Category: Fraud

Ten easy steps to 1000% gains: How to create a pump company from scratch

One thing that most investors and traders do not know about the crazy, slimy underworld of OTCBB and Pinksheets stocks is that a large proportion of the companies are created for the sole purpose of being used in pump and dump schemes. Below is a guide to how penny stock operators create listed companies for pump and dumps. Not all of these steps are used in every pump and many pumps do not involve many of these steps.

(Note: I am not an expert on this so it is quite possible that there are significant errors in this post. As always I welcome corrections.)

The Ten-Step Guide to Creating a Pump and Dump

Option 1: Start from scratch

1. Create a corporate shell.
2. Use a Regulation S placement to sell stock to a few close associates. These ‘seed’ shareholders often pay just a few thousand dollars for the stock.
3. Do a reverse merger with some company with a promotable product or technology (the best companies have cool new technology in the development stage so they can be hyped without worrying about actual sales or profits). You can buy some technology that doesn’t work but sounds like it should to laypersons for a couple hundred thousand dollars or a chunk of shares in the public company. If you have no good ideas and have no connections, start your own mining company, lease a mining claim for $10,000 and pay an engineer $5,000 to say it is worth digging.
4. Fund the company by selling convertible debt to insiders / friends. Bonus points are earned for using front companies based offshore to hide the identities of the beneficial owners of the debt.
5. Do a large forward split to get the share count into the tens or hundreds of millions. (These first five steps can take up to a year or more in order to ensure that all your shares are free-trading and not restricted shares.)
6. Contract a stock promoter to promote the stock at an arbitrary price ($1.00 per share or thereabouts is common for big promotions).
7. Sell some shares at a pre-arranged price in large blocks to the promoters or friends. Use these sales to create a bit of a price history at a high price.
8. Install a friend or compliant stooge as the company’s President/CEO and make sure that he follows your instructions.
9. Have the CEO/President start putting out press releases to coincide with the start of the promotional campaign. This way people unfamiliar with pump & dump campaigns will interpret the new volume in the stock as legitimate investor interest (and not the blatant stock promotion it is). It is much harder for the SEC to go after promoters who lie and exaggerate than it is for them to go after corporate officers who lie, so stick to verifiable facts and positive opinions in the press releases.
10. As soon as the promotion starts, start selling your shares on the offer and let the stock slowly uptick to keep traders interested. Because you controlled the company from the very beginning, all the shares being sold belong to you and your associates. Selling shares slowly while letting the stock go up slowly seems to be the most effective way to sell the largest number of shares. Careful manipulation of the price action by providing bid support is also important (it is also illegal but very hard to prove).

Option 2: Purchase control of a publicly-traded shell company

1. Purchase control of a traded shell company on the OTCBB or Pinksheets. Last I checked, such companies, depending on the details (OTCBB companies are more valuable than Pinksheets companies, operating companies with few operations are more valuable than shell companies), the publicly traded shell can cost from $100,000 to maybe $500,000.

2. This step is not necessary.

3.  Same as step 3 above — do a reverse merger with a company (that you control) with a promotable technology or product. You can use the reverse merger to dilute the existing shareholders into irrelevance.
4. Same as step 4 above  — fund the company by selling convertible debt to yourself and friends. Again, if there are lots of other shareholders, you can use unfavorable debt deals to dilute them into irrelevance.
5.  Same as step 5 above — do a stock split to increase the number of shares outstanding. Unlike when starting from scratch, you have a number of shares of your company that are still in the hands of the public. You will thus want to support the stock price or manipulate it higher during and after the stock price. Real companies share prices drop in proportion to the increase in number of shares during a stock price. You are looking to increase the market cap of your company drastically so you will have to keep the price from dropping. The few public shareholders of your stock will benefit handsomely but they should have mostly been diluted into irrelevance by steps 3 and 4.
6. Same as step 6 above — contract with a stock promoter.
7. Similar to step 7 above, but there are already shares out there and a trading history, so it is best to use wash sales and matched trades between multiple accounts to build a trading history at the current (high) price that you wish to start the promotion at. (Caution: this is illegal.)
8. Same as step 8 above — install a friend or stooge as company CEO/President.
9. Same as step 9 above — have the CEO issue press releases to coincide with the promotion.
10. Same as step 10 above.

