hyperinflation is avoided (we can handle the ordinary inflation)

Any of those, if bad enough, can really dent a portfolio. ?We can have fancy statistics, and draw smooth curves, but that only says that the future?will be like the past, only more so. 😉 ?I try to avoid the idea that?mankind will avoid the worst outcomes out of self-interest. ?There have been enough cases in history where that has not proven true, and envy and revenge dominate over shared prosperity.

I’ve already made the comment on how many can’t bear with short-run volatility. ?There is another factor: when you look at the above graph, it represents the average valuation level, yield curve shape, etc. ?If you are applying this model to today, where credit spreads are low, cash earns nothing, the yield curve is wide, equity valuations are medium-high, you would have to adjust the expected returns to reflect what the likely outcomes are, and the graph would not look as favorable. ?Volatility looks low today, but realized volatility is likely to be higher, and will not likely follow a normal distribution.

Closing

My main point here is to beware of history sneaking in and telling you that stocks are magic. ?Don’t get me wrong, they are very good, but:

  • they?rely on a healthy nation standing behind them
  • their past results are overstated on a dollar-weighted basis, and
  • their past results come from a prosperous time which may not repeat to the same degree in the future
  • you may not have the internal fortitude to buy and hold during hard times.

 

Not Apt, Not Teed Up, Not Going

Not Apt, Not Teed Up, Not Going

Posted on by David Merkel

Okay, let’s run the promoted stocks scoreboard:

Ticker Date of Article Price @ Article Price @ 6/27/14 Decline Annualized Splits
GTXO 5/27/2008 2.45 0.022 -99.1% -53.3%  
BONZ 10/22/2009 0.35 0.001 -99.8% -72.8%  
BONU 10/22/2009 0.89 0.000 -100.0% -85.1%  
UTOG 3/30/2011 1.55 0.000 -100.0% -92.3%  
OBJE 4/29/2011 116.00 0.069 -99.9% -89.7% 1:40
LSTG 10/5/2011 1.12 0.010 -99.1% -81.2%  
AERN 10/5/2011 0.0770 0.0001 -99.9% -90.5%  
IRYS 3/15/2012 0.261 0.000 -100.0% -100.0% Dead
RCGP 3/22/2012 1.47 0.045 -96.9% -77.2%  
STVF 3/28/2012 3.24 0.340 -89.5% -61.8%  
CRCL 5/1/2012 2.22 0.008 -99.6% -91.7%  
ORYN 5/30/2012 0.93 0.026 -97.2% -80.7%  
BRFH 5/30/2012 1.16 0.779 -32.8% -16.8%  
LUXR 6/12/2012 1.59 0.006 -99.7% -93.0%  
IMSC 7/9/2012 1.5 1.220 -18.7% -9.5%  
DIDG 7/18/2012 0.65 0.042 -93.6% -74.0%  
GRPH 11/30/2012 0.8715 0.073 -91.6% -77.4%  
IMNG 12/4/2012 0.76 0.015 -98.0% -90.6%  
ECAU 1/24/2013 1.42 0.004 -99.7% -97.8%  
DPHS 6/3/2013 0.59 0.007 -98.9% -97.9%  
POLR 6/10/2013 5.75 0.050 -99.1% -98.4%  
NORX 6/11/2013 0.91 0.090 -90.1% -86.9%  
ARTH 7/11/2013 1.24 0.200 -83.9% -82.2%  
NAMG 7/25/2013 0.85 0.085 -90.0% -89.6%  
MDDD 12/9/2013 0.79 0.060 -92.4% -98.2%  
TGRO 12/30/2013 1.2 0.150 -87.5% -97.1%  
VEND 2/4/2014 4.34 1.500 -65.4% -88.7%  
HTPG 3/18/2014 0.72 0.100 -86.1% -99.5%  
WSTI 6/27/2014 1.35 0.735 -45.6% -99.8%  
  8/1/2014   Median -97.2% -89.6%

 

Now for tonight’s loser-in-waiting: Apptigo [APPG]. ?This is a company that ?until four months ago was a development stage company for selling Irish horses in the US. ?This is a company that has never earned any money, and only has positive net worth at present because of raising capital when the prior company acquired Apptigo in a reverse marger, and renamed itself Apptigo.

This is a company that says it will make money off of selling apps. ?Well, they have one app at present, and it is called?SCORE – Match Maker. ?It has a grand total of seven likes at the iTunes Store. ?Now let me hazard a guess here, and say that it is difficult to create a broad network for matchmaking. ?The value of a network goes up proportional to the square of its nodes. ?How will they attract enough attention in the iTunes ecosystem to make ?a significant network? ?Even if this is a legitimate company, I don’t see how it will be easy to make it work, as the promoter said it would be easy.

