Those who are new to the penny stock world may not be aware of the websites, but from 2007 to 2009 the websites Doublingstocks.com and Daytradingrobot.com were very big in the stock promotion scene. In 2009 they promoted UOMO, and in 2010 they promoted BGBR. While I did not follow those websites prior to 2009 I have heard they did a number or pumps in 2007 and 2008.
In its lawsuit, the SEC alleges that the websites, which purported to offer an algorithmic trading system (a “stock-picking robot”), simply gave as its stock picks the stocks that the owners were compensated to promote.
The SEC alleges that Alexander John Hunter and Thomas Edward Hunter were just 16 years old when they set their fraud in motion beginning in 2007. They disseminated e-mail newsletters through a pair of websites they created to tout stocks selected by the robot – which they described as a highly sophisticated computer trading program that was the product of extensive research and development. Their claims were persuasive as the Hunters received at least $1.2 million from investors primarily in the U.S. who paid $47 apiece for annual newsletter subscriptions. Some investors paid an additional fee for the “home version” of the robot software.
While I try to never underestimate the power of human stupidity, it boggles my mind that tens of thousands of people paid money for the service:
Approximately 75,000 investors, the vast majority of whom lived in the United States, paid at least $1,200,000 for annual subscriptions to the Doubling Stocks newsletter and copies of the robot software.
Even if the ‘stock-picking robot’ was just a simple but ineffective stock-trading algorithm, it would have made its owners money. But, that was not enough, as the SEC alleges:
In reality, the SEC alleges that the Hunters used a third website to offer their services as stock promoters, claiming that they could “rocket” a stock’s price and increase its volume by sending out newsletters. The Hunters were consequently paid at least $1.865 million in fees from known or suspected stock promoters, and they did not disclose to their newsletter followers the conflicting relationship between their two businesses.
Some of the best evidence against the Hunter brothers came from a job request for free-lance programmers to create the home version of the ‘stock-picking robot’ software:
In soliciting bids in 2007 from free-lance coders to create the software, Alexander Hunter wrote that the software should “not actually find stocks at all. It should connect to my database and simply request any new stocks I have put in.” He bluntly explained that the software “is almost a ‘fake’ piece of software and needs to simply appear advanced to the user.” Like the newsletter, the home version of the stock picking robot was no more than a fraudulent delivery vehicle for stock symbols that the Hunters had been compensated to promote.
Stock promotion itself is not illegal, as long as compensation is properly disclosed. The SEC is suing the Hunter brothers because of the many alleged lies told about the ‘day-trading robot’, such as the following (these quotes are taken from the complaint):
18. On their doublingstocks.com website, the defendants referred to the stock-picking robot as “Marl”, combining the first names of its purported inventors, Michael Cohen (“Cohen”) and Carl Williamson.
19. On doublingstocks.com, the defendants claimed that Cohen “developed the famous ‘Global Alpha’ computer stock trading model” as a contractor for the Goldman Sachs Group, Inc. (“Goldman Sachs”). The Global Alpha program, the defendants claimed, in “most years is responsible for $4,000,000,000+ Annual Trading Profit.”
20. The defendants’ representations about “Michael Cohen” were false. No such employee or contractor worked in that capacity at Goldman Sachs.
21. On doublingstocks.com, the defendants described how Marl arrived at its stock picks. Defendants made the following claims:
• Marl works by analyzing each stock using “technical analysis;”
• Marl analyzes each OTCBB and Pink Sheet stock, predicting future price direction based on past performance;
• Marl looks for companies that are forming bullish trading patterns;
• Marl identifies “in split second timing” distinct trading patterns “from a vast range of 6578, held in Marl’s internal database”;
• Marl can process 1,986,832 mathematical calculations per second; • When Marl identifies a “clean, uncongested chart pattern that is proven to yield a good risk/reward,” Marl adds the stock to its “watch list”;
• Marl is programmed on an “evolutionary framework,” meaning that as Marl is watching hundreds of stock patterns it actually learns the most likely direction of stock prices under thousands of situations – “The longer Marl is allowed to run on a computer … The More Advanced He Becomes!”; and
• “While monitoring hundreds of stocks in the watch list … Marl may notice that a stock has been hitting resistance [at a particular price]. … [I]f the stock breaks that level (meaning there is a good chance it will ‘breakout’ and run much higher) the bot will start analyzing the stock in more detail … looking at its longer term weekly trading pattern and applying its vast range of criteria. Any stocks that reach this stage have been under close scrutiny and passed a variety of complex tests. Marl will then analyze the best entry point (at which to buy the stock) with the lowest risk to potential reward.”