For an investment of some time and up to $5 million dollars for the most expensive of promotional campaigns, it is possible to realize over $100 million in profits. It is quite possible to put together a pump like this for under $1 million (and for just a few hundred thousand) and you can still expect to realize returns in excess of 1000%.

An example of the 10 steps to creating a pump & dump

Following are the steps allegedly taken by the insiders and promoters of RCYT (promoted in February 2010). All quotes below are from the SEC complaint (pdf). See also the SEC litigation release about the lawsuit. Note that many of the steps were completed in a different order than I have above. First, though, meet the defendants in the lawsuit:

A. Defendants

8. Recycle Tech is a Colorado company. From February 16, 2010 through June 2010 its principal place of business was Miami, Florida. Its common stock is quoted on the OTC Link (formerly, “Pink Sheets”) operated by OTC Markets Group Inc. under the symbol “RCYT.” From no later than February 2010 to June 2010, Recycle Tech purported to be a development and engineering firm specializing in “green building.”

9. Sepe, age 54, is a resident of Miami. At the time of the scheme, he was a longtime acquaintance of Halperin and is listed as the officer or director of several private Florida companies.

10. Halperin, age 63, is a resident of Aventura, Florida. He is an attorney licensed to practice law in Florida and is the sole member of the law firm Ronny J. Halperin, P.A. Halperin also served as CEO of HydroGenetics, Inc., a Florida corporation, from January 2009 until April 2009, and served as its director from 2009 until late 2011.

11. Gonzalez, age 33, is a resident of Miami and a friend of Sepe’s nephew. Since February 16, 2010, Gonzalez has been the CEO and President of Recycle Tech.

12. OTC Solutions is a Maryland limited liability company formed by Thompson in 2007 as a marketing and advertising company. From no later than January through March 2010, it was associated with “Explicit Picks” and “Ox of Wall Street,” both stock promotional newsletters.

13. Thompson, age 35, is a resident of Bethesda, Maryland. From no later than January through March 2010, he was the sole member of OTC Solutions.

14. Pudong is a Florida limited liability company with its principal place of business in Delray Beach, Florida. From no later than January through March 2010, it was a marketing and advertising company associated with “Penny Pic,” a stock promotional newsletter.

15. Fung, age 37, is a resident of Delray Beach, Florida. From at least January through March 2010, he was the sole member of Pudong.

16. Rees, age 44, is a resident of Salt Lake City, Utah. He is a corporate and securities attorney licensed to practice law in Utah. He is a partner at the Utah law firm Vincent & Rees, LLC.

1. “On February 16, 2010, Sepe and Halperin orchestrated the purchase of Recycle Tech from the professional shell provider. Sepe paid more than $200,000 to the professional shell provider for Green Building’s purchase of the majority of Recycle Tech’s [RCYT] shares. Halperin, in turn, provided a common stock purchase agreement to Gonzalez for his signature. Pursuant to this agreement, Green Building became the owner of the controlling majority of Recycle Tech’s shares. With the reverse merger completed, Gonzalez took his position as CEO and president of Recycle Tech.”

2. This step was not necessary.

3. Completed in step 1.

4. Rather than issue convertible debt, the people involved with RCYT allegedly purchased already outstanding convertible debt: “In late January 2010, Halperin retained Vincent & Rees to coordinate the purchase, assignment, and subsequent conversion of Recycle Tech’s debt into purportedly free-trading stock. Halperin also asked Rees to issue an opinion letter regarding the transactions, and he provided Rees with the necessary documents and signatures for the transaction.” The outstanding share count of RCYT was doubled by the conversion of the debts into shares: “In early February 2010, pursuant to the Opinion Letter and the corporate resolution, Recycle Tech’s transfer agent issued more than 25 million shares of stock to more than twenty Assignees, including OTC Solutions, Pudong, and Halperin”

5. This step was not taken.

6. “Four days after the February 18 press release, OTC Solutions and Pudong started touting Recycle Tech stock in their newsletters. Thompson and Fung, the respective owners of OTC Solutions and Pudong, had previously agreed to coordinate their touting with each other and with Sepe. Before they issued their newsletters, Sepe agreed to provide Thompson and Fung with 2.325 million shares each of Recycle Tech stock. Halperin provided the actual shares to Thompson and Fung.”

