SCAMS

[Guapo]

Three Scams


If you are an avid penny stock player, I’m sure you know of numerous scams this year. Most of them are the routine pump and dump cons where usually only the method of delivering the pump messages varies. Here are three though that had different wrinkles.

These particular ones are provided because they’re interesting. This article doesn’t address ways to detect scams, but suffice to say, if you play penny stocks, you will encounter some that seem to be too good to be true. Despite the triteness of that phrase, that’s almost always the case.

Note: If any of the links below don’t work, PM me and I’ll post the entire articles. As of today though, all three links are working.

The first scam happened in March of this year.

http://computerworld.com/action/arti...icleId=9012699

I think most everyone has heard of this one, where the perpetrators hacked into accounts of a number of brokerage firms and used the money in the accounts for their own purposes. This scam ran a year before it was finally stopped.


The second scam occurred last August and may still be running.

http://www.computerworld.com/action/...icleId=9029678

This one was ingenious in that the scammers sent email messages to untold numbers of people. The messages contained computer code that forced the receipients’ computers to then email the pump message. In order words, the scammers tricked many people into sending out the spam (pump) message for them.


The last scam was just announced this month - September.

http://www.computerworld.com/action/...icleId=9035158

The scammers in this case talked the owners of 15 penny stock companies to giving or selling them a large number of the company’s stock, promising to take the companies public. Once the stock was trading, the scammers resorted to a common pump and dump scheme. Seven of the companies were used in the scam.

Interestingly enough, a spokesman for the SEC says in the article, the con men were able to take the companies public through the back door. There wasn’t any explanation in the article how they managed to do so. I for one would sure like to know how you can take a company public through the back door! I’ll look for more information on this one as time permits.

The article doesn’t mention if any of the companies themselves were involved in the scams or benefitted from the pump and dump schemes. None of the companies were named.

[Guapo]

The SEC - Protecting Investors Against Penny Stock Fraud

The SEC(1 & 2) is charged with protecting investors against stock fraud(3), but it’s always been debatable whether or not the SEC offers adequate protection. Of course, the SEC claims it does, but investors who have lost money in stock fraud schemes certainly don’t concur.

I believe the discrepancy in the two viewpoints originates from the SEC’s definition or concept of the term, “investors”. The SEC uses the word in a broad sense to include anybody trading stocks. Perhaps more specific definitions are needed; for example, “potential investors,” people who may purchase the stock at some future time but haven’t yet done so, and “current investors”, those holding the stock at the time the SEC initially moves against a fraudulent company.

Indeed, the administrative judge in the Casavant Mining Kimberlite International (stock symbol CMKX) case stated CMKX’s stock registration should be permanently revoked to protect investors.(4) Obviously she meant “potential investors” and not “current investors,” since those folks holding the stock had already lost a lot of money long before the SEC finally brought the sordid affair to an end.

Investors may wonder why the SEC doesn’t provide early warning of possible stock fraud schemes by penny stock companies. The SEC can’t act on mere suspicion. To do so could unfairly damage a company’s reputation and stock price should it subsequently be proven the company is innocent of any wrong doing. Besides the egg on the SEC’s face from false accusations, it would invite a flood of lawsuits from both aggrieved companies and stockholders. The SEC therefore has to be absolutely positive it has sufficient evidence before it takes steps to shut down an errant company.

For these reasons, the SEC doesn’t normally confirm or deny ongoing investigations. Occasionally it will if fraud by the company or suspicion of such is already public information; in situations for example where the cat has already been let out of the bag by the news media.

Generally when the SEC encounters suspected fraud by a penny stock company, it first conducts an investigation. Then, if warranted, it can order a temporary trading suspension(5) of the company’s stock. If the SEC deems further action is necessary, it can order an administrative hearing(6) or take legal action against the company (and company executives) in federal court.

Continued in Part 2

Footnotes:

1. http://www.sec.gov/about/whatwedo.shtml
2. http://tinyurl.com/3xrxr8
3. This article is limited to penny stock fraud run by the companies themselves, typically pumps and dumps.
4. http://www.sec.gov/litigation/aljdec/id291bpm.htm
5. Securities Exchange Act of 1934, Section 12k
http://www.law.uc.edu/CCL/34Act/sec12.html
6. Securities Exchange Act of 1934, Section 12j
http://www.law.uc.edu/CCL/34Act/sec12.html

[Guapo]

The SEC - Protecting Investors Against Penny Stock Fraud

A pump and dump scam may operate for months or even years before the SEC moves to stop it. Putting the company out of business consumes even more time, again months or years.