The promoter also said this in tiny type:

Important Notice and Disclaimer: Flying Under the Radar Stocks is an independent paid circulation newsletter. This report is a solicitation for subscriptions and a paid promotional advertisement of Apptigo, Inc. (APPG). Flying Under the Radar Stocks received an editorial fee of twenty five thousand dollars from Micro Cap Media Ltd. APPG was chosen to be profiled after Flying Under the Radar Stocks completed due diligence on APPG. Flying Under the Radar Stocks expects to generate new subscriber revenue the amount of which is unknown at this time resulting from the distribution of this report. Micro Cap Media Ltd. paid nine hundred forty-eight thousand, three hundred sixty-three dollars to advertising agencies for the cost of creating and distributing this report, including printing and postage, in an effort to build investor awareness. This report does not provide an analysis of a company’s financial position, operations or prospects and this is not to be construed as a recommendation by Micro Cap Media Ltd. or an offer to buy or sell any security or investment advice. An offer to buy or sell can only be made with accompanying disclosure documents and only in states and provinces for which they are approved. Do not base any investment decision based solely on information in this report. Although the information contained in this advertisement is believed to be reliable, Micro Cap Media Ltd. makes no warranties as to the accuracy of any of the contents herein and accepts no liability for how readers may choose to utilize the content. Readers should perform their own due diligence, including consulting with a licensed, qualified investment professional. Further, readers are strongly urged to independently verify all statements made in this report APPG?s financial position and all other information regarding APPG should be verified directly with APPG Audited financial statements and other relevant information about APPG can be found at the Security and Exchange Commission’s website at www.sec.gov. It is recommended that any investment in any security should be made only after consulting with your investment advisor and only after reviewing all publicly available information, including the financial statements of the company. The information contained herein contains forward-looking information within the meaning of section 27a of the Securities Act of 1933 as amended and section 21e of the Securities Act of 1934 as amended including statements regarding growth of APPG. In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act, statements contained herein that look forward in time, which include everything other than historical information, involve risks and uncertainties. ?All forward-looking statements are based upon current assumptions that are believed to be reasonable. In the event any such assumptions turn out to be incorrect, forward-looking statements based upon those assumptions will not be accurate. Flying Under the Radar Stocks presents information in this report believed to be reliable, but its accuracy cannot be guaranteed. More information can be found at APPG’s website www.apptigo.com. (underline emphasis mine)

I actually like this disclaimer, except for the fact that it is in tiny type, while the proclamation of the investment’s fake virtues are in big type. ?So, I have a simple proposal for the SEC regarding newsletters like this: the type size of any disclaimer must be as large as the the largest type in the document.

This is fair, and consistent with other laws that regulate “the fine print.”

I emailed the CEO of Apptigo to ask him whether he knew about the stock promotions (there are three going on), and whether the company, its major shareholders, or its management was benefiting from the promotion. ?There was no answer, though I wrote to him on Thursday.

Regardless, avoid promoted stocks, dear friends. ?No company of any good reputation pays anyone to promote their stock. ?Avoid promoted stocks.

A Stream of Hot Air

A Stream of Hot Air

Posted on by David Merkel

Let’s roll the promoted stocks scoreboard:

Ticker Date of Article Price @ Article Price @ 6/27/14 Decline Annualized Splits
GTXO 5/27/2008 2.45 0.022 -99.1% -53.9%  
BONZ 10/22/2009 0.35 0.001 -99.8% -72.7%  
BONU 10/22/2009 0.89 0.000 -100.0% -83.4%  
UTOG 3/30/2011 1.55 0.001 -100.0% -90.7%  
OBJE 4/29/2011 116.00 0.083 -99.9% -89.9% 1:40
LSTG 10/5/2011 1.12 0.011 -99.0% -81.6%  
AERN 10/5/2011 0.0770 0.0001 -99.9% -91.3%  
IRYS 3/15/2012 0.261 0.000 -100.0% -100.0% Dead
RCGP 3/22/2012 1.47 0.080 -94.6% -72.4%  
STVF 3/28/2012 3.24 0.430 -86.7% -59.3%  
CRCL 5/1/2012 2.22 0.013 -99.4% -90.7%  
ORYN 5/30/2012 0.93 0.026 -97.2% -82.2%  
BRFH 5/30/2012 1.16 0.620 -46.6% -26.1%  
LUXR 6/12/2012 1.59 0.007 -99.6% -93.3%  
IMSC 7/9/2012 1.5 1.000 -33.3% -18.6%  
DIDG 7/18/2012 0.65 0.047 -92.8% -74.2%  
GRPH 11/30/2012 0.8715 0.077 -91.2% -78.6%  
IMNG 12/4/2012 0.76 0.025 -96.7% -88.8%  
ECAU 1/24/2013 1.42 0.047 -96.7% -90.9%  
DPHS 6/3/2013 0.59 0.008 -98.7% -98.3%  
POLR 6/10/2013 5.75 0.051 -99.1% -98.9%  
NORX 6/11/2013 0.91 0.110 -87.9% -86.8%  
ARTH 7/11/2013 1.24 0.213 -82.8% -84.0%  
NAMG 7/25/2013 0.85 0.087 -89.8% -91.5%  
MDDD 12/9/2013 0.79 0.097 -87.7% -97.8%  
TGRO 12/30/2013 1.2 0.181 -84.9% -97.9%  
VEND 2/4/2014 4.34 2.090 -51.8% -84.5%  
HTPG 3/18/2014 0.72 0.090 -87.5% -99.9%  
6/27/2014 Median -96.7% -87.8%