7. In the case of RCYT, the SEC has not alleged that the insiders/promoters engaged in manipulative trading.

8. “With the reverse merger completed, Gonzalez took his position as CEO and president of Recycle Tech.”

9. “From February 18 to 25, 2010, Recycle Tech issued seven false and misleading press releases. As CEO of Recycle Tech, Gonzalez had ultimate authority over the press releases. He drafted them, hired a public relations consultant, and provided the releases to the consultant. Gonzalez also instructed the consultant to issue the press releases pursuant to a time schedule Sepe set.”

10. “Taking advantage of Recycle Tech’s artificially raised stock price, a number of the Defendants sold their shares. From February 23, 2010 to March 2, 2010, Halperin sold 1,130,000 shares for $235,060. From February 22, 2010 to February 25, 2010, OTC Solutions sold 2,325,000 shares for $441,722. On February 23, 2010, Pudong sold 2,325,000 shares for $456,457. On February 23, 2010, Rees sold 25,000 shares for $5,982. Sepe, who did not directly receive shares of Recycle Tech stock pursuant to the conversion of debt, was compensated from others’ sales of Recycle Tech stock. Halperin wired Sepe’s company, Charter Consulting, $300,000 from his law firm account on April 12, 2010. At least $150,000 of that wire came from the illegal sale of Recycle Tech stock.”

 

Many thanks go to Janice Shell for summarizing the steps undertaken by shell companies destined for pump and dump schemes. I have added more detail and more steps and I of course take full responsibility for any errors I have introduced. David Baines often writes about the above steps taken by penny stock pump and dump operators.

Disclaimer: I have no positions in any stocks mentioned and no relationship with any people 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.

 

Twin British brothers sued by SEC for doublingstocks / daytrading robot scam

See the SEC’s litigation release and the legal complaint. Quotes below are excerpted from those two sources.

Those who are new to the penny stock world may not be aware of the websites, but from 2007 to 2009 the websites Doublingstocks.com and Daytradingrobot.com were very big in the stock promotion scene. In 2009 they promoted UOMO, and in 2010 they promoted BGBR. While I did not follow those websites prior to 2009 I have heard they did a number or pumps in 2007 and 2008.

In its lawsuit, the SEC alleges that the websites, which purported to offer an algorithmic trading system (a “stock-picking robot”), simply gave as its stock picks the stocks that the owners were compensated to promote.

The SEC alleges that Alexander John Hunter and Thomas Edward Hunter were just 16 years old when they set their fraud in motion beginning in 2007. They disseminated e-mail newsletters through a pair of websites they created to tout stocks selected by the robot – which they described as a highly sophisticated computer trading program that was the product of extensive research and development. Their claims were persuasive as the Hunters received at least $1.2 million from investors primarily in the U.S. who paid $47 apiece for annual newsletter subscriptions. Some investors paid an additional fee for the “home version” of the robot software.

While I try to never underestimate the power of human stupidity, it boggles my mind that tens of thousands of people paid money for the service:

Approximately 75,000 investors, the vast majority of whom lived in the United States, paid at least $1,200,000 for annual subscriptions to the Doubling Stocks newsletter and copies of the robot software.

Even if the ‘stock-picking robot’ was just a simple but ineffective stock-trading algorithm, it would have made its owners money. But, that was not enough, as the SEC alleges:

In reality, the SEC alleges that the Hunters used a third website to offer their services as stock promoters, claiming that they could “rocket” a stock’s price and increase its volume by sending out newsletters. The Hunters were consequently paid at least $1.865 million in fees from known or suspected stock promoters, and they did not disclose to their newsletter followers the conflicting relationship between their two businesses.

Some of the best evidence against the Hunter brothers came from a job request for free-lance programmers to create the home version of the ‘stock-picking robot’ software:

In soliciting bids in 2007 from free-lance coders to create the software, Alexander Hunter wrote that the software should “not actually find stocks at all. It should connect to my database and simply request any new stocks I have put in.” He bluntly explained that the software “is almost a ‘fake’ piece of software and needs to simply appear advanced to the user.” Like the newsletter, the home version of the stock picking robot was no more than a fraudulent delivery vehicle for stock symbols that the Hunters had been compensated to promote.

