An Introduction to shelf registrations

Probably the most common kind of way of issuing and registering new stocks is a shelf registration. This is filed on SEC Form S-3 (F-3 if the issuer is a foreign company). These can be used with multiple types of offerings, including most commonly PIPEs, Private Investments in Public Equities, where the shares have been sold to an investor and the shares are now being registered so that investor can sell those shares; ATMs or At the Market Offerings (PDF), where a company sells shares into the open market from time to time; and registration of shares underlying warrants or convertible bonds.

Shelf Takedowns by Greenberg Traurig (PDF)
FAQs about Shelf Offerings by Morrison Foerster (PDF)

Besides the actual shelf registration statement, the company has to file a prospectus supplement within two days of whichever comes first, the offering being priced or the shelf registration being used. Also, just because a shelf registration is filed does not mean it can be used immediately — the registration needs to be declared effective after the SEC reviews the registration. This typically takes two to three weeks from when the registration statement is filed. When a shelf registration (or another registration statement) has become effective a form EFFECT will be posted. For example, here is a shelf registration, prospectus, and EFFECT for Diana Containerships (DCIX):

 

Disclaimer. No position in any stocks mentioned and I have no relationship with anyone mentioned in this post. 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.

Some good posts on offerings and fundamental research

These come from Auspex Research on Twitter. Follow him. He has no blog but he does occasionally post longer thoughts on Twitlonger.

A Gevo Inspired Twitlonger (10 June 2016)
When A+B = D (17 November 2016)
Realtime Analysis using Twitlonger (22 November 2016).

Disclaimer. No position in any stocks mentioned and I have no business relationship with Auspex (I don’t even know his real name). 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.

A Short blog post of much importance

If you come across a bear and decide to run, what matters is that you run faster than the slowest person you are with, not that you be able to outrun everyone you are with or outrun the bear. This same sort of logic applies to trading, too. You don’t need to be the smartest (or fastest) trader around, just smarter (of faster) than enough people with enough buying power to move stocks.

 

Disclosure: 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.

SEC Freezes accounts used in illegal sales of unregistered shares of Biozoom $BIZM

Earlier today the SEC announced that it froze accounts of eight different Argentinians who had illegally sold unregistered shares of Biozoom (BIZM). Two others who had not yet sold shares also had their accounts frozen. A week ago the SEC suspended trading in Biozoom. See my original post on the Biozoom promotion as well as the Promotion Stock Secrets post on the individuals behind the promotion.

SEC press release
SEC complaint

The sheer number of shares sold and the profits involved are impressive. Here is a good description of what transpired from the SEC press release:

The SEC’s complaint alleges that from March to June 2013, the ten defendants received more than 20 million shares of Entertainment Art, which was one-third of the company’s total outstanding shares. In a one-month period beginning in mid-May, eight of them sold more than 14 million shares. The sales yielded almost $34 million, of which almost $17 million was wired to overseas bank accounts. Their U.S. brokerage accounts, which include approximately $16 million in cash, are subject to the asset freeze.

The ten defendants in the litigation are: Magdalena Tavella, Andres Horacio Ficicchia, Gonzalo Garcia Blaya, Lucia Mariana Hernando, Cecilia De Lorenzo, Adriana Rosa Bagattin, Daniela Patricia Goldman and Mariano Pablo Ferrari (Mariano Graciarena and Fernando Loureyro are also named but had not yet sold shares). The defendants claimed to have purchased shares in Biozoom (then known as Entertainment Art Inc.) from the company’s original seed shareholders between November 2012 and March 2013, but those shareholders had already sold all their shares back in 2009.

Despite the SEC’s quick action, over $17m in illicit profits were already wired overseas and are now beyond the reach of American authorities. Most likely none of the individuals whose names appeared on the accounts were behind the fraud. It is believed by many that Francisco Abellan has controlled scheme from the start.

The US brokerages used by the defendants are well-known to everyone who is familiar with the penny stock world: Legend Securities and Scottsdale Capital Advisors.

For further details, I suggest reading Promotion Stock Secret’s post on this litigation (same post as here).

Disclaimer: I am net long 1700 shares of BIZM (long 11,700 shares in one account and short 10,000 shares in another account); I have no positions in any other stock mentioned and no relationship with any parties mentioned above. 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.

SEC suspends trading in Biozoom $BIZM due to alleged Rule 144 violation

This year has already seen more suspensions by the SEC of actively traded pump and dumps than any year since I started trading them back in 2007. Today’s suspension of Biozoom takes it to the next level though: the stock had only been actively promoted for a month and it was averaging huge dollar volume (for an OTC stock) of over $10 million per day. This is much higher volume than any other promoted stock was doing at the time it was suspended. When the SEC has in past years suspended stocks that were the subject of stock promotions, it was usually long after the initial stock promotion. The reason for this suspension was also quite clear and was different from the normal reasons given by the SEC.

Before looking at the details of the suspension of Biozoom (BIZM), I recap other notable trading suspensions this year (links are to my blog posts on the suspensions):

1 March 2013 – Southern USA Resources (SUSA): This was a mailer promotion that had not collapsed at the time it was suspended.