 

My, but aren’t they predictable. ?Onto tonight’s loser-in-waiting Windstream Technologies [WSTI]. ?This is another company with negative earnings and net worth, though it has a modest amount of revenue.

Think of it for a moment: this company has a “breakthrough technology,” and yet they were a hotel company within the last year or two. ?That’s not how real businesses work. ?I you have an incredible technology, but little capital, private equity investors will happily fund you. ?You won’t try to do it in some underfunded corporate shell which tempts crooked financial writers to write fantasy.

Now, you might look at the disclaimer in the glossy brochure which came to my house, which in 5-point type takes back all of things that they about in bold headlines and readable text. ?For example:

  • It begins with:?DO NOT BASE ANY INVESTMENT DECISION UPON ANY MATERIALS FOUND IN THIS REPORT.
  • The Wall St. Revelator is neither licensed nor qualified to provide financial advice. As such, it relies upon the “publisher’s exclusion” as provided under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws.
  • The Wall Street Revelator and/or its publisher, Andrew & Lynn Carpenter, dba The Wall Street Revelator has received a total amount of twenty five thousand dollars [DM: $25,000] in cash compensation to assist in the writing of this Advertisement, as well as potential future subscription and advertising revenues, the amount of which is not known at this time with respect to the publication of this Advertisement and future publications.
  • Mandarin Media Limited paid nine hundred thousand dollars [DM: $900,000]?to marketing vendors to pay for all the costs of creating and distributing this Advertisement, including printing and postage, in an effort to build investor and market awareness.
  • Mandarin Media Limited was paid by non-affiliate shareholders who fully intend to sell their shares without notice into this Advertisement/market awareness campaign, including selling into increased volume and share price that may result from this Advertisement/market awareness campaign.
  • The non-affiliate shareholders may also purchase shares without notice at any time before, during or after this Advertisement/market awareness campaign.
  • Non-affiliate shareholders acted as advisors to Mandarin Media Limited in this Advertisement and market awareness campaign, including providing outside research, materials, and information to outside writers to compile written materials as part of this market awareness campaign.

The disclaimer exists to cover the writers from legal risk, and what it tells us is that there are largish shareholders looking to profit by running up the stock price as a result ?of the advertisement, enough to cover the $925,000 cost.

Such it is with a pump and dump. ?One thing is virtually certain, though. ?This is not a stock to hold onto. ?Look at the stocks in the table above. ?No winners, and most are almost total losses in the long run. ?Manipulators love working with stocks that have no earnings and no net worth, because they are impossible to value for the grand majority of people. ?New buyers, if they come in a group, can create a frenzy that raises prices.

That’s the goal of the advertising campaign: a short term “pop” that the sponsoring shareholders can sell into, letting a bunch of muppets take losses.

Again, never buy promoted stocks. ?If they have to buy the services of others to promote the stock, it is a fraud. ?Good stocks do not need promotion. ?It’s that simple.

PS — the pretentiousness of the word “revelator” should be replaced by the simpler “revealer.”

Self-Regulation in the Financial Markets: Exchange Issues, Market Structure, and Investor Protections (Part 2)

Self-Regulation in the Financial Markets: Exchange Issues, Market Structure, and Investor Protections (Part 2)

Posted on by David Merkel

Exchange SROs: Meeting the Needs of Investors and the Financial Marketplace

Questions:

  • How do exchange SROs contribute to the effective functioning of the securities markets?
  • How has the role of exchanges changed since they were first designated as SROs, and have these changes affected their ability to function effectively in that role?
  • Do recent breakdowns in exchange oversight functions indicate a need for an overhaul of structure/functions or point to ?fatal flaws? in the current system?
  • Are conflicts in the current system of demutualized exchanges resolvable or inherent in the system?
  • What needs to be done to reinforce the integrity of the system and increase investor protections?
  • How does increased competition from broker/dealer internalization networks and foreign trading markets affect exchanges under the constraints of the current self-regulatory system?

