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My new venture: OTC MicroCap Research

While there are plenty of people who write about microcap securities fraud and pump and dump scams, too little of the research reaches the people who need it the most: the small investors who believe in the scams. To help them I have created a new website, OTCMicroCapResearch.com. The only thing on that website will be research reports on companies, mostly pump and dumps. I will take no positions in the stocks I analyze at that website, take no payment for articles (except from content syndication websites) and I will do my best to distribute my analyses so that the investing public can see it and learn to avoid pump and dump scams that way. I do not claim that there is anything particularly new about what I am doing, but it is something worth doing.

See my introductory post on why I created the new website.

My PacWest Equities (Pinksheets: PWEI) report published prior to the market open today (PWEI is now down over 75% from its open, although the Infitialis report had a lot to do with that).

Disclaimer: No positions in any stocks mentioned. The new website is owned by MorningLightMountain LLC, just like this website; I am the managing member of the company. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

A stock transfer agent’s tip leads to British Columbia halt of FMNL

Forum National Investments (FMNL), a company that has skyrocketed on a recent stock promotion campaign, received a cease-trade order from the British Columbia Securities Commission (BCSC) five days ago. Of course, such orders do not prevent companies from trading on the OTCBB in the USA, although such orders often result in steep price declines. FMNL was no exception, dropping from a $2.70 close on 7/20/2012 to a close of $1.01 the next trading day, 7/23/2012.

The reason for the cease-trade order was not abnormal: a large promotional campaign along with a number of press releases from the company led to a significant increase in FMNL’s share price; also, the accounts of people associated with FMNL’s president engaged in significant trading in FMNL during the promotion. What is most interesting about the case is that it was the stock’s transfer agent that informed the BCSC of suspicious transactions by the insiders. Much penny stock fraud involves the selling of unregistered shares or the illegitimate issue of new shares. If more transfer agents were as vigilant as FMNL’s transfer agent, penny stock fraud would be significantly less common (or at least less remunerative).

See the BCSC press release. From the cease trade order and notice of hearing (pdf; emphasis mine):

4. Clozza is the President, Chief Executive Officer, and a director of Forum National.

5. Tutschek is the Chief Financial Officer and a director of Forum National.

6. Curtis is a shareholder of Forum National.

…

Unexplained attempts to transfer shares

21. On July 5, 2012, Clozza and Tutschek attended the offices of Forum National’s
transfer agent in Vancouver, British Columbia (Transfer Agent). They carried with
them share certificates representing approximately 2.7 million shares of Forum
National. Among these, were certificates in the names of Curtis and Tutschek.
22. Clozza instructed the Transfer Agent to “overnight” transfer the share certificates into
the name of a Bahamian company (Bahamian Entity), by way of a United States
based brokerage firm (American Brokerage). The Transfer Agent informed the
Commission.
23. On July 10, 2012, the Dealer informed the Commission that some of the accounts
holding Forum National shares had instructed the Dealer to transfer their holdings to
the American Brokerage. Accounts in the names of Bahamian companies, including
the Bahamian Entity, were among those that provided transfer instructions.
24. On July 9 and 12, 2012, the Executive Director obtained freeze orders from the
Commission under section 151 of the Act. Among other things, the freeze orders
blocked attempts to transfer certain share certificates held at the Transfer Agent, and
certain accounts held at the Dealer.
25. On July 16, 2012, Tutschek sent the Transfer Agent a Treasury Direction signed by
Clozza and Tutschek on July 11, 2012, directing it to issue share certificates
representing 137,500 shares in Forum National. The Transfer Agent refused.

Also see David Baines’ article on this case and the Stockhouse article (the first one I saw on this case). Thanks to PromotionStocks for being the first that I saw to mention this case. More info can be found in this iHub post by nodummy.

The $650,000 promotion can be seen here and it was at AmericanInvestingReport.com but is no longer there. See an scanned copy of a physical mailer on it at Promobuyer.net.

