Capitalism fascinates me. Not necessarily the accumulating wealth part, but the process where a business grows and begins to need additional capital, so it takes itself public. Quite often a company has what they call an IPO, or initial public offering. As an example Google started out in its IPO at $85 per share as I recall and now it’s 5 times that. But for every Google you have to assume there’s 100 companies out there that simply tank because of a poor business plan or a harebrained product. Eventually these companies flame out to such a point that their stocks aren’t worth the paper they’re printed on. It seems like that’s the point where some “investment guru” decides to send out thousands of junk faxes (with names such as “Hot Stocks On The Street”, “On The Move Stock Alert”, “Green Stock Alert”, “Wall Street Insider”, or “Uptrend Finder”) to pump up the stock price so they can recoup their investments.
At our business we’re saddled with a number of these faxes a week. So just for fun I kept a few of these and decided to do an imaginary portfolio – $1,000 each at the price they’re listed at the day we received the fax, and track their performance through Friday’s close (the final trading day of 2006.) All of these are “OTC” stocks so they’re very thinly traded.
Allied Energy Group (AGGI) – close at fax date (12-12) was $0.53, closed Friday at $0.40.
Environmental Control Corporation (EVCC) – close at fax date (9-11) was $1.19, closed Friday at $1.39.
Global Beverage Solutions, Inc. (GBVS) – close at fax date (8-30) was $0.89, closed Friday at $0.42.
Homeland Security International (aka Sniffex, Inc.) (HSFI) – close at fax date (10-23) was $0.18, closed Friday at $0.04.
Hybrid Technologies, Inc. (HYBT) – close at fax date (10-20) was $6.80, closed Friday at $3.52.
Syngas International Corp. (SYNI) – close at fax date (9-18) was $0.40, closed Friday at $0.33.
TAO Minerals Ltd. (TAOL) – close at fax date (9-27) was $0.15, closed Friday at $0.10.
So the mythical $1,000 investments in each fared thusly:
AGGI would be worth $754.71.
EVCC would be worth $1,168.07.
GBVS would be worth $471.91.
HSFI would be worth $222.22.
HYBT would be worth $517.64.
SYNI would be worth $825.00.
TAOL would be worth $666.67.
The total “portfolio” would only be worth $4626.22 – off 33.9% from when it was bought scant months ago. Meanwhile, the overall stock markets gained double-digits in 2006 as a whole. There was one gainer out of seven but just randomly picking seven stocks on the NYSE or NASDAQ would probably get me more than one gainer.
So who’s making the money on these? Well, if you read the fine print at the bottom there’s a disclosure that the company which distributed the flyer was compensated for doing so. Here’s a list of the companies that distributed each and their renumeration.
AGGI – “OTM Stock Alerts…was compensated seventy three thousand five hundred dollars by a third party, who is not affiliated with AGGI.”
EVCC – “Sonora Associates Inc. has received one hundred twenty thousand dollars from a third party for the production and distribution of this newsletter.” (This was the “Green Stock Alert”.)
GBVS – “Pathfinder (Marketing) was paid $150,000 for the distribution of this report.”
HSFI – “Cyber (Communications Services) was paid $200,000 for the distribution of this report.”
HYBT – “UTF (Newsletter) has been hired by a third party and is expected to receive $18,000 for the publication and circulation of this report.”
SYNI – Pathfinder (Marketing) was paid $80,000 for the distribution of this report.”
TAOL – “Sonora Associates has accepted compensation in the amount of $120,000 for the distribution of this information.”
Folks, that’s a LOT of stock shares. And I’d have to say that UTF is really selling themselves short since their fee was much less than the others. Something tells me it’s probably pretty easy money because I’m thinking all you need is a nice word processor and a program that can broadcast faxes to thousands of numbers from your computer.
Which leads to the $761,500 question – who’s paying for all this?
In a few cases, it’s noted in the fine print. Sonora Associates “may own a non-controlling share of (Environmental Control Corporation) and reserves the right to sell their shares at any time without prior notice.” Uptrend Finder notes that “UTF and its insiders may from time to time buy or sell (Hybrid Technologies) common shares in the open market without notice.”
Both Pathfinder Marketing and Cyber Communications Services (responsible for the “Hot Stocks On The Street” newsletter) were paid by an outfit called Gemini Market News, Inc. And wouldn’t you know it – “Gemini Market News, Inc.’s affiliates, officers, directors, or employees may own shares of the companies described herein and in that event intend to sell such shares.” Can you say bingo? Seems to me they transfer money from one corporation they own to another (so no loss to them) and they pump up the price to dump the stock (hence, “pump and dump.”) Imagine my surprise when I looked up the stocks through my brokerage account and noticed that there was a spike in volume just after the faxes went out. Yeah, it could be a coincidence, but let’s be real here.
Legally, these fax distribution companies have to provide an “opt-out” number but from accounts I’ve read it’s perpetually busy. And what this also does is verify that you have a “good” fax number so their sister company starts pounding away with junk faxes. I chuckled during my reading on this as one person described how they made a loop of black construction paper and faxed one of these numbers back over a weekend. But if it’s done off a computer there’s no way to get back the faxer in this manner.
Before I finish, I don’t want to make this a vendetta against the companies who offered their shares on the OTC market. They can’t always help who’s bought their stock and the efforts to make a profit (or at least cut their losses) on those shares. Allied Energy Group, et. al. are apparently legitimate companies and who knows, it’s possible they may turn the corner and be successful. Unfortunately, with these penny stocks sometimes the odds are better of hitting the lottery than getting rich off the stock.