22. The defendants’ characterization of the software led investors to believe that they were receiving stock recommendations based on a complex, statistically-driven analysis.
23. To lend further credence to Marl’s claimed analytical abilities, the defendants on doublingstocks.com provided a list of Marl’s supposed past stock picks, claiming that the prices increased in value by 200-400% after Marl selected them.
24. The defendants’ claims about the Marl newsletter and software were untrue. In truth, the newsletters and software sold by the defendants neither contained nor performed any real analysis of securities or their trading patterns. The stocks “recommended” by the newsletters and software were simply those that promoters had paid the defendants to tout.
Following is a list of the stocks pumped by Doublingstocks.com/Daytradingrobot.com from the SEC complaint
Another, minor allegation is that one of the Hunter brothers ‘scalped’ one of the pumps, buying prior to the promotion to the subscribers and selling into their buying. And hilariously, they videotaped those trades to show how profitable their ‘day-trading robot’ was. That is a comically stupid way to give the SEC more evidence.
F. On at Least One Occasion, Defendant Alexander John Hunter Scalped Shares of an Issuer that he and His Brother Were Promoting.
42. On at least one occasion, defendant Alexander John Hunter purchased shares of an issuer “picked” by Marl prior to sending out a newsletter in order to capitalize on the rise in price caused by the newsletter at the next day’s opening.
43. Defendant Alexander John Hunter, on the morning of December 16, 2008, purchased approximately 22,000 shares of Teletouch Communications, Inc. (OTCQB: TLLE) at a cost of $0.16 per share.
44. At 1:21 p.m. (Eastern) that afternoon, the defendants transmitted a newsletter to their subscribers touting TLLE.
45. Fourteen minutes later, defendant Alexander John Hunter began selling the shares of TLLE he had purchased that morning at prices between $0.30 and $0.40 per – 11 – share.
46. Over the next twenty-four hours, he continued selling his TLLE shares, at prices up to $0.51, for a total profit of $5,757, or 161%.
47. The defendants did not disclose to their subscribers that defendant Alexander John Hunter intended to sell shares of TLLE during their promotion of the issuer. The defendants did, however, videotape Alexander John Hunter’s trading activity and used the video to promote the Doubling Stocks newsletter.
One interesting thing is that the SEC alleges that the Hunt brothers have control over a Panamanian corporation, and that the Panamanian corporation was set up to run the promotions after the British authorities froze the accounts of the British corporation used by the Hunt Brothers.
G. The Defendants Masked Their Activity Through the Use of an Alternate Corporate Name and Offshore Bank Account.
48. From early 2007 until January 2009, the defendants deposited the proceeds from their scheme – stock promoter payments, newsletter subscription fees, and software download fees – into a bank account in the United Kingdom.
49. In January 2009, that account was frozen by British authorities.
50. The defendants then directed their newsletter subscription processing service provider to begin wiring their subscription and download fees to a Panamanian bank account in the name of relief defendant Regency Investment Group, Corp. (“Regency”).
51. Regency was incorporated in Panama and controlled, through powers of attorney, by both defendants.
Another interesting tidbit and likely the main reason why the websites have not done much since 2009 is that their payment processor terminated their account:
In July 2009, the company that processed the defendants’ subscription sales terminated its relationship with the defendants as a result of the high number of complaints and refund requests by Doubling Stocks subscribers.
[Edit – the below was added 4/22/2012]
At least one of the Hunter brothers was fined by the British. According to the BBC:
In November, Newcastle Crown Court ordered Alexander Hunter to pay back nearly $1m after he admitted providing unregulated financial advice. He was given a suspended 12-month prison sentence.