A good example is CMKX. The SEC first temporarily suspended trading in the stock in March 2005.(7) Thirteen days later, in its order directing an administrative hearing, the SEC claimed CMKX’s first violation of SEC rules and regulations occurred in May 2002.(8) That was almost three years after CMKX’s first offense before the SEC initially moved against the company. The administrative hearing was conducted in May 2005, followed by the judge’s decision in July 2005, ordering the permanent revocation of CMKX’s stock registration. It was therefore well over three years when CMKX was finally put to rest.

The SEC’s confrontation with Universal Express (stock symbol USXP) has dragged-on even longer than the one with CMKX. The SEC’s first action, a temporary restraining order (TRO) filed in federal court in March 2004, stated USXP had committed its first transgression in April of 2001.(9) For some reason, USXP was allowed to operate almost three years before the SEC took any action against it.

The federal judge found USXP and the CEO guilty of several infractions of SEC rules and regulations in February 2007. A final judgement was issued against the company and the CEO two months later in April 2007;(10) thus, it required another three years to conclude the court case from the time the SEC filed its initial charges. In June of 2007, the company appealed and the SEC filed a motion for appointment of a receiver for USXP.(10) These latest actions are still pending.

Regarding Cyberkey(11) (stock symbol CKYS), the SEC temporarily suspended the stock from trading in February 2007.(12) Then in March 2007, the SEC announced a court action against the company, claiming the company had been engaging in illegal activities since November 2005.(13) In June 2007, the SEC announced the CEO had been indicted for various criminal offenses.(14) There are now both civil and criminal actions pending. Don’t count on a final resolution with CKYS for another year at least.

CSHD(11) collided with the SEC slightly over a year ago. The stock was temporarily suspended from trading in October 2006.(15) The very next day the SEC filed a complaint against CSHD in federal court, claiming its first offense began in late September 2006.(16) There’s been some activity in the court but the case has mostly been in limbo since the complaint was initially filed. When we’ll see a conclusion is anybody’s guess.

To summarize the status of these cases: CMKX, completed, over 3 years to conclusion; USXP, open more than 6 years, pending; CKYS, open almost 2 years, pending; and CSHD, open over 1 year, pending.

Note that in the above examples three of the four stocks were slapped with temporary trading suspensions. Trading suspensions are effective in stopping penny stock scams dead in their tracks, since very few people will buy the stocks afterwards. The announcement of a trading suspension also warns people to stay away from the stock. In this sense, “potential investors” are protected. However “current investors” are usually slaughtered. When trading resumes after the suspension, it’s not unusual to see a quick 50-90% drop in the stock’s price. Investors caught holding the stock when the trading suspension goes into effect are likely to lose half their cash, sometimes almost all of it.

In conclusion, there’s hardly anything the SEC can do to protect “current investors”. Investors should understand they’re required to rely on themselves for protection. If they look for the telltale signs - red flags - of penny stock scams,(17) they’ll detect stock fraud well before the SEC.


Footnotes

7. http://www.sec.gov/litigation/suspensions/34-51305.htm
8. http://www.sec.gov/litigation/admin/34-51383-o.pdf
9. http://www.sec.gov/litigation/complaints/comp18636.htm
10. http://www.sec.gov/litigation/litrel...07/lr20165.htm
11. The cases versus CKYS and CSHD are still pending. The companies
and their executives haven’t been found guilty of any charges
at the time this article was posted.
12. http://www.sec.gov/litigation/suspen...7/34-55237.pdf
13. http://www.sec.gov/litigation/litrel...07/lr20049.htm
14. http://www.sec.gov/litigation/litrel...07/lr20171.htm
15. http://www.sec.gov/litigation/suspen...6/34-54645.pdf
16. http://www.sec.gov/litigation/litrel...06/lr19883.htm
17. Page 12, posts 115-118 http://tinyurl.com/28zsvq