Disclaimer: No relationship with any parties named above (except that I trade pump and dumps) and no positions in any stocks or funds mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

Spam pump and dump: VIBE edition

The majority of pump and dumps are run by stock promoters who advertise online to get people to sign up to their emails lists and then follow the law (at least the CANSPAM law) only sending the stock promotion emails to those who sign up. But spam pumps are not uncommon. Some spam pumps may at least have the veneer of legality by obtaining another pumper’s email list and offering a way to unsubscribe. Some spam pumps are a bit more blatant. VIBE was pumped via spam email from a variety of different fake or free email addresses over last weekend and Monday and Tuesday. Unlike most spam pumps, it even had pretty graphics.

While VIBE did move up impressively on Monday morning, like most spam pumps, however, the stock soon began to drop like a rock. Below is a two-day chart with 5-minute candlesticks.

(click to embiggen)

See the pump image below:

(click to embiggen)

Disclaimer: No relationship with any parties named above and no positions in any stocks or funds mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

Penny stock lawyer Kenneth Eade sued by SEC

The SEC today sued numerous individuals involved in Gold Standard Mining Corp (litigation release here). The parties are named below (emphasis mine):

On June 29, 2012, the Securities and Exchange Commission filed a civil action in the United States District Court for the Central District of California against Gold Standard Mining Corp. (“Gold Standard”), its Chief Executive Officer/Chief Financial Officer Panteleimon Zachos, attorney Kenneth G. Eade, auditor E. Randall Gruber and his firm Gruber & Company LLC.

The case itself is not particularly unusual. The SEC alleges that the company materially misrepresented the financial and legal details of an acquisition and that the company filed false financial statements. This is par for the course in penny land. What is much more interesting to me is that the SEC sued the company’s attorney, Kenneth G. Eade, and the company’s auditor, Randall Gruber. SEC lawsuits against penny stock lawyers and auditors, while not unknown, are far less common than they should be. Penny stock fraud would be a lot harder without auditors who are willing to ignore suspicious actions and lawyers who give false opinion letters to allow shares to be registered. Below is the essence of the SEC’s case (emphasis mine):

In its complaint, the Commission alleges that, between May 2009 and April 2011, Gold Standard filed numerous reports about its purported Russian gold mining operations that were materially false and misleading in various respects. According to the complaint, Gold Standard represented that it had acquired a Russian gold mining company known as Ross Zoloto Co., Ltd. (“Ross Zoloto”), but did not inform investors that it had agreed to allow the prior owner of Ross Zoloto to keep profits from existing operations or of issues surrounding Russian government registration or approval of the business combination. The complaint also alleges that Gold Standard filed false or misleading financial statements.

The complaint alleges that Gold Standard and Zachos were responsible for these misstatements, and that Eade, Gruber and Gruber & Co. substantially assisted Gold Standard in making these false and misleading statements. The complaint further alleges that Gruber & Co., through its sole member Edward Randall Gruber, misrepresented in an audit opinion that it had audited the company’s 2007, 2008 and 2009 consolidated financial statements in accordance with standards of the Public Company Accounting Oversight Board.

See the full SEC complaint (PDF).

If the name Kenneth Eade sounds familiar, it is because he is a well-known lawyer for penny stock companies who made the mistake of suing a bunch of message board posters (including Janice Shell) and InvestorsHub for libel back in 2011. He lost that case badly. Below is a quote from the iHub press release about the verdict:

Kenneth Eade sued iHub and 10 John Doe posters in February of this year for allegedly defamatory posts made on the iHub website. iHub raised several meritorious defenses, including that the comments made by the John Doe posters were protected speech under the First Amendment and that immunity was provided by the Communications Decency Act.

In his 12-page ruling, The Honorable John A. Kronstadt granted iHub’s motion to strike Eade’s complaint in its entirety and without leave for him to amend. The court’s ruling effectively dismissed the action against the John Doe posters as well.

Dave Lawrence, spokesperson for iHub commented, “This federal court ruling finding in favor of iHub and awarding legal costs should serve as notice to others who would engage in frivolous litigation, try to plead around CDA immunity or attempt to chill the public’s exercise of freedom of speech.”

