PUMP & DUMPS

[Guapo]

EXACTLY What Are Company Pumps And Dumps?


I spent a few hours this past weekend cruising the penny stock message boards. In many of the threads where the stock was causing investors headaches, I encountered statements like these:

“They have several pending deals which will make the company a lot of money. Why do they continue diluting the stock?”

“The company promised the deal would close three months ago but nothing has happened. They just continue to sell stock. Don’t they realize they are destroying their own company?”


Almost everybody knows the phrase “pump and dump” is another term for “scam”, but it soon became obvious to me there are many people who don’t understand exactly how pumps and dumps operate.

Succinctly, pumps and dumps make money solely by selling stock. That’s their one and only purpose.

Pumps and dumps aren’t necessarily run by companies. They can be executed by any person or group holding large blocks of stock, and their purpose is to sell their shares. Company pumps and dumps are the most frequent ones you will encounter however.

Company pumps and dumps do not care one iota about stockholders. Stockholders appealing to the company to fix the stock’s price or to get on with business will have no effect. They want only the stockholders’ money.

Announcements about business activities are intended to make the company appear legitimate. Overwhelmingly so, pumps and dumps have no business at all. When a company does have some sort of business, it’s often merely window dressing.

There are two parts to a pump and dump, the pump and the dump. Those running the scam must execute the pump in order to do the dump.


The Pump

No stock moves without advertisement. If investors don’t know about a stock, they can’t buy it. If no one buys the stock, the price won’t increase. The pump is therefore a procedure to attract a lot of buyers and thusly create demand for the stock.

Pumps and dumps always predict great success for the company. Investors are looking for stocks which will increase in price of course, so the more convincing a company’s story and predictions are, the more likelihood they will attract a larger number of investors.

Pumps and dumps advertise in a variety of ways; publicity releases (PR~s), company web sites, appearances of company officials on internet radio and TV programs and even by hiring consulting companies to “promote” the stock. “Promote” by the way is a euphemism for “pump”.

Pumps and dumps are often innocently assisted by people on penny stock message boards by the way. While there are some hardcore pumpers on the sites, most of the pumping is done (I think) by people who are sincere and truly believe the company will become successful. These folks can be very persuasive and often convince others, especially new or inexperienced people, to buy the stock.

PR~s are the most frequent and effective method pumps and dumps themselves employ to convince people to buy the stock. The PR~s are often very convincing but they rarely promise anything.

If you look closely at such PR~s, you will see they imply many actions, which if brought to fruition would lead to the company’s success. However, the PR~s contain a lot of “weasel words” to make it appear the company is actively engaging in business or will positively take some action in the future, whereas in reality they have promised nothing of the sort.

Here are a couple of examples:

A PR reads, “It’s expected the deal will close by the end of March.” The company said they expect to close the deal by that time. They didn’t say they will.

A PR says, “The board of directors has approved a stock buy-back plan.” Ok, so the board of directors approved such a plan. The company however didn’t say it would actually do a stock buy-back.

Unfortunately many people mistakenly interpret such PR~s, believing the actions implied will actually occur. With pumps and dumps, implied actions in PR~s are almost never realized.

The use of PR~s and other techniques are therefore the pump, attempts to convince the largest number of people possible to buy the stock.

[Guapo]

EXACTLY What Are Company Pumps And Dumps


The Dump

The dump is the actually selling of the stock into the market. As stated earlier, in order to sell the stock, the scammers must have buyers, attracted by the pump part of the scheme.

The scammers’ goal is to sell as much stock as they possibly can, regardless of the price they can get for it. The shares cost them very little, so even when the PPS drops to sub-penny levels, they will continue to sell. It’s better to get something for the shares since the scammers make no money on shares they don’t sell.

As long as people are buying shares, the scammers are selling theirs.


The End Of A Pump And Dump

Nothing last forever of course so the result of a pump and dump is severe stock dilution, where the float (the number of shares in the market) reaches billions of shares.

When the float reaches the point where the scammers can’t sell any more stock, they usually do a reverse split, wiping out the holdings of current stockholders. Stockholders usually lose 50-100% of their investments if they hold through a reverse split.


I always admonish folks to use logic and common sense when evaluating penny stocks. They are two of your best weapons against penny stock scams.

Pumps and dumps will make any extravagant and grandiose promise they think will fly. Often their PR~s are ridiculous; nevertheless there always seems to be a constant supply of people who believe anything a company says.

It’s illogical for a penny company whose stock is sitting at .0015 to claim it has $300 million in the bank. If it had that much cash in the bank, the stock wouldn’t be at .0015.

Common sense tells me it’s nothing but bunk if a company with no assets and whose stock’s PPS is .0050 claims it will soon receive a loan from an investment group for $200 million. Why would an investment group loan some broke minuscule penny stock company that kind of money when it could buy the company a hundred times over? Investment groups don’t loan large amounts of cash to penny stock companies. They would never get it back.

Always examine a penny stock company's claims. If they sound nonsensical or don’t fit with the way you know the real world works, then the information in the PR~s is probably just a pump.

For more information about pumps and dumps, click on the link below. If you haven’t read the article, I recommend you do so.

Company Pump & Dumps And Red Flags Page 12 Posts 115-118
http://www.hotstockmarket.com/forums...=36435&page=12


It is important I think to repeat that pumps and dumps only sell stock. Rarely do they have any legitimate business, despite what the companies may claim. Their PR~s and other pumping techniques are intended solely to convince people to buy the stock. Pumps and dumps exist only to relieve you of your cash.