Panel

Roberta Karmel
Centennial Professor of Law, Brooklyn Law School
Former Commissioner of the US Securities and Exchange Commission

The change from fixed commissions was significant. ?NASD traders had preferential rates trading with one another. ?Existing SROs continued on. ?Expulsion was a threat. ?Exchange listing standards were a significant protection.

Many markets, and profit seeking exchanges have changed matters. ?Sarbox and Dodd-Frank have affected matters ?with listing requirements. ?JOBS act has opened up listing standards, and perhaps not in a good way. ?SEC was happy to see the monopoly of the NYSE broken, but there have been unanticipated secondary effects. ?We need to ask what kind of regulation we need now in the present environment.

 

Richard G. Ketchum
Chairman and CEO,?Financial Industry Regulatory Authority

Mentions MS was the first Chair of FINRA. ?Merger of NASD and NYSE Reg. ?FINRA has an enhanced majority of public governors. ?No way for industry to capture FINRA. ?Oversees all bond and equity trading. ?Exchange SROs can delegate to FINRA, but they must oversee what FINRA does for them.

 

Mary Schapiro
Vice Chairman of the Advisory Board, Promontory Financial Group
Former Chairman of the US Securities and Exchange Commission
Former CEO of the Financial Industry Regulatory Authority (FINRA)
Former Chairman of the Commodity Futures Trading Commission

SROs are cost-effective and flexible, with deep expertise. ?Examine participants, Surveill markets, etc. ?New tech, markets, exchanges as profit-seeking entities are new challenges. ?Conflicts of interest have grown along with HFT.

 

Moderated by: Andrew N. Vollmer, University of Virginia School of Law

Q: Does the current system work well? What areas do we need to change?

MS: It’s working well. ?Vigilence is needed. ?Well-functioning SROs are an aid to regulators. ?Easier for an SRO to address an issue with stakeholders.

RK: Wants the SEC to have a bigger budget, merge the CFTC into the SEC. ?SROs are necessary now because the system won’t work without them. ?Fragmentation of?trading makes self-regulation less effective.

ANV asks RGK to reply.

RGK says FINRA aids regulators. ?FINRA brings knowledge, focus and access. ?Government regulators are more confrontational, FINRA can get more done. ?Exchanges are the only ones enforcing listing?standards.

MS concurs that listing standards are needed.

 

Q: Have we lost some of the benefits of SROs with the delegation of authority to FINRA?

RGK: has worked with SROs his whole life. ?Comments how things were often worse in the past, not all things are worse today.

MS:?Concurs with RGK.

RK: There has been loss, much of it through the destruction of exchange-based trading. ?2008 meltdown — few firms did anything to stop the crisis. ?Everyone acted in their own interest.

 

Q: Aside from listing standards, what other?things should the exchange SROs do?

MS: Exchanges will always be responsible for aspects of investor protection.

RK: Exchanges will always have an interest in the integrity of their markets.

RGK: Comments that exchanges should watch over the quality of products traded [DM: think of leveraged and inverse ETFs, ETNs, penny stocks, promoted stocks, etc.]

 

Q: What about efficiency at the SRO level?

MS: Competition and efficiency don’t always work well together. ?SEC and CFTC should be merged.

RK:?SEC and CFTC should be merged. ?Need more than one regulator, though. ?Did not work in the UK. ?FSOC a disaster, a non-solution.

RGK: We interact with everyone. ?No opinion on whether the?SEC and CFTC should be merged.

As Light As Hydrogen

As Light As Hydrogen

Posted on by David Merkel

Okay let?s roll the promoted stocks scoreboard:

Ticker Date of Article Price @ Article Price @ 3/18/13 Decline Annualized Splits
GTXO