Company linked to Awesomepennystocks.com sues Thebullexchange.com for allegedly stealing their email list

Email list theft is not a new thing. Read about a similar lawsuit I previously wrote about. I show some excerpts from the amended complaint below and I provide a few of my own comments. I will post more on this case as it develops.

Case summary at Justia

Initial complaint 3/22/2012 (pdf)

Amended complaint 4/09/2012 (pdf)

Motion to dismiss 6/07/2012 (pdf)

Motion for continuance 6/22/2012 (pdf)

The case is:

MARKETING INTEGRALE CO. v. Todd Roberson, Todd Roberson d/b/a bestdamnstocks.com, thepennystockguru.com a/k/a Jeff Jeffries, William William, Mesa Marketing LLC, otcbullmarkets.com, thebullexchange.com John Does 1-10, ABC Corporation 1-10.

From the amended complaint, we learn the following about the plaintiff:

Plaintiff Marketing Integrale Co. is a web-based Company marketing and customer relations firm, incorporated in Quebec, Canada; principally conducting its business via the internet, and purposefully availing itself to the U.S. Customer base. Integrale maintains core staff in the United States, primarily in Harris County, Houston, Texas and Los Angeles County, Los Angeles, CA.

As you can see from the Awesomepennystocks.com privacy policy page, Marketing Integrale is the corporation behind the website. Screenshot below:

(click to enlarge)

Of course, recent emails from Awesomepennystocks.com have indicated that it is owned by a different legal entity, Centro Azteca S.A.; the most recent email I have on file from Awesomepennystocks.com disclosing in its CANSPAM-required footer that it is Marketing Integrale is from November 6, 2011.

(click to enlarge)

For comparison, here is the most recent email I received from Awesomepennystocks.com. Note that it says it is owned by Centro Azteca S.A.

(click to enlarge)

And the defendants, again from the amended complaint:

Defendant(s)

2. Upon information and belief Todd Roberson, Todd Roberson d/b/a bestdamnstocks.com, thepennystockguru.com aka Jeff Jeffries, William William are the owner(s)/operator(s) of certain web domains that are responsible for Plaintiff’s damages. The address where the defendants may be served with process is at 398 Jade way, Marysville, GA 30558.

3. Upon information and belief Defendant MESA MARKETING LLC, owner of otcmarketbulls.com is responsible for some or all of Plaintiff’s damages. Defendant MESA MARKETING, may be served by providing a copy of this Complaint to counsels, Christine N. Wiseman, Barrister and Solicitor, GILMOUR BARRISTERS, Suite 3 -1 Royce Avenue, BRAMPTON, Ontario L6Y 1J4; or through any other counsel they may so designate, or through their registered agent THE COMPANY CORPORATION, located 2711 CENTERVILLE ROAD SUITE 400, WILMINGTON, DE or wherever they may be found.

4. Upon information and belief Defendant thebullexchange.com is responsible for some or all of Plaintiff’s damages. Plaintiff will serve Defendant thebullexchange.com at its owner(s)’ address where each may be located when said parties are identified.

5. Upon information and belief, John Does 1-10 and ABC Corporation 1-10 are unidentified parties who may be responsible for some or all of the damages incurred by Plaintiff. Plaintiff will serve John Does 1-10 and/or ABC Corporation 1-10 at addresses where each may be located if said parties are identified.

The essence of the legal complaint is that the defendants stole the plaintiff’s email lists. Again from the amended complaint:

13. The Plaintiff charges its customers a dissemination fee (advertising fee) in order for customers to gain access to its email dissemination services to its proprietary database. Upon information and belief, on or around February 18, 2011, the defendants in this case have each/or while in acting in concert by the use of an artifice or scheme, successfully hacked into Marketing Integrale’s server’s hosted at its primarily servers located in the United States at I-contact (http://www.icontact.com). Defendants hacked into Plaintiff’s server in order to gain access, copy, and distribute mail directly to persons on Marketing Integrale’s proprietary e-mail customer lists. By accessing and utilizing Plaintiff’s e-mail list without payment and without authorization, Defendants violated 18 U.S.C. § 2701 and 18 U.S.C. § 1030.