[Guapo]

Other Kinds Of Penny Stock Pumps And Dumps

A few weeks ago we discussed penny stock pumps and dumps run by companies.* There are other kinds, run by groups or organizations.

A group might be as few as two-three people working together. It might be larger groups, twenty or more. It may be organizations running pumps and dumps.

If it’s only a few people working together on the penny stock message boards, generally they’ll just pump the stock on those sites. Larger groups sometimes have their own blog or chat site where they pump the stock, combined with pumping it on the message boards. Often when larger groups are involved, it may be a one-shot pump and dump. That is, the stock will run a few hours on a single trading day. A group pumps and when the stock runs, members of the group dump their shares. Generally since the stock is running, mostly because of the pump, once the group has dumped all of its shares, the run dies and the price starts falling. The stock may not move significantly for months afterwards.

Organizations which pump penny stocks are generally the stock advisory sites and consulting firms. Stock advisory sites advertise many stocks. These are the sites where you can sign-up for their newsletters. The newsletters contain one or two stocks the advisory sites recommend. These sites may or may not receive compensation from the companies whose stock they’re advertising.

Consulting firms are paid by companies to “promote” their stock. They are paid partially or sometimes fully in stock. Therefore it’s to the consulting firms’ advantage to pump the price as high as they can, since they make more money when they sell it; ditto for stock advisory sites which are paid by the company in stock.

The company may or may not be involved in second party pumps and dumps. If the company isn’t involved with the group pumping and dumping the stock, they may not hinder the group since it helps the company in its pumping.

If a company is involved however, the pump and dump is usually coordinated and run jointly. The company may feed information to the group running the pump and dump. It helps establish the group’s bonafides if it can provide accurate information before the company releases it. The information is generally disseminated on the message boards. A few accurate items posted on the boards will attract other users who listen and take the advice of those pumping.

Other folks on the message boards won’t know if the pumpers are just expressing their own opinions or if they are working with a group. However, if a person on a message board seems to provide accurate company information more often than not, chances are he’s a member of a group.

Companies who hire stock advisory sites and/or consulting firms to promote the stock of course coordinate the pump and dump.

In order to run a pump and dump, the group must have stock to sell when the price increases. Individuals in the group acquire the stock slowly and quietly to keep the price as low as possible. The technique is called Front Loading. Once the group has acquired sufficient stock, they begin the pump and dump. Stock advisory sites and consulting firms are front-loaded when they receive stock from the company.

Regardless who runs a pump and dump, the object is to create a demand for the stock and make money by selling it. Pumps and dumps usually have no legitimate business, though all of them will pretend to be engaged in some sort of commercial enterprise.

[Guapo]

The Lighter Side – Don’t Drink The Kool Aid

Do you drink The Kool Aid?

You do? Perhaps you should check the latest definition before you answer so quickly.

According to Word Spy(1) , Drink The Kool Aid means,

To become a firm believer in something; to accept an argument or philosophy wholeheartedly or blindly.

It can also mean someone is forced to Drink The Kool Aid, to go along with a policy or agenda, even if that person perhaps disagrees with it. Here’s an example from Word Spy.

One top executive named McMahon, the treasurer, was known for going around the company after he met with Skilling, Lay, and Fastow, and they directed him to do some bogus deal and say, 'Well, we've all got to go drink the Kool-Aid.’ —William Lerach, quoted in Marie Brenner, "The Enron Wars," Vanity Fair, April, 2002

The Urban Dictionary(2) contains similar definitions,

To completely buy into an idea or system, whether good or bad and Going along with what a crowd desires. Often used when a person changes positions on a topic. “Dave got a haircut and a new suit. Looks like his company is making him drink the kool-aid.”

For the imperative Don’t drink the Kool Aid, the Urban Dictionary(2) defines it as,

Don’t trust any group you find to be a little on the kooky side, or Whatever they tell you, don't believe it too strongly.

Several internet sites, if not most, cite the term came from the 1978 Jonestown mass suicide where the cult leader convinced his followers to drink grape-flavored Kool Aid laced with cyanide(1,2,5).

Word Spy’s earliest known use of the phrase(1) came from a radio conversation about Washington, D.C. Mayor Marion Berry,

You don't follow anyone blindly, my brothers and sisters . . . . We love Marion Barry. He is the mayor . . . . But if Marion Barry disrespects us, we will cry out . . . . We will not blindly drink the Kool-Aid any longer . . . . —Cathy Hughes, transcript from a radio call-in show as reported in Being Stood Up by Mayor Leaves Radio Host Fuming, The Washington Post, July 17, 1987.

The term has been so popularized it’s sometimes used humorously to advertise special events. Linden Labs did so for a network mixer(3). You can even take the Republican Kool Aid test(4), to determine if you follow the Republican party line. I couldn’t find a Democratic Kool Aid test.

Ironically, it may not have been Kool Aid the Jonestown cult members drank but Flavor Aid(5), according to a 1978 Washington Post article citing "… packets of unopened Flavor Aid scattered in the dust in Guyana.” The Kool Aid company however has received the most publicity from the use of the term, as half a billion gallons of real Kool Aid are consumed every year(5).

Drink The Kool Aid is now ingrained in stock market lingo too. We see it used frequently on HSM, generally to describe someone who’s accepted without question the party line of companies and their supporters. A group of people drinking The Kool Aid are sometimes referred to “Kool Aid Kids”. You might also see the term used to describe someone’s past addiction for a certain stock(s), “Oh yeah, he’s A Kool Aid Kid from way back.”