5/27/2008

2.45

0.040

-98.4%

-50.8%
BONZ

10/22/2009

0.35

0.001

-99.7%

-73.0%
BONU

10/22/2009

0.89

0.001

-99.9%

-79.1%
UTOG

3/30/2011

1.55

0.000

-100.0%

-95.1%
OBJE

4/29/2011

116.00

0.167

-99.9%

-89.7%

1:40
LSTG

10/5/2011

1.12

0.010

-99.1%

-85.7%
AERN

10/5/2011

0.0770

0.0001

-99.9%

-93.4%
IRYS

3/15/2012

0.261

0.000

-100.0%

-100.0%

 Dead
RCGP

3/22/2012

1.47

0.300

-79.6%

-55.1%
STVF

3/28/2012

3.24

0.420

-87.0%

-64.5%
CRCL

5/1/2012

2.22

0.026

-98.8%

-90.6%
ORYN

5/30/2012

0.93

0.110

-88.2%

-69.5%
BRFH

5/30/2012

1.16

0.515

-55.6%

-36.3%
LUXR

6/12/2012

1.59

0.009

-99.4%

-94.7%
IMSC

7/9/2012

1.5

0.900

-40.0%

-26.1%
DIDG

7/18/2012

0.65

0.042

-93.5%

-80.7%
GRPH

11/30/2012

0.8715

0.085

-90.3%

-83.5%
IMNG

12/4/2012

0.76

0.045

-94.1%

-88.9%
ECAU

1/24/2013

1.42

0.240

-83.1%

-78.8%
DPHS

6/3/2013

0.59

0.010

-98.3%

-99.4%
POLR

6/10/2013

5.75

0.070

-98.8%

-99.7%
NORX

6/11/2013

0.91

0.210

-76.9%

-85.2%
ARTH

7/11/2013

1.24

0.360

-71.0%

-83.6%
NAMG

7/25/2013

0.85

0.164

-80.7%

-92.2%
MDDD

12/9/2013

0.79

0.320

-59.5%

-96.4%
TGRO

12/30/2013

1.2

0.220

-81.7%

-100.0%
VEND

2/4/2014

4.34

4.900

12.9%

187.3%

3/18/2014

 Median

-93.5%

-85.2%

Tonight’s loser-in-waiting is HydroPhi Technologies [HPTG]. ?This one can’t even get basic science right. ?It claims to be able to split water into hydrogen and oxygen, and then recombine them to create energy. ?Circular processes in general lose energy, otherwise we would have perpetual motion machines.

And behind the vapid analysis is an uber-loser. ?His analyses never pan out over one year. ?A clever speculator might make money occasionally, but not regularly, because the stocks he pumps are like this one. ?Little revenues, negative earnings, negative net worth. ?This is a recipe for disaster.

Think about it — if you had a miracle energy technology, would you merge your company with a failed internet advertising company “BigClix?” ?I would think not. ?You would keep your company private and enjoy the significant profits.

As it is, there are no profits, so where is this great energy technology? ?This is a scam, and laws should be revised to allow prosecution of those who write such promotional garbage as we have seen. ?It is no good to have the 4-point type disclaimers telling some of the truth, while the big type says “Buy, buy BUYYY!!!” ?Also, as far as the web version of this promotion goes, the promoters pour in half a million. ?As it says in the 4-point type:

Third Party Advertiser IMPORTANT NOTICE: Esquire Media Services Inc (EMS) has managed up to a $500,000 USD advertising production budget as of January 21, 2014 in an effort to build industry and investor awareness for HydroPhi Technology Group Inc (ticker symbol: HPTG).?

It’s easy to affect the price of a company that has bad fundamentals. ?It’s overvalued to start; it will only be more overvalued at the crest of the promotion. ?If you attract a bunch of people to the pump-and-dump who want to play the momentum, some may think they will be clever enough to scalp a quick profit along with the insiders. ?Some of them win, and others lose. ?Others believe the advertising, and stay to lose a ton.

Seth Klarman recently said,??It might not look like it now, but markets don?t exist simply to enrich people.? ?This needs to be remembered by all. ?Markets are for trading, and trading is a negative-sum game. ?Those who buy & hold valuable businesses for a span — that is a positive-sum game, because the underlying asset is appreciating.

To close: don’t buy promoted stocks. ?Never. ?Those who are paid directly or indirectly to encourage you to buy are at best sub-agents for the seller — they aren’t on your side. ?In buying promoted stocks, it’s like going to Vegas, minus the fun. ?You will lose. ?You will lose a lot. ? The house edge is fixed — it’s only a question of how much you will lose.

Avoid promoted stocks. ?As I often say: “Don’t buy what someone else wants to sell you, buy what you have researched and know has value.”