Outright Lies

Stock promotion itself is not illegal, as long as compensation is properly disclosed. The SEC is suing the Hunter brothers because of the many alleged lies told about the ‘day-trading robot’, such as the following (these quotes are taken from the complaint):

18. On their doublingstocks.com website, the defendants referred to the stock-picking robot as “Marl”, combining the first names of its purported inventors, Michael Cohen (“Cohen”) and Carl Williamson.

19. On doublingstocks.com, the defendants claimed that Cohen “developed the famous ‘Global Alpha’ computer stock trading model” as a contractor for the Goldman Sachs Group, Inc. (“Goldman Sachs”). The Global Alpha program, the defendants claimed, in “most years is responsible for $4,000,000,000+ Annual Trading Profit.”

20. The defendants’ representations about “Michael Cohen” were false. No such employee or contractor worked in that capacity at Goldman Sachs.

21. On doublingstocks.com, the defendants described how Marl arrived at its stock picks. Defendants made the following claims:

• Marl works by analyzing each stock using “technical analysis;”

• Marl analyzes each OTCBB and Pink Sheet stock, predicting future price direction based on past performance;
• Marl looks for companies that are forming bullish trading patterns;

• Marl identifies “in split second timing” distinct trading patterns “from a vast range of 6578, held in Marl’s internal database”;

• Marl can process 1,986,832 mathematical calculations per second; • When Marl identifies a “clean, uncongested chart pattern that is proven to yield a good risk/reward,” Marl adds the stock to its “watch list”;

• Marl is programmed on an “evolutionary framework,” meaning that as Marl is watching hundreds of stock patterns it actually learns the most likely direction of stock prices under thousands of situations – “The longer Marl is allowed to run on a computer … The More Advanced He Becomes!”; and

• “While monitoring hundreds of stocks in the watch list … Marl may notice that a stock has been hitting resistance [at a particular price]. … [I]f the stock breaks that level (meaning there is a good chance it will ‘breakout’ and run much higher) the bot will start analyzing the stock in more detail … looking at its longer term weekly trading pattern and applying its vast range of criteria. Any stocks that reach this stage have been under close scrutiny and passed a variety of complex tests. Marl will then analyze the best entry point (at which to buy the stock) with the lowest risk to potential reward.”

22. The defendants’ characterization of the software led investors to believe that they were receiving stock recommendations based on a complex, statistically-driven analysis.

23. To lend further credence to Marl’s claimed analytical abilities, the defendants on doublingstocks.com provided a list of Marl’s supposed past stock picks, claiming that the prices increased in value by 200-400% after Marl selected them.

24. The defendants’ claims about the Marl newsletter and software were untrue. In truth, the newsletters and software sold by the defendants neither contained nor performed any real analysis of securities or their trading patterns. The stocks “recommended” by the newsletters and software were simply those that promoters had paid the defendants to tout.

Following is a list of the stocks pumped by Doublingstocks.com/Daytradingrobot.com from the SEC complaint

Another, minor allegation is that one of the Hunter brothers ‘scalped’ one of the pumps, buying prior to the promotion to the subscribers and selling into their buying. And hilariously, they videotaped those trades to show how profitable their ‘day-trading robot’ was. That is a comically stupid way to give the SEC more evidence.

F. On at Least One Occasion, Defendant Alexander John Hunter Scalped Shares of an Issuer that he and His Brother Were Promoting.

42. On at least one occasion, defendant Alexander John Hunter purchased shares of an issuer “picked” by Marl prior to sending out a newsletter in order to capitalize on the rise in price caused by the newsletter at the next day’s opening.

43. Defendant Alexander John Hunter, on the morning of December 16, 2008, purchased approximately 22,000 shares of Teletouch Communications, Inc. (OTCQB: TLLE) at a cost of $0.16 per share.

44. At 1:21 p.m. (Eastern) that afternoon, the defendants transmitted a newsletter to their subscribers touting TLLE.

45. Fourteen minutes later, defendant Alexander John Hunter began selling the shares of TLLE he had purchased that morning at prices between $0.30 and $0.40 per – 11 – share.

