Updated: May 3, 2013 12:14PM
Originally published: August 7, 2001
You suddenly receive a call from a broker singing the praises of a small technology company that’s about to revolutionize e-commerce.
You hear a radio commercial promising you can make a fortune attending a seminar about trading stock options or purchasing heating oil futures. In an Internet chat room everyone seems to know about the next dot.com company that will quadruple in price. So is this the road to instant riches - or instant poverty?
The rise of the Internet has elevated stock fraud to a new level, both in the number of scams that are created and the speed with which they can be executed. How can you avoid being suckered into one of these deals?
Well, you know I’m going to start with the first rule of avoiding hype: If it seems too good to be true, it’s not true! But almost every sector of the stock market seems to have fallen victim to that concept. That’s why you missed AOL and Amazon.com, isn’t it? You’re determined to take the plunge.
At the very least you should understand that there are ways to separate the completely fraudulent stock promotions from those technology companies that have legitimate dreams, if no earnings.
Before sending a check, you should know if the broker has a long disciplinary record for previous infractions or ripoffs. And before you ante up for seminars, books or tapes you should check into whether previous buyers think they got the same good deal that those midnight infomercial testimonials claim.
The best way to check up on small company stocks, which are being touted both on the Internet in chat rooms and by calls from shady stockbrokers, is to use your computer. Just go to to www.stockdetective.com. It is the one online destination that can give you information on hundreds of current stock promotions and promoters.
You’ll be fascinated to read the stories about publicly traded companies on the ``Stinky Stock’’ section or the ``Red Light District.’’
It’s simply amazing to me that people would fall for these stories, but StockDetective founder Kevin Lichtman says these frauds are sprouting like mushrooms.
Lichtman, a 39-year-old financial services professional, created StockDetective as part of his FinancialWeb.com complex of 18 free Web sites for investors.
Early in his career, he found himself working for what was billed as a ``financial public relations firm.’’ He soon realized they were just touting stocks to make profits for themselves and insiders.
Lichtman was determined to expose this kind of fraud, which the Securities and Exchange Commission seems unable to prevent. (The SEC does not announce ongoing investigations, so it is often too late for many investors when charges finally are filed.)
The Web site features a list of all the stock promoter sources that have been uncovered by the stock detective. When the site started in May 1997 it revealed 14 promoters or newsletters. Today the list features more than 90 stock promoters who fail to disclose that they are being compensated in cash and; or stock by the company or third parties who stand to make a lot of money when the stocks soar - temporarily. Of course, the unsuspecting stock-buyers are left holding the bag when the touts cash in.
Many stories have been uncovered on tips from readers. The Red Light District is a warning zone where two or three stocks are added every other week. Just exposing their outrageous claims to public scrutiny serves a purpose. One example: SpaceDev was delisted from trading by the SEC after StockDetective reported they were claiming to be gearing up to mine asteroids!
The Stinky Stocks section is where you’ll find in-depth reports on the most egregious stock touts. Associate editor Lynn Duke - a former reporter for the New York Times regional newspaper group - does the digging, and she finds plenty of dirt.
A new company is placed on the list every four to six weeks, a total of 20 since the inception of the list in June 1997. One stinky stock was permanently halted from trading, several are facing class-action lawsuits, and two have revealed they are the subject of SEC investigations. All are substantially down in price since appearing on the list. And, most importantly, countless potential investors have been warned about the dangers.
This Web site is not only about Internet fraud. There’s a must-read article about the Wade Cook seminars, which promise a system of 300 percent annual returns using options. Duke found that organization raked in $100 million in fees from seminars and tapes last year. But the article reports that the company’s own trading account lost $800,000 last year, and it details ongoing state investigations.
Other useful articles at StockDetective.com show you how to check out your broker’s track record, and how to handle an arbitration hearing if you feel you’ve been cheated. You can easily search the entire site for any company that has ever been mentioned there.
I’d rank this Web site as the greatest advance in investor protection since the SEC was created half a century ago.
There are other ways to check out individual brokers and brokerage firms. Unfortunately the SEC’s Web site at www.sec.gov is so wordy and convoluted that you might give up before you dig out the information you seek.
If you don’t want to read through all the latest enforcement actions, which could provide the basis for a novel of financial intrigue, just go down to the bottom of the Web site’s home page.
There you can click on a small print heading that says ``Search the SEC.’’ A box will come up allowing you to enter a broker or firm’s name. The search will bring up anyplace the name is listed, including innocuous registration forms. So click only on those citations that start with the words ``enforcement’’ or ``news.’’ Then you’ll get the full text of the article in which the company is mentioned.
An easier, but not necessarily as current, way to check on brokers and brokerage firms is to go to the NASD’s Web site at www.nasdr.com.
From the list inside the blue bars on the left, click on ``About Your Broker.’’ That will take you to the next page, where the blue bars at the top right give you several choices. Click on ``Perform an Online Search.’’ You can then enter either the name of an individual stockbroker, or the name of a brokerage firm. You’ll get the broker’s name, address and registration history.
What you won’t get is a history of any disciplinary actions - unless you notice that a little ``Deliver Report’’ icon at the top is highlighted. If you click on it you will be asked for an e-mail address (or in the case of a long history, a regular postal mail address) and the report will be sent.
If the icon is not highlighted, you can assume there is no disciplinary history.
Obviously, the NASD could post the citations immediately online, but is hesitant about offending its broker-registrants. So they make this information difficult to get. If you can’t even find a registration on this site, assume the worst.
If you happen to hear a pitch for heating oil futures or foreign currency futures, you’ll want to see if the brokerage firm is registered, as required, with the National Futures Association. Its Web site is www.nfa.futures.org. Once again, it’s a site that’s easier for regulators than investors to use, but it’s in the process of a redesign.
In the meantime, you should click on a large box marked BASIC, which is the NFA’s database. Then under the very small print, you’ll see the word ``search,’’ which will lead you to a screen that allows you to input the name of a futures broker or firm. That gives you the registration information, but to learn about past disciplinary actions by regulators or arbitration awards to customers, you must click on the firm’s NFA ID number. As if by magic, everything you wanted to know about the firm or broker’s past history is revealed!
Now you’re armed with the latest and most efficient measures to keep from being scammed. So ignorance is no excuse for being ripped off.
And if all else fails, heed that tiny voice inside that whispers ``don’t’’ when someone offers you an investment deal that’s simply ``too good to be true.’’
Terry Savage is a registered investment adviser for stocks and commodities and is on the board of directors of McDonald’s Corp. and Pennzoil Co. You can send her questions via e-mail at email@example.com. Her second book, published by HarperCollins, is Terry Savage’s New Money Strategies for the ‘90s. Copyright Terry Savage Productions.