When somebody posts a particularly kool-aidy opinion such as, “The company says they will buy-back 90% of the float(6,7), and I believe them.”, often another HSM~er will reply, “Pass him another glass of Kool Aid”, or “He needs to stop drinking the Kool Aid.”

So in the future if someone inquires, “Are you drinking the Kool Aid?”, perhaps you’d better first ask him what he means.

Good luck to you with your trading, and remember, don’t drink The Kool Aid.

[Guapo]

Penny Stock Kool Aid Kids


I posted an article last year entitled “Don’t Drink The Kool Aid”, explaining the origins and uses of the phrase.

http://www.hotstockmarket.com/forums...=36435&page=32
Post 311


There are several ways to use the words “Kool Aid” and related phrases. In the pennies, Kool Aid Kids or Kool Aid Drinkers are devout followers of a particular stock, erroneously believing their favorite company can do no wrong and if they hold the stock long enough, they will become rich.

Not everybody is vulnerable to the Kool Aid syndrome, but occasionally you will find a thread that’s full of Kool Aid Kids. You can easily get the impression they number in the dozens, and if you aren’t already a kool aid drinker yourself, you may wonder if they have all lost their marbles.

I don’t know of any data regarding the percentage of penny stock players who succumb to the Kool Aid syndrome but I would estimate it’s about ten percent. Reading a thread where a number of Kool Aid Kids have gathered, it can certainly seem higher though.

Most Kool Aid Kids appear to be newbies, despite their claims of vast experience in the markets. Occasionally experienced traders will fall victim too. I suppose no one is completely immune.


What Are Some Of The Characteristics Of An Investor Who’s Likely to Become A Penny Stock Kool Aid Kid?

1. They usually have a limited knowledge about the markets and a lack of sufficient understanding of the penny stock game. In other words, they are more than likely newbies or inexperienced people.

2. Potential Kool Aid Kids are usually naïve and will listen to other more experienced traders, especially someone who writes well and knows a sufficient number of buzzwords to make his posts sound intelligent and knowledgeable. They don’t understand there are people on the message boards who only want them to buy the stock to help pump-up the price. They refuse to believe this is so.

3. They are to some extent gullible. They don’t comprehend that CEO~s, PR and IR guys and other company officials will lie to them, even to their faces. They refuse to accept there are CEO~s who will rip them off. They don’t believe people running penny stock companies are trying to make money for themselves; that they don’t care one iota about stockholders.

4. They don’t realize or understand most scammers are charismatic, friendly, smooth talkers and easily earn other people’s trust. Scammers do what they do because they are skilled at it.

I have read the following on message boards dozens of times, “I talked to Sam Smith the CEO (or PR guy) yesterday on the phone. We spent an hour discussing the company. He’s really a nice guy and wants to help the stockholders.” I recommend you take a large grain of salt with statements like these because more often than not, they aren’t true.

I remember the comments about Rufus, the CEO of CSHD, made after his two bar-b-cues at his house for stockholders. Almost everyone at the bar-b-cues were convinced Rufus was gonna make them rich. Just about everybody had glowing comments about him, “He was so nice and helpful.”, “He really knows his stuff about bonds!” and “He really wants to help stockholders!” Some stockholders flew to Texas once, to have dinner in a restaurant with Rufus and listen to him talk about the company. CSHD was eventually suspended from trading for ten days. That action killed the stock. It appears the SEC will shortly push the company into oblivion.

5. Potential Kool Aid Kids are dreamers. They actually believe a miniscule penny company with no obvious business, no income and no history of any will make them millionaires, despite overwhelming evidence to the contrary.

6. They are often stubborn. They refuse to face reality, even after the game is long over, maintaining “The company will come back, just wait and see!” I remember some Kool Aid Kids, during the SEC’s hearing against CMKX, when it was in the closing stages of shutting the company down. The evidence was overwhelmingly against the company, but the Kool Aid Kids maintained CMKX would beat the charges. Even after the SEC killed the company by de-registering the stock, there were stockholders who insisted the company would, like the Phoenix, rise from the ashes and fly again. There are stockholders who still to this day believe so.

7. Lastly, some investors set themselves up to be trapped by the syndrome, as they are going for the big score, attempting to get rich off one stock. They enter the penny stock market looking to hit it big. It’s no wonder they find a stock with a “good story”, one that has a special appeal to them. They are looking for one they think has a chance of making them wealthy. Of course they are going to find it.

[Guapo]

Penny Stock Kool Aid Kids


How Does An investor Become A Kool Aid Kid?

1. The first lure is the basis of all scams, “Something for nothing”, or in the pennies, “Something for almost nothing.” Many people are attracted to penny stocks because they can trade with very little money. There is the chance, albeit minimal, that they might be lucky, pick the right stock and rake in a ton of cash. Stocks on the big boards do not run 400% in a day or so. It’s possible in the pennies though it’s unusual these days to see a penny move that much.

2. A group of Kool Aid Kids working together can be very convincing, even overwhelming to those new or inexperienced in the markets. It’s almost always, “To Da Moon!” with dyed-in-the-wool Kool Aid Kids. The sheer number of their posts is sufficient to convince almost anybody it’s possible the stock might hit the moon. The thinking is generally, “Surely all these guys can’t be wrong.”

3. So an investor buys some shares of the stock he likes starts reading the stock’s thread or vice versa. He’s regularly inundated by the Kool Aid crowd with posts like, “We gonna be rich!” and “The price will be at $2 in a month!” when the PPS is currently at .0050 for example. In a thread where the Kool Aid Kids are posting 80-90% of the messages, it can become mesmerizing. Slowly but surely the new guy comes to think his stock can’t miss so he buys a few more shares. Over time he buys more shares. Such an investor can literally become carried away with his stock purchases as he’s convinced by Kool Aid Kids he will make more money off the stock than he has ever dreamed of.