46. Over the next twenty-four hours, he continued selling his TLLE shares, at prices up to $0.51, for a total profit of $5,757, or 161%.

47. The defendants did not disclose to their subscribers that defendant Alexander John Hunter intended to sell shares of TLLE during their promotion of the issuer. The defendants did, however, videotape Alexander John Hunter’s trading activity and used the video to promote the Doubling Stocks newsletter.

One interesting thing is that the SEC alleges that the Hunt brothers have control over a Panamanian corporation, and that the Panamanian corporation was set up to run the promotions after the British authorities froze the accounts of the British corporation used by the Hunt Brothers.

G. The Defendants Masked Their Activity Through the Use of an Alternate Corporate Name and Offshore Bank Account.

48. From early 2007 until January 2009, the defendants deposited the proceeds from their scheme – stock promoter payments, newsletter subscription fees, and software download fees – into a bank account in the United Kingdom.

49. In January 2009, that account was frozen by British authorities.

50. The defendants then directed their newsletter subscription processing service provider to begin wiring their subscription and download fees to a Panamanian bank account in the name of relief defendant Regency Investment Group, Corp. (“Regency”).

51. Regency was incorporated in Panama and controlled, through powers of attorney, by both defendants.

Another interesting tidbit and likely the main reason why the websites have not done much since 2009 is that their payment processor terminated their account:

In July 2009, the company that processed the defendants’ subscription sales terminated its relationship with the defendants as a result of the high number of complaints and refund requests by Doubling Stocks subscribers.

[Edit – the below was added 4/22/2012]

At least one of the Hunter brothers was fined by the British. According to the BBC:

In November, Newcastle Crown Court ordered Alexander Hunter to pay back nearly $1m after he admitted providing unregulated financial advice. He was given a suspended 12-month prison sentence.

Disclaimer: I have no positions in any stocks mentioned and no relationship with any parties 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.

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..

The Single Greatest Analyst / Investigator / Short-Seller the World has Ever Known

While I wish I were referring to myself, I refer to Andrew Left of Citron Research (see my other articles referencing him). Once again today his bold assertions of fraud were vindicated when a court ruled that Conversion Solutions Holding Company & Rufus Harris did bad things. The SEC’s press release on the matter is hilarious. Here is an excerpt:

On the basis of the evidence presented at the hearing, the Court found that Conversion never had any business-related revenue, and that its only source of funds was an ongoing offering of convertible notes and/or stock that began before the time period charged in the Complaint. The Court also found that Conversion had not paid any money for any of the purported assets carried on its books, which consisted of various series of bonds, uncollected interest due on the purported bonds, and a document called the UCC-1 Note. The Court found that the UCC-1 Note is not a standard piece of commercial paper, but an eight-page document signed by an individual named David Hawkins, which purports to be an “Affidavit of Obligation” in favor of Mad Dog Builders, Inc. and Mr. Hawkins, and which contains references to purported legal concepts including the “individual energy protection maxim,” the “social cooperation protection maxim,” and the “Hebrew/Jewish Commercial Code.”

This leaves me to say but one thing: Evidently Rufus Harris was not quite as cool as THE Rufus from Bill & Ted’s Excellent Adventure:

Left’s articles on Conversion Solutions
Original report on Fronthaul Group (July 26, 2006)
Update on Conversion / Fronthaul (August 2, 2006)
Final report on Conversion (August 9, 2006)

I should also point out that as always, the penalty exacted upon Rufus Harris is utterly inadequate to deter future penny stock hucksters. Again according to the SEC press release: “The Court did not find a basis for disgorgement of any ill-gotten gains by Harris or Conversion.”

Disclosure: I have no connection to anyone mentioned above. I am not Andrew Left. I am not Rufus Harris. I cannot play the guitar. I have yet to meet a securities regulator who is neither stupid nor evil.

Noble Roman’s Sued by Franchisees

I am quoted in another excellent article by Cory Schouten of the Indianapolis Business Journal. Ten former and current franchisees have sued Noble Roman’s for misleading them when it sold them their franchises.