14. Upon information and belief, after the Defendants stole Integrale’s email lists, Defendants incorporated the use of several websites and other associated servers in order to complete their illegal activity.

The allegations in the amended complaint allege the defendants, after having stolen the plaintiff’s email list, then used that email list for their own purposes. Along with various websites, the plaintiffs allege that a couple Twitter accounts and a Facebook account belong to the defendants :

20. Upon information and belief, the websites operated by Defendant Does’ are linked to the Twitter accounts named Sherrybrooks34 and Tracycallies.

21. Upon information and belief, the websites operated by Defendant Does’ are linked to the Facebook account named adria.robinson5.

Mesa Marketing LLC responded by filing a motion to dismiss:

Plaintiff’s pleading leaves open several fundamental questions. What role did defendant Mesa Marketing play in the hacking scheme alleged by the Plaintiff? Who acted on defendant Mesa Marketing’s behalf? How does the website otcmarketbulls.com—allegedly owned by defendant Mesa Marketing—figure into Plaintiff’s claims? The FAC simply does not allege enough facts to infer defendant Mesa Marketing’s misconduct.

Obviously, I am not a lawyer and I cannot evaluate any of the claims by either side.

The most recent filing in the case (on June 22nd) is the plaintiffs’ motion for a continuance, which in this case is a request for more time for the scheduling conference between plaintiff and defendants, for the reason that many of the defendants are unknown to them.

Thanks to Jerry in the Prepromotionstocks chatroom for finding this (he found it somewhere on InvestorsHub, the cesspool of internet stock messageboards).

Disclaimer: No relationship with any parties in the suit. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well..

How the uptick rule abetted illegal bear raids

This post was originally published on my GoodeValue.com blog on 5/12/2009. Due to blog moves it was not correctly moved to this blog so I have reposted it.

The SEC Enforcement Division just put out a press release announcing a judgment against a stock trader who conspired with a brokerage CEO and another trader to evade the uptick rule and profit from manipulative short selling, creating ‘bear raids’. See the original SEC complaint [pdf] against Robert Todd Beardsley and his partner George Lindenberg for details (all the quotes that follow come from that document). The two used multiple accounts to attack various stocks with a concentrated barrage of short sales with the aim of quickly driving the stock price down. Beardsley even “utilized the identities of two foreign individuals to open additional Redwood [brokerage] accounts” in an attempt to cover up the scheme. The two violated the law by failing to observe the uptick rule (their short sales were all in NYSE stocks), by failing to properly mark their orders as short sales, and by trading with the intent to manipulate stock prices.

They made total profits of “approximately $2,400,000.” Evidently both men spent the money quickly, because by the time the SEC obtained judgments against them, both had few assets left and as a result Beardsley only had to pay $100,000 and Lindenberg had to pay $65,000. Now for the interesting part of the story. The duo’s illegal profits were possible only because of the uptick rule. Under the uptick rule, market short sale orders often could not be immediately executed. Those orders would pile up, waiting for an uptick. Market makers and those with special software (as Beardsley and Lindenberg had) could see those unfilled market short sale orders. The duo “looked for stocks where a large market sell order was waiting to be executed, which they surmised was a short sale order”; they would then quickly drive a stock down with short sales and then create an uptick to cover their whole position at a price that was often “one cent higher than their last sale.”

In one instance, they sold short 16,485 shares of Tesoro at prices ranging from $17.82 to $17.51; they covered the whole position at $17.52, covering into a market short sale order that could finally be executed. In this manner Beardsley and Lindenberg made about $2,000; they repeated this procedure throughout the day and their profits quickly piled up. This is the first solid evidence I have ever seen of an actual bear raid. Of course, this bear raid was made possible only by the existence of the uptick rule. Furthermore, the market participants who were most harmed by it were the hapless short sellers whose market short sale orders were executed at depressed prices. As to the so-called bear raids that supposedly occur because the uptick rule has been removed, I continue to doubt their existence. Without the kind of advance knowledge of big sell orders that Beardsley and Lindenberg had, it would be very unlikely for a bear raid to be profitable, as the buy orders to cover the short position would drive the stock back up as quickly as it fell.