You Would Be Better Off Buying McDonalds

You Would Be Better Off Buying McDonalds

Posted on by David Merkel

Okay let’s roll the promoted stocks scoreboard:

Ticker Date of Article Price @ Article Price @ 2/4/14 Decline Annualized Splits
GTXO

5/27/2008

2.45

0.014

-99.4%

-59.9%
BONZ

10/22/2009

0.35

0.001

-99.6%

-72.4%
BONU

10/22/2009

0.89

0.001

-99.9%

-81.1%
UTOG

3/30/2011

1.55

0.000

-100.0%

-95.0%
OBJE

4/29/2011

116.00

0.200

-99.8%

-89.9%

1:40
LSTG

10/5/2011

1.12

0.017

-98.5%

-83.3%
AERN

10/5/2011

0.0770

0.0001

-99.9%

-94.2%
IRYS

3/15/2012

0.261

0.000

-100.0%

-100.0%

 Dead
RCGP

3/22/2012

1.47

0.160

-89.1%

-69.4%
STVF

3/28/2012

3.24

0.500

-84.6%

-63.5%
CRCL

5/1/2012

2.22

0.015

-99.3%

-94.1%
ORYN

5/30/2012

0.93

0.132

-85.8%

-68.6%
BRFH

5/30/2012

1.16

0.440

-62.1%

-43.8%
LUXR

6/12/2012

1.59

0.013

-99.2%

-94.6%
IMSC

7/9/2012

1.5

0.780

-48.0%

-34.0%
DIDG

7/18/2012

0.65

0.038

-94.2%

-84.0%
GRPH

11/30/2012

0.8715

0.108

-87.6%

-83.0%
IMNG

12/4/2012

0.76

0.070

-90.9%

-87.1%
ECAU

1/24/2013

1.42

0.225

-84.2%

-83.3%
DPHS

6/3/2013

0.59

0.007

-98.9%

-99.9%
POLR

6/10/2013

5.75

0.060

-99.0%

-99.9%
NORX

6/11/2013

0.91

0.225

-75.3%

-88.3%
ARTH

7/11/2013

1.24

0.300

-75.8%

-91.7%
NAMG

7/25/2013

0.85

0.230

-72.9%

-91.5%
MDDD

12/9/2013

0.79

1.150

45.6%

1009.0%
TGRO

12/30/2013

1.2

0.350

-70.8%

-100.0%

2/4/2014

 Median

-92.5%

-85.5%

Tonight’s loser-in-waiting is Fresh Healthy Vending [VEND].? But before I go there, let me point you to an article I read today regarding promoted stock scams.

We’ll start with the fact that there is [sic] essentially four kinds of penny stock companies in the Pump & Dump world: (1) the kind where the management is in on the scam and is directly knowledgeable and complicit with the intent to deceive the public; (2) the kind where some poor schmoe has a great idea (at least he thinks it is) that requires financing, and becomes the mark of a parasitic “funder” who makes all kinds of promises of unlimited monies and riches beyond the mark’s wildest dream; (3) the kind where the company is absolutely for real but the shares have been hyped (sometimes hijacked) into ridiculous valuations; and, (4) a hijacked empty and inactive shell.

The following article explains each type of promoted stock scam.? I appreciated it, because it clarified my thinking — I’ve seen all four of these, but I did n’t realize it until now.? My error was looking for one common modus operandi, when there are a variety of parties that can benefit from a stock promotion.

Fresh Healthy Vending fits the first category of promoted stock scams.? Read this portion of the Disclaimer:

The Wall Street Revelator and/or its publisher, Andrew & Lynn Carpenter, dba The Wall Street Revelator has received a total amount of Seventeen thousand five hundred dollars in cash compensation to assist in the writing of this Advertisement, as well as potential future subscription and advertising revenues, the amount of which is not known at this time with respect to the publication of this Advertisement and future publications. Brown Dog Marketing, Inc. paid two million three hundred thousand dollars to marketing vendors to pay for all the costs of creating and distributing this Advertisement, including printing and postage, in an effort to build investor and market awareness.

If successful, the Advertisement will increase investor and market awareness, which may result in increased numbers of shareholders owning and trading the common stock of Fresh Healthy Vending Inc. increased trading volumes, and possibly increased share price of the common stock of Fresh Healthy Vending Inc.

Brown Dog Marketing, Inc. was paid by non-affiliate shareholders who fully intend to sell their shares without notice into this Advertisement/market awareness campaign, including selling into increased volume and share price that may result from this Advertisement/market awareness campaign. The non-affiliate shareholders may also purchase shares without notice at any time before, during or after this Advertisement/market awareness campaign. Non-affiliate shareholders acted-as-advisors to Brown Dog Marketing, Inc. in this Advertisement and market awareness campaign, including providing outside research, materials, and information to outside writers to compile written materials as part of this market awareness campaign.

The bolding is mine.

The scam is rarely this bald.? The type for the disclaimer is 5 or 6 points.? Very tiny, though I have seen smaller.? But why be so plain?? Because few read it, and it immunizes them from any lawsuits.

In this case, one guy owns ~65% of the company, and he got the shares at a very low cost in the reverse merger that converted a “green advertising” company into a company that vends healthy snacks.? He has a history of his own that should raise a yellow flag.? But the rest of the holders that provided financing, have the chance to get out at much higher valuations as a result of the pump and dump going on here.

