Goode Trades

Jerry Williams has been well known among the penny stock community for over two years. He was the driving force in what were described as ‘float lock-down’ schemes that purported to create massive short squeezes. Today the SEC sued him for ‘scalping’ his followers, in other words, selling into the buying of his followers without disclosing those trades.

From the SEC litigation release:

The Commission charged Williams with running a scalping scheme from which he made over $2.4 million. Scalping is a type of fraud in which the owner of shares of a security recommends that security for investment and then immediately sells it at a profit upon the rise in market price which follows the recommendation.

…

In particular, the Complaint alleges that Williams told potential investors that by buying up the outstanding shares, or float, of these companies, they could collectively trigger a “short squeeze” that would allow them to sell their stock to “market makers” that had shorted the stock. The Commission’s Complaint alleges that Williams falsely stated that he had previously used this strategy to make himself and others enormous profits. The Complaint alleges that in fact, unknown to potential investors, Williams had been hired by Cascadia and Green Oasis to promote their stock and had been compensated with millions of free and discounted shares of these stocks. According to the Complaint, Williams secretly sold millions of Cascadia and Green Oasis shares at the same time he was encouraging potential investors to buy, hold and accumulate these stocks.

This is a clear case and should be easy for the SEC to prove. I expect Williams to settle quickly. The case is Securities and Exchange Commission v. Jerry S. Williams, Monk’s Den, LLC, and First In Awareness, LLC, 3:12-cv-01068 (District of Connecticut, Complaint filed July 20, 2012).

Read the full SEC complaint (pdf).

Not mentioned in the lawsuit is the most recent of the float lock-down plays that I am aware of, 8000 Inc. (EIGH). The “Internet Forum” mentioned in the complaint is InvestorsHub (the cesspool of online investing).

Perhaps the thing that is hardest for a cynical trader such as myself to understand is how many people not only believed Williams but paid him to learn his ‘float lock-down’ method. From the complaint:

From December 2009 through October 2010, Williams held approximately 18 Monkinars in cities across the United States, including Los Angeles, Richmond, Phoenix, Atlanta, Indianapolis, Chicago, Portland, Pittsburgh, Grand Junction, Groton, and Boston. Williams also held Monkinars in Japan, Germany and Barbados. By October 2010, Williams charged $1,500 per person for a “Basic” Monkinar held in Boston, Massachusetts, which drew approximately 90 people.

I have believed all along that the whole ‘float lockdown’ scheme is illegal market manipulation; while the SEC did not pursue that course against Williams, Thomas Gorman at the SEC Actions blog points out that the SEC did argue that in the recent lawsuit against Philip Falcone (SEC v. Falcone, 12 Civ 5027 (S.D.N.Y. Filed June 27, 2012)). See my post on the Harbinger short squeeze case.

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.

See my earlier post on this lawsuit for background on this lawsuit. Since that post there have been four documents filed with the court. In reverse chronological order:

July 7, 2012: Plaintiff’s notice of dismissal (pdf)
June 28, 2012 Amended complaint (pdf)
June 27, 2012 Plaintiff’s response to defendant’s motion to dismiss (pdf)
June 26, 2012 Order on scheduling conference (pdf)

The order on the scheduling conference is unimportant — it just sets a date for the scheduling conference wherein the parties decide on the schedule for the trial; that was set for August 27th.

The plaintiff’s response to the motion to dismiss is simply the plaintiff’s argument for why the case should not be dismissed, in which they argue that they have alleged the wrongdoing with enough specificity and that they have done enough to connect defendant Mesa Marketing (the only respondent among the defendants) to the wrongdoing. This is an expected response to defendant Mesa Marketing’s motion to dismiss.

The amended complaint appears to add some details to the previously submitted initial complaint and amended complaint.

The plaintiff’s notice of dismissal is confusing to me. I really do not understand why they would dismiss the case now. From the notice:

 8. This dismissal is without prejudice to re-filing as to Plaintiff’s claims against Defendants for misappropriation of Plaintiff’s trade secrets, and violations of the Stored Wire and Electronic Communications Act, 18 U.S.C. §§ 2701-2710, and the Computer Fraud and Abuse Act, 18 U.S.C. § 1030, and for any other claim that Plaintiff has, known or unknown, against Defendants.