Here is what I was quoted as saying:

But plenty of the blame for franchise problems rests with the Mobleys, according to Michael Goode, a St. Louis stock trader and financial blogger who writes GoodeValue.com.

The company owns only a few stores, giving it little opportunity to prove the model works and to test new products or strategies, Goode said. The Mobleys also tried a nationwide expansion despite lacking national marketing and having limited brand recognition.

But the biggest red flag for Goode was the barrage of area developer agreements that boosted revenue and profit.

“They engaged in business in such a way to get lots of near-term earnings at the expense of future earnings,” said Goode, who previously bet against Noble Roman’s by selling the stock short but no longer has a position.

Further Information

I argued that Noble Roman’s expansion strategy was doomed to failure back on December 2, 2007 when the stock was priced at $2.48. I later criticized management for blaming franchisees for their failures. More recently, I mocked the company’s effort to hire an investment bank to sell itself, calling the company overvalued at $1.50 per share. The stock currently trades at $1.00. Most recently, I reported on the company’s 54% decrease in earnings.

Disclosure: No position in NROM, long or short. I have a disclosure policy.

Perf Go Green Holdings: Another Pumped Up Penny Stocks Falls to Earth

Perf Go Green Holdings (OTC BB: PGOG) is a standard pumped-up penny stock, although it has former NY governor Pataki as a director to lend it “credibility” (although anyone who know’s Pataki’s record knows that he has no credibility at all). The New York Post had a good article about the company. Carol Remond had a great article on Perf Go last week (only available on DJ Newswires, a pay service), in which she brought up some interesting history about the company’s CEO:

“Then, there is the issue of company Chairman and Chief Executive Anthony Tracy’s involvement with an extortion attempt a few years back. According to a court docket available to online subscribers, Tracy pleaded guilty to one count of extortion in state court in Pinellas County, Fla., in August 2002. Joseph Cartolano, a lawyer who represented Tracy, said he is “pretty sure” that his client pleaded no contest instead of guilty, neither admitting nor denying guilt. The judge in the case sentenced Tracy to three years probation and withheld adjudication of guilt – which means that as long as he didn’t violate the conditions of his probation, he wasn’t convicted of a crime.”
…
“According to information available online, Tracy and George Cappelli in November 2001 threatened a Palm Harbor businessman named James McGuire to get back $30,000 he owed to another individual. Michael Holbrook, a detective who investigated the case, said Tracy took McGuire’s watch and said he would keep it until the debt was paid. The detective said that about the same time as Cappelli was arrested, an attorney from Miami called the Pinellas Sheriff Department looking to return the watch without naming his client. Tracy was later identify through information contained in one of Cappelli’s notebooks. Tracy’s lawyer Cartolano said he (Cartolano) called “the owner of the watch to return it.” Cartolano, who explained the affair as “an argument between two guys”, said Tracy was given the watch as a collateral and then returned it.”

The fall of pumped penny stock Perf Go Green is yet another testament to why people should never speculate in penny stocks.

Disclosure: No position in any stock mentioned. I inadvertantly published this article two days previously, violating my disclosure policy (as I had just closed a short position in the stock a day earlier). I regret the error.

Are your deposits insured? How to avoid losing money in the coming bank Armageddon

I am not one to use the term Armageddon lightly. But when major banks like National City (NCC) and Washington Mutual (WM) are trading under 30% of book and Wachovia (WB) is trading at under 50% of book value, what othe term is appropriate? The market is pricing in a fair probability of a number of very large banks being bought out at firesale prices (like just happened to PFB) or being taken over by the FDIC and then being dismantled.

That being said, while the coming two years will be a very bad time to own bank stocks or bonds or to have uninsured deposits at banks (over the $100,000 FDIC limit), the economy will not completely collapse (though we should have a decent recession) and the world will move on.

