The SEC Should Make Stock Advertising Illegal

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The SEC Should Make Stock Advertising Illegal
AnandKZ / Pixabay

The SEC Should Make Stock Advertising Illegal

First, the promoted penny stock scorecard:

Ticker Date of Article Price @ Article Price @ 7/18/12 Decline Annualized
GTXO

5/27/2008

This Tiger grand-cub was flat during Q2 but is ready for the return of volatility

Tiger Legatus Master Fund was up 0.1% net for the second quarter, compared to the MSCI World Index's 7.9% return and the S&P 500's 8.5% gain. For the first half of the year, Tiger Legatus is up 9%, while the MSCI World Index has gained 13.3%, and the S&P has returned 15.3%. Q2 2021 hedge Read More


2.45

0.03

-99.0%

-66.9%

BONZ

10/22/2009

0.35

0.02

-94.0%

-64.2%

BONU

10/22/2009

0.89

0.12

-86.5%

-51.9%

UTOG

3/30/2011

1.55

0.07

-95.5%

-90.7%

OBJE

4/29/2011

2.90

0.03

-98.9%

-97.5%

LSTG

10/5/2011

1.12

0.13

-88.2%

-93.4%

AERN

10/5/2011

0.0770

0.0009

-98.8%

-99.7%

IRYS

3/15/2012

0.261

0.110

-57.9%

-92.0%

NVMN

3/22/2012

1.47

1.44

-2.0%

-6.2%

STVF

3/28/2012

3.24

0.42

-87.0%

-99.9%

CRCL

5/1/2012

2.22

0.625

-71.8%

-99.7%

ORYN

5/30/2012

0.93

0.46

-50.5%

-99.5%

BRFH

5/30/2012

1.16

0.69

-40.5%

-97.9%

LUXR

6/12/2012

1.59

0.265

-83.3%

-99.999999%

IMSC

7/9/2012

1.50

1.13

-24.7%

-99.998982%

DIDG

7/18/2012

0.65

???

???

???

I added an “annualized” field to try to equalize the results over the length of time I have been tracking them.  Helps to highlight how horrible the last six stocks have been.  Big price falls in less than four months.  Most of those have had negative net worth, negative earnings, little revenue, and often have changed industries to the “next hot idea.”

What was hot three years ago?  Mining companies.  Well, not really.  That mostly popped in 2007-8.  But inexperienced investors, those that might buy the promotion for a penny stock, are always late to the game.  Regency Resources IPO’ed in April 2009 for a nickel a share, and has lost money ever since.  No revenue, negative earnings, negative revenues — no action.

They owned two bodies of land where they expected to find gold.  But in a letter to the SEC, the management wrote:

Neither of our officers and directors has visited either La Trinidad Claim or the Mara Claim.  In response to this comment the following has been added to the risk factor disclosure as shown on page 8 in the Form 10-KA and page 15 in the Form 10-QA.

Neither of our two directors has visited La Trinidad or Mara claims.

Our two directors have not visited our two mineral claims, being La Trinidad and the Mara claims.  Therefore, they have no personal knowledge of the mineralization on each of the claims, the terrain and the possibilities of hazards during exploration activities.  They have had to rely upon the advice and opinions of the geologists working on each of the claims.”

For such a tiny company, quite an admission.  Really, the company wasn’t doing much of anything, so they decided to switch businesses to Internet Television, and rename themselves Digital Development Group.  They did this a little more than two months ago.  A more recent press release is here.

So now, when I receive the glossy mailer that says something to the effect of, “Here is the Miracle Company that has a miracle technology that will lead to it being bought out by Google Inc (NASDAQ:GOOG), Facebook Inc (NASDAQ:FB), or Microsoft Corporation (NASDAQ:MSFT) for $2-3 billion dollars,” I say ridiculous.  If I had such a technology, I would grow it myself, with no help from others, or maybe with the aid of a few angel investors.  After all, the company has little in the way of liquid assets at present.  How will it achieve its great aims?

The simple answer is that it won’t, and the stock price will follow the same decay pattern as the above sham companies.  Look at this disclaimer from the tout (done in 5 point type):

IMPORTANT NOTICE AND DISCLAIMER: This is paid advertisement by Eric Dany and/or Eric Dany’s Stock Prospector (collectively, “EDSP”). EDSP has received twenty three thousand dollars from Belmont Group Ltd. in compensation for this advertisement and related market materials to enhance public awareness of Digital Development Group Corp (hereafter DIDG). EDSP also expects to receive new subscriber revenue the amount which is unknown at this time as a result of this advertising effort. EDSP does not perform any due diligence on the stocks and companies discussed herein EDSP relies on generally available public information and representations made by DIDG. EDSP does not purport to provide an analysis of any company’s financial position, operations, or prospects and this is not to be construed as a recommendation by EDSP or an offer to sell or solicitation to buy or sell any security. DIDG, the company featured in this issue, appears as paid advertising. Belmont Group Ltd. has paid eight hundred and fifty thousand dollars for the dissemination of this info to enhance public awareness for DIDG.

On Judgment Day, I do not want to be Eric Dany.  To write glowingly of a lousy stock and say that it is an aggressive buy, in big type, and then in tiny type say that none of this is research — it is all advertising, is the legal fiction hiding the lying.

The SEC should bar these practices, and make illegal the advertising of stocks.  Research is one thing, there are some regulations there, but the rank promotion of stocks is ridiculous.  When I started writing about this, I never dreamed that the results would be so bad, but they are that bad.

By: alephblog

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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