Penny stocks often have a hard time getting their name in front of the public. While some hardcore value investors are willing to do extensive research to find these diamonds in the rough, most financial news is dominated by companies in the S&P 500 (INDEXSP:.INX) or other large cap firms. While sometimes a legitimate company will pay for advertising to raise its profile, online financial sites who market companies with little value have started paying for positive analysis to temporarily boost stock prices, which almost inevitably crash back down a few days or weeks later. This type of hype marketing is commonly known as pump-and-dump.
As a case in point, Valuewalk was recently contacted with such an offer from CEKO WEB Inc., a web design and promotions firm, to promote the company Freyja Resources, Inc (OTCMKTS:DFCPF) (CVE:FRA).
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“Our client [Freyja Resources] is really looking for specialized journalists or editorialists that can write articles about this project. He is even ready to bring some influencers to Mexico to see by themselves the value of this project and write about it on your platform(s),” wrote Jean-Luc Dubé from CEKO WEB. “We have also other clients that can be interested by your services if we get a good return on our investment.”
Freyja Resources has never generated revenues
We don’t do sponsored articles as a matter of policy, but in this case there was an even bigger problem.
“The Company’s properties are in the exploration stage and to date none of them have a proven ore body. The Company does not have a history of earnings or providing a return on investment,” Freyja Resources, Inc (OTCMKTS:DFCPF) (CVE:FRA) wrote in an MD&A (management’s discussion and analysis) filed with Canadian regulators. In fact, the company has never brought in any revenue, has dwindling cash on hand, and has yet to find commercial grade ore.
Freyja Resources, Inc (OTCMKTS:DFCPF) (CVE:FRA)’s management acknowledges that the company may not even be around very long.
“The Company did not generate revenue nor cash flows from its operations to date. As at June 30, 2013, the Company has a cumulated deficit of $1,048,361 ($690,487 as at September 30, 2012). The Company’s ability to continue as a going concern is dependent upon obtaining additional financing by shares issuance or other mode of financing needed to continue its activities and the ability to complete its qualifying transaction,” they write in the MD&A. “These conditions raise substantial doubt regarding the Company’s ability to continue as a going concern.”
Investors should be informed about potential risks, conflicts of interest
Of course there’s nothing unethical about a company trying to finance operations when things look grim, but to do so by paying financial analysts to praise the company to influence stock prices is unethical, if not illegal. If people want to make a high risk investment in an unproven company that’s burning cash, they have that right, but they should know what they’re getting themselves into.
If you’re curious what kind of coverage CEKO WEB was trying to get for Freyja Resources, Inc (OTCMKTS:DFCPF) (CVE:FRA), just check out this clip from Sun News in a video posted by Dubé. Mark Lackey of CHF Capital Markets praises Freyja, neglects to mention the obvious problems the company faces or the fact that Freyja is one of his clients.