Further Reading
SEC Press Release regarding Beardsley judgment
SEC Complaint against Beardsley & Lindenberg [pdf]
Final Judgment against Lindenberg [pdf]
Final Judgment against Beardsley [pdf]
The Trader’s Guide to the Uptick Rule

Disclaimer: No positions in any stocks mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well..

We are all in this together … or not

Whenever you hear that phrase, “We’re all in this together,” be very, very cautious. That is what scammers will say to convince you to do stupid things with your money (like buying pumped stocks) and what both hucksters and even non-fraudulent trading gurus will say to try to get their hands on your money.

The simple truth of the matter is that everyone has different goals and priorities. The most important thing you can do is to make sure you are aware of how the priorities of those you deal with and listen to differ from your own. A stock promoter’s goal is simply to get you to buy stock — damn you and your kid’s college fund. A trading guru who sells his services with an alert service or trading chatroom benefits the longer you subscribe. His financial interest is best served by selling something that you will continue to want or need for years and years. The guru’s monetary motivation will — ceteris paribus of course — cause him to charge as much as he can for as little as he can. He will sell you hard to get you to pay him more money.

Even saying that all traders care about is profits is wrong. Especially in the penny stock world there are many of us who are motivated by other things besides profits (of course we are all motivated to a large extent by profits). I remember getting a bunch of flak from commenters on this blog when I accused a certain pumper of violating securities laws (six months later the SEC sued him). People attacked me for potentially destroying profitable trading opportunities. But I along with most other bloggers don’t just do this for money.

At the end of the day, each of us is motivated by different things, some of which are obvious, some of which are not. Money is the most obvious, but most of have emotional motivations — we genuinely want to help those we come across. Some of us have other motives that drive us, more powerful motives. When the time comes, my motivations will be made clear. In the meantime, let us embrace the motto “All for one, one for all, and every man for himself!”

Disclaimer: No positions in any stocks mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well..

Deep Springs: A lesson in randomness

Longtime readers will know that I stress the importance of randomness in investing and trading. Any investing or trading strategy will produce a number of losers. Sometimes these losing trades or investments will cluster together purely by chance; it can be difficult to distinguish these chance losing streaks from a declining in a trading system’s performance.

Those without statistics training may find it difficult to think in probabilistic terms and and often do not realize how random the world truly is. Following is a real life example of randomness in action. Take two bright, motivated, and somewhat unusual young men, just five years apart in school, both living in the Chicago metropolitan area. One of them, named Michael, attends a pretty good suburban high school. The other, named Franklin, attends the state math and science magnet school. When it comes time, both apply to a number of colleges, including the most exclusive and unusual college in the country, Deep Springs.

The application process to get into Deep Springs is the most demanding application to any undergraduate institution in the country. After writing over 20 pages of essays each, submitting recommendations and standardized tests, both Michael and Franklin are given the chance to visit Deep Springs where they face a second screening, intended to winnow the applicants further (this is early in 1999 for Michael and 1995 for Franklin). One is rejected, the other accepted. Here their paths diverge.

Franklin attends Deep Springs for two years and then transfers to Harvard. He graduates with high honors, marries, and then works for three years in a psychology research lab at Brandeis University. He then applies and is accepted to enter the Psychology PhD program at Washington University in St. Louis, under renowned researched Henry L. Roediger III.

Five years after Franklin is accepted by Deep Springs, Michael is rejected by Deep Springs and instead he begins college at Grinnell College in Iowa, a well-respected liberal arts college. Three months later he drops out and moves back home, working a retail job for 45 hours a week while taking classes full-time at the local community college. After three semesters he transfers into to a virtually unknown Quaker liberal arts school in Indiana named Earlham College. He studies for a year, takes a year off to work in France, then after another year he graduates with high honors. He applies immediately to graduate school, and he is accepted to the Psychology PhD program at Washington University in St. Louis, studying with Henry L. Roediger III. Not long after starting graduate school he marries his college sweetheart.