4. At this point, one or two phenomena come into play. The first is if the stock has dropped and he can’t force himself to sell and take his losses, or he can’t afford to lose his cash, he will hold, believing the stock will recover or at least hoping it will. The second is his ego interferes. He can’t admit to himself he made a mistake, that he picked the wrong stock. BTW, the prices of penny stocks always drop. It’s never a straight line from the earth to the moon.

5. Whether he won’t accept a loss or can’t afford one, or his ego is now in control, negative statements about the stock are now personal. He interprets an attack on the stock as criticism of his investing skills and a deliberate attempt to sabotage the stock and thusly his profits. He feels honor-bound to defend himself and the stock, even in the face of overwhelming logic, common sense and fact showing he’s wrong. He’s now a full-blown Kool Aid Kid, and most likely will go down with the stock, rather than admit he made a mistake, sell and cut his losses.

[Guapo]

Penny Stock Kool Aid Kids


How Do You Recognize A Kool Aid Kid?

1. Birds of a feather flock together and so do Kool Aid Kids. If you find one in a thread, chances are good you’ll find several and sometimes ten or fifteen or more. They often label themselves as “The Longs”, wearing the label as a badge of honor. It’s the Kool Aid Kids versus the world.

2. Day traders, swing traders and flippers are viewed as a lesser species of trader whose trading methods hold down prices. They deserve no respect from “longs”. People who actually criticize the stock are mortal enemies. In the most egregious cases Kool Aid Kids will harass, badger and intimidate others who disagree with them trying to drive them from the thread.

3. Kool Aid groups display some characteristics of cults. There is a good deal of camaraderie among members. They re-enforce each others’ opinions, support each other’s posts and join together to combat anyone posting negative opinions.

Any member of the Kool Aid group who begins expressing doubts about the stock will be gently urged to cast his reservations aside, once more “see the light” and rejoin the group as a member in good standing. An individual who fails to comply with the group’s standards will be ultimately ostracized and becomes a member of the enemy camp. The only standards a Kool Aid group usually has are that everyone agrees the stock will make them a pile of money and that members must fight off any naysayers.

4. Kool Aid Kids urge everybody to buy the stock and get in on the good fortune soon coming. Anybody not heeding their advice simply fails to comprehend the fine opportunity they are missing. Kool Aid Kids are the best pumpers a penny stock company can have.

5. Upon the receipt of good news, they will dance in the thread, slap each other on the backs congratulating each other for their brilliance in investing in the stock and make predictions of breath-taking runs. They’ll count their profits, discuss their plans for retirement and talk about the sports cars they will buy. They will ridicule others who have failed to see the path to riches as they have.

6. Kool Aid Kids accept without question anything the company says, no matter how far-fetched or ridiculous it may be. They will defend the company under all circumstances. Kool Aid Kids toss logic and common sense out the window, and refuse to consider any criticism of the company, no matter how cogent or factual it may be.

7. When defending the company, Kool Aid Kids will disregard any negative information. Old information is simply ignored, claiming that information is no longer applicable. Excuses will be offered that those criticizing the stock have misinterpreted the information, don’t have the complete story or have failed to grasp the “big picture.” Often, anybody disagreeing with them is labeled a basher just trying to depress the stock to pick up cheap shares, is a short seller or is trying to take revenge on the company for some reason.

8. Any bad news they can’t explain is never the company’s fault. They will provide excuses for the company when company plans and goals fail to materialize. Non-performance of the company or stock is blamed on something or somebody else. For example, “Well, the company’s three months late on the latest audited financials but audits take time, you know?” and “Sure, the stock should have run on that good news but the MM~s are holding the price down.”

9. Kool Aid Kids are on a divine mission. They honestly believe the stock will make them rich. Their minds are closed. Most of the time, there’s no talking any sense into them. The Kool Aid Kids’ reality is they will soon be rich. Some will desert the group in adverse circumstances, an announcement of a reverse split for example, but many of them will hang-on until the bitter end, until they’ve lost 90% or more of their money.

[Guapo]

Penny Stock Kool Aid Kids


Here Are Some Guidelines To Help You Prevent Falling Into The Kool Aid Trap

1. First and most important, don’t put any money into a stock that you can not afford to lose.

2. Set a limit on how much you will invest in any one stock and under no circumstances exceed it.

3. Make your own trading decisions. Don’t let others influence you with comments similar to, “You can’t miss with this one!” or “This stock will definitely make us rich.”

4. Listen to both sides of an argument regarding a penny stock. Weigh all the information you have and make the most logical decision you can about the stock, whether you’re buying, holding or selling.

5. Don’t automatically reject legitimate arguments simply because they don’t agree with your current appraisal of a stock.

6. Don’t let your ego interfere with your trading simply to convince yourself and others that you’re a skilled investor or to avoid admitting a mistake. Playing penny stocks is mostly speculation and often nothing more than rolling the dice. Nobody makes profitable trades all the time, not even the pros, so in situations where it’s obvious you have made a mistake, admit it to yourself, sell and wait for a more opportune time to jump back into the stock or move on to the next one.

7. Don’t accept company information at face value. Closely examine all information disseminated by penny stock companies. Penny companies will display false information on their web sites and will imply actions in PR statements which do not absolutely declare they will do them.

For example, suppose a company issues a PR saying, “The board has approved a 50% buy-back of the shares in the float.” That doesn’t mean the company will actually buy-back 50% of the float. It simply means the board has approved a buy-back. Don’t assume anything to be true that’s only implied.

