You can’t fix stupid: Investing in pumps

In terms of how long it has been promoted, how long the stock did not go down, and the likely profits of insiders who paid for the stock promotion, UAPC has been one of the more successful stock promotions of 2012. As with all stock promotions, however, the end result is that investors get killed, the insiders who paid for the stock promotions make easy money by selling their shares at inflated prices, and the company never achieves any of the things the stock promoters said it would.

UAPC was featured as Chuck Jaffe’s stupid investment of the week last week. The best part was the response from Barry Gross, who handles the company’s investor relations:

 “We would not want anyone to invest on the basis of that [flyer],” Gross said. “But you would be amazed at how many people have received it — or seen something written about us — called us, been told that what they’re looking at is fraudulent and not a good or fair representation of the company, and then they say ‘But where can I buy shares.?’”

This kind of mindset is why stock promotions work. People believe too easily in the beautiful lies told by the stock promoters.

(click chart to embiggen)

Here is what one of the idiots who bought the stock had to say about UAPC (emphasis mine):

 He understood that the “newsletter” he was looking at was hype and even figured — correctly as it turns out — that by the time he was looking at the pamphlet, the stock had already popped and the buzz might be wearing off.  That said, he felt that if he could buy the company back in the $1 range talked about in the pamphlet, he would benefit when the buzz is gone and the intrinsic value of the company is left for the market to see.  “United American really does seem to have locations on the biggest oil deposit in the United States,” Richard wrote, “and the stock is cheap, so what is the harm in taking a flyer? If they hit on one of the properties, wouldn’t the stock do just what [the letter] says?”

The problem is that the stock was not cheap. The stock price doesn’t matter. Stocks are like pies — what matters is not the price per slice (they can be arbitrarily large or small) but the price of the whole pie. With over 45 million shares outstanding as of May and a price around $1, UAPC had a market capitalization of over $45 million despite having almost no assets and no revenues. Even without the pump such a company (unless it was led by someone with tons of experience) wouldn’t be worth $1 million, let alone $45 million.

If you ever have the urge to invest in a penny stock that is touted by a stock promoter, please give me a call. I would be glad to write you a very, very cheap one-year European call option on the stock.

Disclaimer: No relationship with any parties named above and no positions in any stocks or funds mentioned (unfortunately — I would’ve loved to short UAPC and I was previously short but my brokers have not had shares to short for over a month). This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well..

2 thoughts on “You can’t fix stupid: Investing in pumps”

  1. Overseas Stock Manipulator Settles SEC Charges
    Washington D.C., Aug. 2, 2017—
    The Securities and Exchange Commission today announced that an overseas stock manipulator has agreed to pay nearly $800,000 and be permanently barred from involvement in penny stocks after hiding his significant stake in a small oil & gas company while secretly funding a fraudulent promotional campaign that artificially boosted the company’s stock price before he dumped his shares.

    SEC enforcement investigators uncovered the fraud by peeling back layer upon layer of shell companies and nominee owners to reveal that Joe Yiu Cheung controlled United American Petroleum Corp. (UAPC). According to the SEC’s order, Cheung utilized an elaborate network of overseas bank and brokerage accounts mostly in bank secrecy jurisdictions to conceal his UAPC ownership. In addition, he did not file required reports that would have publicly disclosed his burgeoning ownership of UAPC stock. Cheung paid for the issuance of promotional materials to 2.2 million U.S. residents, inducing investors with rosy falsehoods about UAPC’s operations and prospects. The SEC’s order finds that while UAPC’s stock price was rising as more investors bought in, Cheung secretly ordered his foreign brokers to dump his shares. He did not file required reports that would have revealed his sizeable sales to investors, including those purchasing the stock.

    “Investors are often attracted to microcap companies and we are committed to protecting them from overseas manipulators and cross-border schemes. In this case, we worked with numerous foreign authorities to get the evidence we needed to expose Cheung as the man behind false promotional materials and hidden stock transactions,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

    The SEC’s order finds that Cheung, who lives in Canada and Hong Kong and also goes by Dylon de lu Zhang, violated Sections 17(a)(1) and (3) of the Securities Act of 1933, Sections 10(b), 13(d), and 16(a) of the Securities Exchange Act of 1934, and Rules 10b-5(a) and (c), 13d-1, 13d-2, 16a-2, and 16a-3. Without admitting or denying the findings in the SEC’s order, Cheung has agreed to cease and desist from further violations and must pay $542,498.33 in disgorgement plus $94,131.66 in interest and a $150,000 penalty. He agreed to a penny stock bar and a 10-year officer-and-director bar.

    The SEC’s investigation was conducted by Tracy Sivitz of the Microcap Fraud Task Force and Douglas Smith, David Stoelting, and Sandeep Satwalekar. The case was supervised by Lara Shalov Mehraban. The SEC appreciates the assistance of the Financial Industry Regulatory Authority, Swiss Financial Market Supervisory Authority, Hong Kong Securities and Futures Commission, Liechtenstein Financial Market Authority, Guernsey Financial Services Commission, British Columbia Securities Commission, Québec Autorité des Marchés Financier, Ontario Securities Commission, Turks and Caicos Islands Financial Services Commission, and Cayman Islands Monetary Authority.

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