The main thing to do is make sure that you and any friends and relatives never have more than $100,000 at any bank. If you wish to keep more, you may want to visit the FDIC website to see if your type of account is protected for more money (some are). You can search for your bank here and find out if it is insured by the FDIC and you can view financial information on your bank, even if it is private. For example, try searcing for “Home State Bank NA” in zip code 60014* (see random note at bottom of post). Then click on “Last Financial Information”, and on the next page click on “generate report”. This brings you to the bank’s balance sheet. If you click on the link towards the bottom for “past due and nonaccrual assets”, you will be taken to the good stuff. You can see that past-due loans have more than doubled over the last year. Unsurprisingly, much of the increase ($2.5m) was from “construction and land development loans”. It also pays to note that this big increase in past-due loans was solely in the 30 to 89 days late category. A more agressive bank might still be accruing interest on those loans. However, this is a conservative community bank and as you can see towards the bottom of the page, all loans that are more than 30 days late are non-accrual. (An interesting discussion of regulatory vs. tax requirements for deciding which loans are non-accruing can be found here.)

If you go back to the main balance sheet page and click on “net loans and leases” you can find the breakdown of loans. This is a good place to find out how risky your bank’s loan portfolio is. Unfortunately for Home State Bank, 20% of their loans are construction and land development loans. This bank is based in the far northwest exurbs of Chicago, so I think it likely that the bank will take a huge hit here. If you click on “1-4 family residential” you can see the breakdown of these loans. Luckily, most of these are first mortgages. Overall, Home State Bank looks okay. What about your bank?

If you have accounts as a credit union, visit NCUA to see details on insurance of your deposits. You can find your credit union and then request that a financial report be emailed to you. As an example I uploaded the report on my credit union. You can download the Excel Spreadsheet here. When analyzing credit unions, be aware that they will generally have more real estate exposure than similar commercial banks. Important things to examine are delinquent loans as a percent of assets (sheet 2, line 21 in the spreadsheet), asset mix including the amount of REO (sheet 4). If you are afraid of a bank run sparked by articles similar to this, take a look at the amount of uninsured deposits (sheet 5, lines 46-50). Delinquent loan info is always interesting (sheet7). For most of the data in the spreadsheet, an average of peer group credit unions is provided as well, making comparison easy. Overall, I think West Community looks quite safe.

What should you do if your bank doesn’t look safe (such as National City, where I have multiple accounts)? First thing that you should do is make sure your deposits are insured. Then make sure that you have enough cash in safer banks so that you can last awhile if you temporarily lose access to your money. Up until now the FDIC has been very good at getting depositors quick access to their insured deposits at a failed bank, but if things get really bad and big banks go down the FDIC could become backed up and take weeks or months to grant depositors access to their money. It pays to be prepared for such a scenario, even if it is unlikely.

*This bank, by the way, provided me with my first mortgage. Easiest mortgage I ever got — my father and I ran into Steve Slack, the bank president, while dining at the local country club, and I mentioned that I was buying a house in St. Louie. Slack gave me his card and told me to give him a call when I get close to finding a house. There are benefits to relationship banking–my extended family has banked there for three generations and uses the bank for a family company.

Disclosure: I am short several regional and local banks. 

Phoenix lawyer sues blast-faxing stock touters for $6 billion

Finally, a lawyer after my own heart. See this article about Peter Strojnik’s class action lawsuit against “Triple Play Stock Alert” and those behind it. From the article:

The Complaint alleges that Triple Play Stock Alert is a fictitious name used by stock manipulators who want to conceal their identity to avoid liability for their illegal activities. The suit was filed in the United States District Court for the District of Arizona under case number 2:08-cv-1116.

Hopefully he wins, although I am never optimistic about pursuing scammers, fraudsters, or spammers. If you have received spam faxes from “Triple Play Stock Alert” and you wish to join the class action, please contact Peter Strojnik, 602-524-6602, ps@strojnik.com.

Violating the laws of thermodynamics for fun and profit

Evidently someone forgot to tell investors or management of GMC Holding Corp about the law of conservation of energy. The company reported tests on a motor that produced more energy than was put into the device. According to the SEC’s complaint in the matter, the company did not mention that “the efficiency lasted only a few moments and that they were unable to duplicate the results in subsequent tests.” The company also put out a press release stating that it was negotiating to sell the technology to a company in the S&P 500. However, again according to the SEC, “GMC and Brace never contacted, much less negotiated with, an S&P corporation, or any other company, regarding the sale of the company’s technology.”

The SEC today received an injunction against Richard Brace, formerly of GMC, preventing him from serving as the officer of a public company. I presume that the SEC will continue its case against Brace in the pursuit of monetary penalties.