8. When evaluating information about a stock, use logic, common sense and your knowledge of how the real world works. Examine all company claims closely and determine if they make sense to you.

For example, CMKX claimed it had a large amount of diamonds on its leased properties in Canada. At one point the value of the diamonds claimed by the company was worth more than the value of all the known diamonds in the world at that time.

Does that sound logical to you? It certainly didn’t to me but Kool Aid Kids shouted everybody down that suggested the company’s statement regarding the value of its diamonds was nonsense. As it turned out, the company’s claim was totally false. The SEC eventually shut the company down for stock fraud but not before the company fleeced its stockholders out of their cash.

STTK popped-up on the scene soon after the bird flu crisis hit the news. It claimed, though it was a tiny penny company with only a few employees, it would develop a bird flu vaccine within six months to a year or so. Considering the cost and time of developing a vaccine and getting it tested and approved, does it seem likely a tiny penny company is capable of achieving such a goal?

I didn’t think so but if you questioned the company’s statements, you were jumped-on by several Kool Aid Kids who had blindly swallowed everything the company had said. STTK never developed a vaccine.

It is true though if you had gotten in early and waited for the run, you could have made some good money, as the stock went to about $1.75 a share. Some folks did get in early of course but most didn’t, buying at higher prices than was prudent, and lost nearly everything listening to the Kool Aid Kids pronouncing the stock was going to $3 a share and higher.

[Guapo]

Penny Stock Kool Aid Kids


Here Are Some Guidelines To Help You Prevent Falling Into The Kool Aid Trap - Continued

Perhaps the biggest swindle in the last few years has been CSHD. The CEO claimed the company owned or controlled about $7.5 billion in bonds. Nobody gives bonds away. In order to acquire or control bonds, you must have cash or assets of some kind.

Where did CSHD, a miniscule penny company with no previous earnings, get funds to control or own that quantity of bonds? The company never provided an answer. Is it common sense to believe a penny company suddenly obtained sufficient cash or other assets to purchase or control $7.5 billion of bonds? It wasn’t to me but the CSHD Kool Aid Kids were high-fiving, congratulating and applauding each other on their smart investment decision and predicting the stock would climb to $15 a share, $25 a share, $100 a share and higher. Some CSHD Kool Aid Kids even compared CSHD to Berkshire Hathaway.

They were celebrating in the threads every day and attacking anybody who said the company’s claims were exorbitant, right up to the day the SEC suspended trading and killed the stock. Of course, enmity was directed at the SEC for the trading suspension. No blame was attributed to the company by the Kool Aid Kids.

The trading suspension occurred in late October – early November 2006. The stock has been dead since, pushed to the grey market after the trading suspension was completed. However, like CMKX, even when it appears likely in another month or so the SEC will put CSHD to sleep forever, there are still stockholders who believe Rufus’s promises of the company’s survival and recovery. These folks are truly hardcore Kool Aid Kids.

It’s true you could have made great money on CSHD since it ran to $4, if you had sold at or near that price. Some folks did and they made some nice change. However, many of the Kool Aid Kids continued to hold and lost almost everything.

In the three examples above, the stocks were strongly pumped with extravagant claims that didn’t make sense and didn’t fit with the way the real world works as I understand it. I could easily give you another dozen examples where Kool Aid Kids lost their pants on their investments and took a lot of other people with them whom they had persuaded the stock was going “To Da Moon!”

9. Never let others convince you a particular stock is the one that “Can’t miss.” or “It’ll make us a lot of money.” It happens occasionally but finding that specific one is difficult; and it’s rarely one that’s pumped hard.

10. If you feel you are being influenced by a group of Kool Aid Kids, stop reading the thread for a few days. Clear your head and re-analyze the stock. Much of what penny stocks claim, especially pinks, can’t be independently verified. You therefore have to use logic and common sense to judge the company’s plans and goals. If a penny company’s claims seem far-fetched, they usually are. As the old saying goes, “If it sounds too good to be true, it almost always is.”

Pennies are chancy but they can be profitable. I’ve always recommended playing the pennies on the price changes and taking profits when you can, rather than holding shares long term and waiting for the PPS to move to a dollar a share for example, and making you rich. Very few penny companies ever make any money including the legitimate ones. Rarely does a penny stock make anyone truly wealthy, despite what Kool Aid Kids will tell you.

[Guapo]

A Review and Analysis of FCCN – AERP

Franchise Capital Corporation (FCCN) was an interesting company that captured many investors’ attention. Indeed, many CSHD~ers ventured into FCCN in hopes of recovering some of the cash they had lost on that stock. Many people believed FCCN was a penny stock which would make them rich.

FCCN underwent a deal with a private company that took almost thirteen months to conclude. During that time, it was never really clear exactly what the deal was with the private company, Aero Exhaust, or how solvent Aero was until the deal was complete.

FCCN was not an original company. Its origins began in July 2001 with a company named Cortex Systems.1 It was a business development company in the medical industry.2 Cortex was unsuccessful and changed its name in September 2003 to BGR Corporation, with a new symbol of BGRR. It also changed its business model, switching to the franchised fast food restaurant business.3 Later, the company did a 4/3 forward stock split and changed its symbol to BGRN, continuing in the same business.4

On 12 January 2005, the company changed its name again to Franchise Capital Corporation (FCCN) and conducted a 1/10 reverse split. The company continued in franchised operations including restaurants.5

Note: Most of the information below was taken from the FCCN and AERP threads on HSM in descending chronological order. A list of these threads is the end of this article.