As a result of the reverse merger, this is a real company, unlike most promoted stocks.? It has real revenues, but still has negative net worth and regular losses.? Why this company has a market cap over $100 million is a mystery to me, aside from the promotional activity over the last few months.? Aside from that, its revenue growth is slowing, and it faces a number of lawsuits over its behavior as a franchisor.

Given trading volumes since the promotions began, it would not surprise me if the selling shareholders are out of their positions in full by now.? It would also not surprise me if this company did a PIPE or a secondary to monetize the gains of the main holder at a lower valuation.

As with all promoted stocks, this is something to stay away from.? On a speculative level, one can never tell where a stock like this will break down, but I can tell you this, it is coming soon, and holders at this price level will lose money.

There’s No Tiger in the Tank

There’s No Tiger in the Tank

Posted on by David Merkel

Okay, time to roll the promoted stocks scoreboard:

Ticker Date of Article Price @ Article Price @ 12/30/13 Decline Annualized Splits
GTXO

5/27/2008

2.45

0.009

-99.6%

-63.2%
BONZ

10/22/2009

0.35

0.001

-99.7%

-74.2%
BONU

10/22/2009

0.89

0.001

-99.8%

-78.6%
UTOG

3/30/2011

1.55

0.002

-99.9%

-91.1%
OBJE

4/29/2011

116.00

0.230

-99.8%

-90.3%

1:40
LSTG

10/5/2011

1.12

0.012

-98.9%

-86.9%
AERN

10/5/2011

0.0770

0.0001

-99.9%

-94.9%
IRYS

3/15/2012

0.261

0.000

-100.0%

-100.0%

 Dead
RCGP

3/22/2012

1.47

0.140

-90.5%

-73.4%
STVF

3/28/2012

3.24

0.430

-86.7%

-68.3%
CRCL

5/1/2012

2.22

0.024

-98.9%

-93.5%
ORYN

5/30/2012

0.93

0.030

-96.8%

-88.5%
BRFH

5/30/2012

1.16

0.610

-47.4%

-33.3%
LUXR

6/12/2012

1.59

0.012

-99.2%

-95.7%
IMSC

7/9/2012

1.5

0.850

-43.3%

-31.9%
DIDG

7/18/2012

0.65

0.053

-91.8%

-82.2%
GRPH

11/30/2012

0.8715

0.024

-97.3%

-96.4%
IMNG

12/4/2012

0.76

0.050

-93.4%

-92.1%
ECAU

1/24/2013

1.42

0.248

-82.5%

-84.7%
DPHS

6/3/2013

0.59

0.006

-99.0%

-100.0%
POLR

6/10/2013

5.75

0.050

-99.1%

-100.0%
NORX

6/11/2013

0.91

0.096

-89.5%

-98.3%
ARTH

7/11/2013

1.24

0.290

-76.6%

-95.4%
NAMG

7/25/2013

0.85

0.290

-65.9%

-91.7%
MDDD

12/9/2013

0.79

0.480

-39.2%

-100.0%

12/30/2013

 Median

-97.3%

-91.1%

Before I talk about tonight’s loser-in-waiting, let me tell you what happened to Makism3D, the last company I reviewed.? Four days after I reviewed it, the SEC suspended trading, and it reopened on 12/30, falling 49% on the day.? Dig the price graph:

MDDD

The SEC is getting more aggressive about suspending trading in companies that are being promoted.? Some suggest that publishing pieces like this, or others at Seeking Alpha, is encouraging the SEC to be more bold.? If true, that is good.

Now for our loser-in-waiting — Tiger Oil & Gas [TGRO].? I ran into TGRO via an ad on Bloomberg.com.? It led me to this spammy article, which led me to this even more spammy article.? If I were invests.com, I would be more protective of my reputation.? I get all sorts of requests to publish low quality articles at Aleph Blog, maybe 50 per month.? You can make money doing that in the short run, but I never want to treat my readers in such a bad way.

And if I were Bloomberg.com, I would not let them advertise.? Because I write these articles, sadly, I get ads for them, but if I see those ads, I tell my ad network to stop running them.

TGRO is another company that has no revenues, negative income, and negative net worth.? Sound familiar?? Maybe Congress should ban “development stage companies.”? I’ve never seen one that was worth anything.