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..

[Note: As of 7/11/2012 Awesomepennystocks.com has been removed from the SpamHaus DBL]

Many people were surprised when Awesomepennystocks.com and the related group of 20 or more websites stopped promoting pump and dump stock Great Wall Builders (GWBU). The last email I received from Awesomepennystocks.com was at 2:30pm EST on June 24th. Just yesterday I saw a mention of a blog post by a noted spam fighter posted on the iHub Fraud Research Team / Due Diligence message board (the only good message board on iHub). The blog post is the SpamBouncer MainSleaze blog.

The post itself is fairly ordinary — a spam fighter indicated that an email address used only to check for spam received email from Awesomepennystocks.com. The blog post is also fairly old: it was posted on June 5th. The comments are the interesting part. Andrew Barrett, a higher-up at iContact (Director, ISP Relations & Deliverability) replied the same day, saying:

 Thanks for the heads-up, Catherine. I’m in Berlin at the moment, but I’ll have our compliance team drop a hammer.

Then there are a few comments from “centroazteca”, purportedly written on behalf of Awesomepennystocks.com (Centro Azteca S.A. is the entity listed at the bottom of their emails). Those comments are quite funny, especially where “centroazteca” writes, “We work with large companies such as Goldman Sachs, and only profile legitimate small companies who are looking to succeed.”

The first reply from “centroazteca” was posted on June 23rd, presumably as the people behind Awesomepennystocks.com realized that Spamhaus Block List was about to add their domain name to its list of domain names that it recommends that email providers not accept emails from (see an explanation of how blocklists work). On June 24th, Andrew Barrett posted the following comment on the blog post:

Hi Catherine,  I have killed the account. I apologize for the length of time it has taken to correctly and permanently remediate the issue. I will be working with management to identify all the points at which our processes broke down, and to correct them.  All the best, Andrew.

The blogger then asked why “centroazteca” had shown up three weeks after the blog post to comment, and Barrett responded by saying:

Well, I hate to name names, but it rhymes with “Spamhaus”

Tom Mortimer of Spamhaus replied to that comment (bold added):

SBL listings are public record, Andrew. It’s quite alright with us if you name names, although we do appreciate the discretion on other issues.  Speaking of which, there were some other issues than simple spam in this case. I can’t go into detail, but suffice it to say that this was most certainly a customer that no reasonable ESP or ISP would want on their network. :/

Right before posting this blog post, I checked the Spamhaus block list and found that AwesomePennyStocks.com is listed as being on the list (marked as a spammer). However, none of their other domain names or IP addresses of which I am aware appear on the list. Check here to see if it is still on the list. I think it is likely that having their main domain name added to the Spamhaus block list forced Awesomepennystocks.com to change internet hosting providers and judging from Barrett’s comments it is likely they are being forced to find a new email service provider.

A cursory check of a few of the websites of Awesomepennystocks.com shows that the welcome emails they are currently sending to new subscribers are being sent using Aweber.com, which is further evidence that iContact is no longer doing business with them.

Consider the timing of the last pump email on GWBU and the comment from Andrew Barrett. I do not think it is a coincidence that Awesomepennystocks.com and related websites have not sent any emails since Barrett wrote that he had “killed the account”. This is an interesting development and may mark a turning point in the effort to fight pump and dumps.

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.

In terms of how long it has been promoted, how long the stock did not go down, and the likely profits of insiders who paid for the stock promotion, UAPC has been one of the more successful stock promotions of 2012. As with all stock promotions, however, the end result is that investors get killed, the insiders who paid for the stock promotions make easy money by selling their shares at inflated prices, and the company never achieves any of the things the stock promoters said it would.

UAPC was featured as Chuck Jaffe’s stupid investment of the week last week. The best part was the response from Barry Gross, who handles the company’s investor relations:

 “We would not want anyone to invest on the basis of that [flyer],” Gross said. “But you would be amazed at how many people have received it — or seen something written about us — called us, been told that what they’re looking at is fraudulent and not a good or fair representation of the company, and then they say ‘But where can I buy shares.?’”