The company issued a PR on 28 September 2005 stating it was reducing its authorized shares (A/S) from 5 billion to 200 million. There would be a problem with this action later. The PPS was sitting about .04 at the time. The price increased some but the next day the company announced it had filed its latest 10K. By 3 October 2005 the PPS had dropped about 33% to roughly .027. What little interest there was in FCCN at this time seemed to die.

In February 2006, FCCN issued a PR stating it was now opening some of its restaurants. By the middle of March 2006, the PPS was down to about .01 with an estimated O/S of 75 million.

By the middle of August 2006, FCCN was selling or had sold one of its restaurant chains to another company. Stockholders in FCCN were to get restricted shares in the company buying FCCN’s restaurants.

On 12 December 2006, FCCN announced it had reached a tentative agreement to merge, reverse merge or buy a private company, Aero Exhaust, Inc. It was at this time interest jumped in FCCN. The deal with Aero Exhaust was supposed to take only a few months. According to posts in the thread, Aero Exhaust was a large player in their industry with sponsorships of NASCAR activities and other functions. It was also alleged Aero Exhaust was a solvent successful company.

FCCN’s announcement of the deal with Aero caused the stock to move up to about .027 over the next several days. The price dropped somewhat but moved back up over .02 by 26 December 2006. At the end of the year, FCCN issued another PR claiming it was working to become compliant with SEC rules in order to move to a higher exchange.

On 3 January 2007, the stock closed at .031 with some folks predicting the deal with Aero would be finalized by 12 January 2007. By 5 January 2007, the PPS closed at .049. Many folks were discussing Aero Exhaust, speculating how profitable the company was and how many distributors it had at that time, estimated to be about 30,000. Unfortunately no one had seen any reports regarding Aero’s finances. The hype was nothing but speculation.

On 8 January 2007, FCCN appeared to raise its A/S to 5 billion from 200 million.6 As a result; the PPS dropped to a low of .022 but reversed its path and closed at .043. Some folks called the company and were told that was done by previous management and that the A/S had not been raised. On 9 January FCCN issued an 8K and a PR stating because previous management had erred in reducing the A/S, FCCN had to reinstate the A/S to 5 billion.7

On 9 January 2007, the company stated it needed time to clean up its financials in order to move to the OTCBB, with a view down the road to moving to the AMEX or NASDAQ exchange. FCCN closed at .035, down about 18% from the previous day.

On 11 January the PPS had moved up and made a small run to .061. However it dropped back and closed at .048. On 16 January, the PPS moved up to about .070 but dropped back at closing. After closing, FCCN filed an 8k announcing a definitive deal with Aero, expecting the deal to be completed in the second quarter of 2007. In the 8K, FCCN claimed it had loaned $1.5 million to Aero. After the 8K and a PR on the morning of 18 January 2007, the PPS dropped and closed at .045.


Footnotes

1 http://tinyurl.com/2tu5zb

2 http://tinyurl.com/2jbd4e

3 http://tinyurl.com/354ear

4 http://tinyurl.com/2mpf9m

5 http://tinyurl.com/2mgbcw

6 http://tinyurl.com/yl2st3

7 http://tinyurl.com/2lcsq6

[Guapo]

A Review and Analysis of FCCN – AERP

On 19 January 2006, FCCN issued a PR stating the actual O/S was about 920 billion shares with 780 million held in escrow for Golden Gate Investors (GGI), leaving roughly 140 million shares in the float. The PR was very confusing. There were additional discussions about the company withdrawing as a business development company. The reason given by the company was that previous management had left the books in terrible shape and it would be easier to fix the financials to make FCCN a clean shell for the deal with Aero if it became an operating company. The next trading day, 22 January 2006, the PPS fell again, closing at .0285. By 25 January, the stock had fallen some more, closing at .0145. By the end of the month, FCCN had dropped to sub-penny levels but recovered and finished the month at about .019, far down from its high of about .070 earlier in the month.

February 2006 was a slow month with FCCN closing around .012. FCCN issued several PR~s about Aero’s activities, none which did anything for the stock.

On 14 March 2006, the company announced it had filed to withdraw the Business Development Corporation status of the company. According to the PR, the withdrawal was effective immediately and from the 14th, the company was now an “operating company”. March ended another slow month for FCCN with the PPS finishing about .0110.

In the early part of April 2007, FCCN rebounded and reached about .0170. For the most part, April was quiet with everyone waiting for news on the merger.

May was another uneventful month with not much movement in the stock.

June started off with talk of dilution in the stock. In early June FCCN announced it had reduced the amount of money owed to GGI. On 08 June 2007, FCCN issued a PR announcing they had filed all the late financial reports and was now current with their SEC filings, in anticipation of the completion of the deal with Aero. The news did nothing for the stock, closing down on 12 June about .0157. On 25 June 2007, FCCN announced it had loaned another $400K to Aero and that the Aero deal had been delayed. No specific date was given. June 2007 ended with the stock around .075.

July 2007 was another slow month, with investors waiting on news. The PPS closed the month around .01.

On 08 August 2007 with the price sitting around .01, FCCN announced the merger was set for the week of 30 September 2007.

By 09 August the PPS had moved up to about .014-.015 but by 22 August the price had dropped to .011. The PPS at the end of the month was .0115.

On 17 September 2007, the PPS closed up about 44% at .0215 in anticipation of the announcement of the completed deal. The price at the end of September was .0295. Investors were waiting on FCCN’s 10Q for the 3rd quarter 2007 and the 8K with Aero’s financials.