Here is the beginning of the disclaimer:

This report is for informational purposes only, and does not represent a solicitation to buy or sell the profiled company?s securities, which trade under the symbol TGRO, nor any other securities. StockTips.com is operated by Amerada Corp. (AC). Neither AC nor its employees are certified financial analysts or licensed in the securities industry in any manner. The information in this marketing piece and any accompanying information is subjective opinion and may not be complete, accurate or current and was paid for directly or indirectly by shareholders of the profiled company who may or will profit as a result of the preparation, publication and distribution of this marketing piece and accompanying information. AC expects to receive $2,500,000.00 (TWO MILLION FIVE HUNDRED THOUSAND DOLLARS) as a marketing budget for production and distribution of TGRO marketing material from an unaffiliated 3rd party, Laluna Services, Inc.

And that is what paid Bloomberg.com to give them the top link on a box to the side.? The amount paid is 5% of the present market cap, but 30% of the market cap prior to the promotion.? Look at the price graph:

I should add that this was a operating chemicals company 2007-2010, and another development stage company prior to that.? Such behavior where a company is in the development stage indicates that there is little if any underlying business, and that it is merely a machine to suck money out of the pockets of naive investors, and into the pockets of promoters and insiders.

As I often say, “Don’t buy what someone wants to sell you.? Buy what you have researched and think is valuable.”? Particularly with intangible items like stocks, those who are directly paid to promote stocks are almost always scammers.

Avoid promoted stocks.

Three Dimensions, and Printed, but not Real

Three Dimensions, and Printed, but not Real

Posted on by David Merkel

Okay, let’s run the promoted stocks scoreboard:

Ticker Date of Article Price @ Article Price @ 12/9/13 Decline Annualized Splits
GTXO

5/27/2008

2.45

0.014

-99.4%

-60.9%

  
BONZ

10/22/2009

0.35

0.001

-99.6%

-74.2%

  
BONU

10/22/2009

0.89

0.001

-99.9%

-79.4%

  
UTOG

3/30/2011

1.55

0.001

-99.9%

-93.0%

  
OBJE

4/29/2011

116.00

0.350

-99.7%

-89.1%

1:40
LSTG

10/5/2011

1.12

0.015

-98.7%

-86.2%

  
AERN

10/5/2011

0.0770

0.0001

-99.9%

-95.3%

  
IRYS

3/15/2012

0.261

0.000

-100.0%

-100.0%

 Dead
RCGP

3/22/2012

1.47

0.300

-79.6%

-60.4%

  
STVF

3/28/2012

3.24

0.490

-84.9%

-67.1%

  
CRCL

5/1/2012

2.22

0.028

-98.8%

-93.5%

  
ORYN

5/30/2012

0.93

0.038

-95.9%

-87.6%

  
BRFH

5/30/2012

1.16

0.420

-63.8%

-48.6%

  
LUXR

6/12/2012

1.59

0.015

-99.1%

-95.6%

  
IMSC

7/9/2012

1.5

0.800

-46.7%

-35.8%

  
DIDG

7/18/2012

0.65

0.049

-92.5%

-84.4%

  
GRPH

11/30/2012

0.8715

0.053

-93.9%

-93.5%

  
IMNG

12/4/2012

0.76

0.063

-91.7%

-91.4%

  
ECAU

1/24/2013

1.42

0.330

-76.8%

-81.2%

  
DPHS

6/3/2013

0.59

0.007

-98.8%

-100.0%

  
POLR

6/10/2013

5.75

0.090

-98.4%

-100.0%

  
NORX

6/11/2013

0.91

0.160

-82.4%

-97.0%

  
ARTH

7/11/2013

1.24

0.182

-85.3%

-99.0%

  
NAMG

7/25/2013

0.85

0.785

-7.6%

-19.1%

  

12/9/2013

 Median

-97.2%

-88.4%

Market regularities are heartening.? It’s astounding how regular the losses are from promoted stocks.

On to tonight’s loser-in-waiting, Makism 3D Corp [MDDD].? This is another company with no revenues, has never earned a dime, etc.? It used to be a company that supposedly was trying to improve cellular telephony, but never earned a dime doing so.? So they bought a UK company that was supposedly working on 3D printing, and surrendered the company to them.

It would be incredibly surprising that a company of three people would be able to overthrow the 3D leaders — DDD and SSYS.? They have invested a lot of time, money, and effort to improve 3D printing, and a startup can beat them with less than a million bucks, and less than a year, with a young undifferentiated staff?? I don’t think so.? Or, as an old-style pinball machine might say, “TILT!”

I don’t buy it, and you should not either.? As with all promoted stock scams, the hard part is identifying who benefits.? My guess is affiliates of the guy who wrote the glowing report.? The company has disclaimed ay responsibility.

In any case, avoid promoted stocks.? Do your own research, and buy stocks that you find attractive.? Don’t buy anything that another is trying to pitch you.

Two zeroes merge, and should we expect a positive result?? I think not.

 

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