This is a true story of how two similar people end up in the same place despite wildly divergent paths (and their paths have since diverged again). Randomness is a powerful force and given the large number of uncorrelated events we all experience in our lives, coincidences are bound to happen and sometimes they are so prevalent that we become convinced that fate and destiny exist.

Never underestimate the power of randomness. When it comes to trading it is easy to see illusory correlation and find spurious correlations that do not continue and were simply the result of random chance.

Disclosure: The above is true. Please see my terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

Update on Tim Sykes’ trading system

As I wrote previously, I have been trading stocks using Tim Sykes’ trading system. This has been quite profitable for me (but is not my most profitable trading strategy). To update my previous post, since then I have made only about $6,000 more trading Sykes’ system. November and December were tough for me in most of my trading (in one trading system I have been using for 6 months, I saw an 80% draw down) and I messed up lots of things; I also dealt with an injury to my wrist that made trading more difficult. Despite all this, I never lost a substantial sum of money on Sykes’ system and continue to believe in it.

Probably the best reason to believe that Sykes’ system works? Look at his trades on Covestor. This comes straight from his brokerage account, so it cannot be faked. So many people who sell trading systems won’t give their real trading performance. The reason is because it is usually very bad. (Please keep in mind that Covestor does not account for cash in a trading account, so the raw percentage return is incorrect; so instead of a 2000% return, Syke’s return since the fall of 2007 is more like 300%.)

If you want to give Tim Sykes’ system a try, I suggest reading all his past blog posts in which he describes his trades. Then consider purchasing his Pennystocking 2 DVD and/or his TimAlerts trading-notification service. (The one problem with TimAlerts is that so many people now subscribe that his followers move the market with less liquid stocks.) I recommend avoiding his other DVDs: TimRaw is one long ramble, Pennystocking is very basic (just use wikipedia and buy Tim’s book), and his new TimFundamentals DVD seems pointless–he has already explained the material in that DVD on his blog.

Disclosure: I am an affiliate of Tim. I am also a TimAlerts subscriber for life and have purchased his Pennystocking (1 & 2) DVDs and have attended his trading seminar.

My new ergonomic workstation

Yay Ergonomics! If you sit down all day (not good for your back or legs), use a mouse and keyboard all day (not good for your wrists, at least for the more susceptible to repetitive strain injury), and need lots of monitor space, here is the setup for you.

I bought a new WorkRite Egonomics sit-to-stand desk that automatically doubles in height with the press of a button so that I can work sitting down or standing up (the price was surprisingly reasonable, on par with other quality desks that used hand cranks to adjust the height). (If you are in the St. Louis area I recommend buying this or other ergonomic office products from distributor Advanced Ergonomic Concepts; I was impressed by their speed and by attention to detail).

(click images for larger images)

My monitors are all Elo Touchsystems touchscreen monitors. I have two 19″ and two 24″ monitors. I have so far been impressed with their quality. I can’t wait until Windows 7 comes out because it will be designed for touchscreens. Until then I need to keep my mouse for certain tasks (like resizing windows).

So far, my wrists are feeling better after changing to touchscreens. The new desk will definitely help on busy trading days when I do not have time to take a break.

The only thing missing from this picture? Dragon Naturally Speaking 10, allowing me to control my computer with my voice and dictate. Unfortunately, the idiots at Nuance do not believe it is worth their time to adapt their program to Windows Vista 64-bit, even though it would benefit from the 64-bit architecture (or at least from the larger amounts of RAM that a 64-bit operating system can use; 32-bit Vista is limited to 3.5 GB).

[Edit later on 1/14/09 – I was able to install Dragon Naturally Speaking 9 on Vista 64 using this workaround. Thank you Chad.]