On 04 October 2007, FCCN issued a PR stating the merger had been completed. The PR also said the debt obligation with GGI had been satisfied. The 8K on the deal was expected to be filed by 11 October. The PPS was sitting at .026. The announcement of the merger completion did nothing for the stock the next day as the price closed down roughly 27% at .019 after dropping as low as .014. Early Monday morning, 08 October, the price fell to .016 but closed that day at about .019. On 09 October FCCN also issued a PR claiming they were looking at another acquisition of a company in the automotive parts field.

The 8K on the merger was late, finally being issued 19 October 2007.8 The 8K was somewhat confusing. FCCN and Aero swapped shares and it was revealed Aero had a debt of $4.4 million, which was satisfied by the share swap. Exhibit 99.2 to the 8K indicated Aero was in debt, rather than being a thriving company as most investors had believed. The one glaring fact of the 8K was that Aero was far from being the profitable company everyone was led to believe.

Monday morning the 22nd of October, the stock’s price dropped and closed about .0080, down from around .0190 the previous Friday. On 29 October it was alleged Aero was looking at purchasing a company named “Dr. Gas”. The stock closed at the end of the month around .0080.

November 2007 was not a good month for the stock. A lot of people in the thread by this time were lamenting their losses with FCCN/Aero. Investors were also discussing possible dilution. FCCN’s 3rd quarter 2007 10Q was filed on 11 November 2007.9 The 10Q stated the O/S was about 1.72 billion shares. It did not give the A/S and float numbers. The 10Q showed FCCN was not doing well. FCCN had a net loss of about $440,000 for the quarter. That wasn’t a huge surprise because almost everybody understood the key to the deal with Aero was the financial shape of Aero, not FCCN. By the middle of the month, the PPS had descended to .0040. The PPS closed around .0035 at the end of the month.

December 2007 was another slow month with the stock dropping some more. The stock traded in the .0020~s most of the month.

Footnotes

8 http://tinyurl.com/352k4t

9 http://tinyurl.com/25rswy

[Guapo]

A Review and Analysis of FCCN – AERP

In January 2008, FCCN announced they had filed a 14C to change the company’s name and symbol, effective 21 January 2008. The new name of the company was Aero Performance Products. The new symbol was AERP. So instead of roughly 3-6 months to complete the FCCN/Aero deal from the time it was first announced, it took almost 13 months.

The stock started climbing. By 24 January 2008 the price was about .0060, about a 50% increase from a few days earlier. By the end of January the price was between .0050-.0060 with AERP now pumping out a lot of PR~s about its future business.

On 14 February 2008, Aero filed a 10Q for the last quarter of 2007.10 The two most noticeable facts of the financial statement was the company had a net loss of $761,719 for that quarter and that they were not profitable in 2006. The company had decreased its losses in 2007 from the previous year but its losses were still heavy. By 15 February, the PPS was down to .0016. The stock closed the last day of the month at .0012.

In early March 2008, it was discovered that TheSubway.com, a stock advisory site was paid 22.5 million shares to promote AERP stock.11 The stock continued to fall during the rest of the month to its current price of .0008 on 28 March 2008.

So what went wrong with this one?

Obviously the largest mistake was the assumption Aero Exhaust was a profitable company. Once the deal between FCCN and Aero was announced on 12 December 2006, it was established Aero had a real business, namely selling mufflers. However the stock was heavily pumped from that time on.

Many people assumed Aero was profitable because it actually had some business. FCCN did nothing to dispel the impression Aero was profitable. In fact, just about all the PR~s issued about Aero by FCCN began with this phrase or one very similar, “Aero Exhaust, a world leader in automotive exhaust technology….” As investors discovered with the release of the 8K on 19 October 2007, Aero was anything but a world leader.

The simple fact is penny stock companies rarely become profitable, even the legitimate ones. Even fewer ones become stable successful companies.

There were also a few red flags which long-term investors ignored during the hysterical pumping of the stock.

The first red flag was it was never clear exactly what the FCCN-Aero deal was. Was FCCN buying Aero or was it some kind of merger? The deal was called a merger, reverse merger and an acquisition at various times. It appeared to be something like a reverse merger but as it turned out, it was an acquisition of Aero by FCCN as FCCN stated in the 8K filed 19 October 2007. The question is, if Aero Exhaust was a profitable company, why did it sell itself to a pink company that was unprofitable? Once that 8K was filed, everybody of course understood Aero Exhaust was not profitable as most people had believed.

The second one occurred at the end of 2006 when FCCN claimed it was working on becoming complaint with SEC rules to move to a higher exchange after the completion of the deal with Aero. As of this time, about 15 months later, it hasn’t happened; and as far as I can tell, Aero in any of its filings or PR~s since the completion of the deal 21 January 2008, has failed to mention a move to a higher exchange.

The third one happened in early January 2007 when it appeared FCCN has raised its A/S from 200 million to 5 billion. This was related to the reduction of the A/S from 5 billion to 200 million before in late September 2005. Perhaps it was a legitimate requirement but the A/S was still raised to 5 billion. Whatever the reason, it gave the company a much larger number of shares to sell.

The next red flag and a huge one too, occurred in early January 2007 when FCCN announced it had loaned $1.5 million to Aero. If Aero was a strong vibrant company why did it need a $1.5 million loan? FCCN later announced it had lent an additional $400K to Aero.

The next one also occurred in early January 2007 when FCCN stated the deal should close by the end of the second quarter 2007. That didn’t happen of course since the deal wasn’t consummated until January 2008 (or 19 October 2007, take your pick.)