This kind of mindset is why stock promotions work. People believe too easily in the beautiful lies told by the stock promoters.

(click chart to embiggen)

Here is what one of the idiots who bought the stock had to say about UAPC (emphasis mine):

 He understood that the “newsletter” he was looking at was hype and even figured — correctly as it turns out — that by the time he was looking at the pamphlet, the stock had already popped and the buzz might be wearing off.  That said, he felt that if he could buy the company back in the $1 range talked about in the pamphlet, he would benefit when the buzz is gone and the intrinsic value of the company is left for the market to see.  “United American really does seem to have locations on the biggest oil deposit in the United States,” Richard wrote, “and the stock is cheap, so what is the harm in taking a flyer? If they hit on one of the properties, wouldn’t the stock do just what [the letter] says?”

The problem is that the stock was not cheap. The stock price doesn’t matter. Stocks are like pies — what matters is not the price per slice (they can be arbitrarily large or small) but the price of the whole pie. With over 45 million shares outstanding as of May and a price around $1, UAPC had a market capitalization of over $45 million despite having almost no assets and no revenues. Even without the pump such a company (unless it was led by someone with tons of experience) wouldn’t be worth $1 million, let alone $45 million.

If you ever have the urge to invest in a penny stock that is touted by a stock promoter, please give me a call. I would be glad to write you a very, very cheap one-year European call option on the stock.

Disclaimer: No relationship with any parties named above and no positions in any stocks or funds mentioned (unfortunately — I would’ve loved to short UAPC and I was previously short but my brokers have not had shares to short for over a month). 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..

While I remain primarily a short seller, I also buy pump & dumps sometimes. However, I usually only hold for short periods of time — minutes or hours. While the vast majority of traders of penny stocks lose money (and most of that money is made by the stock promoters themselves, and a small bit goes to short sellers), sometimes buying penny stocks can be lucrative — but only if you are quick and know what you are doing. The chance of outsized gains, no matter how small, leads to a sizeable group of traders who try to make money by buying stock promotions. So while a large stock promotion budget tells me that there are holders of a huge number of shares who want to sell, traders who look to buy stock promotions will see a large budget (not incorrectly) as a sign that more people will receive the stock promotion and buy, sending the price up. Most pump and dumps never go up much, if at all, but that doesn’t keep people from buying them.

Of course, if you are a small shareholder of a penny stock company and want to get the share price to go up, but can’t afford to pay for a stock promotion, what you could do is just put together a fake promotion and then post it on Twitter and internet message boards like iHub (InvestorsHub, the cesspool of the internet). If you convince enough people that the pump is real, you could get the price of your stock to move up. Of course, the SEC might come knocking on your door if you are successful, accusing you of market manipulation.

I came across this post on iHub earlier today and was amused by how badly faked the ‘hard mailer’ was. (For those who don’t know, that is the common term for pump and dump brochures sent through postal mail rather than email). I looked at the image and it was obvious that rather than even printing out and then scanning the faked mailer, the person had simply used image editing software to paste in new text over a scan of a different mailer. See the full image. While the image was obviously faked (notice the lack of any sort of smudge except in a areas where there is no text; also note the different font used for the company name and ticker in the disclaimer at the bottom), I thought it would make for a nice test of image error level analysis.

Here is what that shows us on a small section of the disclaimer (see original at the FotoForensics website):

What this analysis essentially does is it degrades the image down to show just the digital noise. In an unedited image the noise will be random (you will be able to notice original shapes in the image but around those shapes there should be just random noise). An image that combines two images of different quality levels will allow us to see where the two images are combined. Many common editing techniques such as smoothing/blurring will also be quite obvious through this analysis. The above image shows that the company’s name and ticker came from another image with less noise — and most likely were from an undegraded image (i.e., they were created in the image editing program).

Above is another example taken from the fake mailer (see it on the FotoForensic website). The paper crease shows a decent amount of error, as does the two lines just below it, but there is much less error around the other text, including the ticker symbol.

In this case, I didn’t need image error level analysis to tell that the image was manipulated. But it is a powerful tool that can help identify manipulation even in better fakes.

Disclaimer: I have no position in any stocks mentioned. I trade pump and dumps and OTCBB / Pinksheets stocks. 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.