The next red flag was on 19 January 2007, FCCN announced it owed money to GGI. Surely the company already knew earlier but didn’t mention it until a month after they had announced the FCCN-Aero deal. The deal with GGI perhaps was contained in a previous filing but hardly anyone had read any of the old SEC filings.

The next red flag is why wasn’t the financials from Aero announced earlier than they were? Aero’s financials were surely known by FCCN when they announced the firm deal with Aero in January 2007. I understand Aero was a private company at the time but in the interest of transparency, Aero could have voluntarily released its financial status.

The next one was in early June 2007 when FCCN announced they had completed catching their books up to date and had completed their back filings with the SEC, bringing the company current. Why did it take another four months, from June to 19 October to close the deal with Aero?

Footnotes

10 http://tinyurl.com/28fxu8

11 http://tinyurl.com/yuvz96

[Guapo]

A Review and Analysis of FCCN – AERP

Next, when the 8K confirming the completion of the FCCN-Aero deal was issued on 19 October 2007, it revealed Aero had had a $4.4 million debt which was satisfied when the deal closed. Obviously FCCN knew about this debt. Why weren’t investors told earlier? It would have at least given a clue to investors that Aero was not what many people believed.

The deal was confirmed on 19 October 2007. Why did it take another three months, until 21 January 2008 to change the company’s name and stock symbol?

Of course it’s easy to see the red flags in retrospect; and some of the red flags above were too late to warn investors but there was sufficient information available early on to cast doubt on the FCCN-Aero deal.

The 8K on 19 October killed the stock’s price. Once that 8K was issued, it was too late for long-term investors. On 14 February 2008, Aero filed a 10Q for the last quarter of 2007. Most folks already knew the condition of Aero but that 10K nailed the lid on the pickle barrel so to speak, demolishing the PPS.

By February 2008, most long-term investors had already lost most of their funds but it didn’t end there. In early March 2008, it was discovered AERP’s stock was being advertized by a stock advisory site, TheSubway.com. TheSubway.com received 22.5 million shares for its efforts.

Lastly, what happened to the deal with “Dr. Gas” which was announced in October 2007?

The one bright spot for FCCN during the time it took to conclude the deal with Aero was that FCCN was often a very trade-able stock. See the stock-price list at the end of this article. There was a drawback to flipping FCCN on-line however. Several on-line brokers had restricted trading in FCCN where you couldn’t buy the stock. Transactions had to be done by calling your broker.

What does the future hold for AERP? Since AERP has a real business – they just haven’t been good at it so far – perhaps they can recover. However since it appears they have been selling stock, I wouldn’t bet on it. If the company continues to sell stock, it’s possible we’ll see a reverse split in the future. After all, that’s how FCCN began, with a 1/10 reverse split.

The lesson to be learned from FCCN-AERP is that investors should not automatically assume a penny stock company is or will be profitable, simply because it has a real business. Legitimate companies which want to attract investors will always show their financials by filing them with the SEC. With penny stocks, investors should always be aware of red flags and indications a company isn’t being completely honest and open.

List of FCCN-AERP threads on HSM

1 FCCN @ .040 Huge Share reduction
28 September 2005 – 04 October 2005 Pages 1-3 http://www.hotstockmarket.com/forums...highlight=bgrr

2 FCCNE Looks good at .01
15 March 2006 – 17 March 2006 Page 1
http://www.hotstockmarket.com/forums...al+Corporation

3 FCCN - BREAKOUT DIVI PLAY 1 Share GAMN @ $1.17 for every 100 Shares FCCN @ .008
21 August 2006 – 15 September 2006 Pages 1-2
http://www.hotstockmarket.com/forums...al+Corporation

4 FCCN - BDC Withdrawn and Moving Forward with Merger with AERO Exhaust!
12 December 2006 – 11 April 2007 Pages 1-703
http://www.hotstockmarket.com/forums...al+Corporation

5 FCCN (6/25/07) NEWS OUT! Clean Shell..merger with AERO!
11 April 2007 – 11 October 2007 Pages 1-131
http://www.hotstockmarket.com/forums...10#post1309610

6 AERP Aero Performance Products Inc.
09 August 2007 – current date Pages 1-888
http://www.hotstockmarket.com/forums...highlight=FCCN



FCCN-AERP Prices

Referring to the chart below, you could have bought FCCN right before or on 12 December 2006 at .01 and almost doubled your money by selling it on 26 December 2006 around .02.

You could have purchased the stock on 3 January 2007 at .031 and sold it for about .049 on 5 January 2007.

You could have bought it early on 8 January 2007 at about .022 and just about doubled your money again by selling it later that day at .043.

You could have bought it again on 09 January 2007 at about .035 and sold it at or near .061 on 11 January 2007.

You could have purchased it again on 11 January 2007 about .048 and sold it near or at .070 on 16 January 2007.

Near the end of January 2007 you could have bought it at less than .01 and sold it a few days later at .019.

You could have purchased the stock at the end of March 2007 at .011 and sold it in early April 2007 at about .017.

June 2007 was a bad month but you could again have bought the stock near the end of July 2007 about .01 and sold it on 9 August 2007 at .014.

If you had picked-up the stock at the end of August 2007 at about .011, you could have sold it on 17 September 2007 at or near .0215; or held it and nearly tripled your money by selling it at the end of that month for about .0295.

There were several times during the month of October 2007 you could have flipped the stock for small gains.

November 2007 wasn’t a good month to trade the stock but if you have bought the stock at the end of December 2007, you could have almost tripled your money by selling it on 24 January 2008 at about or a little less than .0060.

Obviously no one could have made all these trades but there were many opportunities to make at least five or six profitable trades off FCCN-AERO.