The Commission temporarily suspended trading in the securities of Southern USA Resources because of questions that have been raised about the accuracy of assertions by Southern USA Resources, and by others, in press releases and other public statements to investors, and in promotional mailers, concerning, among other things: (i) the company’s operations; and (ii) thecompany’s outstanding shares.

susa

8 March 2013 – Endeavor Power Corp. (EDVP): This was an email promotion by various poor promoters the day before the suspension; it had previously been promoted in January by others.

It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Endeavor Power Corp. (“Endeavor Power”), quoted under the ticker symbol EDVP, because of questions regarding the accuracy of assertions in Endeavor Power’s public filings and press releases relating to, among other things, patents.

edvp

14 March 2013 – Face Up Entertainment (FUEG): This suspension was likely related to a Department of Justice criminal investigation into death threats made by some people involved in the promotion against one of the promoters.

The Commission temporarily suspended trading in the securities of Face Up because of questions concerning the adequacy and accuracy of publicly available information about Face Up, including, among other things, its financial condition, the control of the company, itsbusiness operations, and trading in its securities.

fueg

10 June 2013 – Polar Petroleum (POLR): This hard mailer and email pump lasted  for a month and a half before being suspended and it averaged over $1 million in daily dollar volume over that period. The suspension was almost certainly related to the company’s press releases that said more about Exxon’s operations than about Polar Petroleum’s.

The Commission temporarily suspended trading in the securities of Polar because of questions
regarding the accuracy and adequacy of assertions by Polar, and by others, to investors in press
releases and promotional material concerning, among other things, the company’s assets,
operations, and financial condition.

polr

 

 

Besides the increased pace of SEC trading suspensions of active stock promotions this year, FINRA also joined the party, halting trading in Eco-Trade Corp (BOPT) for 14 trading days back in April, just a week after the beginning of a disastrous promotion by StockMarketAuthority / StockDectective that saw the stock drop in days from $0.24 to $.05. FINRA has for awhile had the ability to halt trading in OTCBB stocks but to my knowledge this is the first time they used that power. FINRA gave no notice whatsoever nor any explanation

bopt

The Biozoom Suspension

SEC press release
Suspension Order

Unlike the previous suspensions this year, the SEC was quite specific in why Biozoom’s stock was suspended:

The Commission is concerned that certain Biozoom affiliates and shareholders may have unjustifiably relied upon Rule 144 of the Securities Act of 1933 (“Securities Act”) and they, Biozoom, and others may be engaged in an unlawful distribution of securities through the OTCBB.

The SEC has a concise but vague description of Rule 144:

Rule 144 provides an exemption and permits the public resale of restricted or control securities if a number of conditions are met, including how long the securities are held, the way in which they are sold, and the amount that can be sold at any one time. But even if you’ve met the conditions of the rule, you can’t sell your restricted securities to the public until you’ve gotten a transfer agent to remove the legend.

The law firm Morrison Foerster at Mofo.com has much better description of Rule 144 and what it means (pdf). I am not a securities lawyer and am certainly not an expert on Rule 144, but the likely cause is that the insiders / control persons selling the shares had to wait 12 months after obtaining the shares before selling them (because Biozoom was listed as a shell company as recently as February 2013). Thanks to nodummy of Promotion Stock Secrets and Janice Shell for pointing this out. If Biozoom had not ever been a shell company then insiders would only have to wait 6 months before selling restricted shares under Rule 144.

I expect to see some litigation releases relating to the allegedly illegal share sales sometime in the coming months. See my previous report on Biozoom (and make sure to check out all the other articles about the company I link to). One interesting thing to note is that while I and others (like Ashraf Eassa writing at SeekingAlpha) have brought up the likelihood that the promotional campaign is being paid for by a shareholder (despite the promoters disclosing no compensation), which would make the promotion illegal, this was not mentioned in the SEC suspension order. I believe that the Rule 144 violation is simply easier and quicker to prove and that in time the SEC will sue the promoters for what I believe to be a false disclosure of no compensation.

bizm

A Note on Trading BIZM

I made more than a few thousand dollars buying BIZM and shorting it at various times over the last month. Especially after the POLR suspension I became very cautious especially considering the lack of disclosure of compensation in the BIZM promotional materials. I warned people repeatedly in TimAlerts chat that it was risky to hold BIZM overnight. But I tried to get cute and get out at the best possible price and ended up not fully filling my sell order. Trying to save a few cents per share will likely end up costing me over $3 per share: I bet BIZM opens under $0.50.

 

MichaelGoode

sell I agree with them but it isn’t news. And I still put the risk of a suspension of BIZM at low. I still refuse to hold long o/n because of that risk though

Posted Jun 24, 2:47 PM

 

MichaelGoode

I plan to sell into the next BIZM spike … no matter what I won’t hold o/n although I think it closes strong and gaps up

Posted Jun 24, 3:17 PM

MichaelGoode

sold BIZXM @ 3.41

Posted Jun 24, 3:59 PM

 

MichaelGoode

actually not all my BIZM filled — I waited too long. Still net long 1700 o/n.

Posted Jun 24, 4:01 PM

[Update 2013-6-27]: See Janice Shell’s article on what the recent rash of SEC trading suspensions means for pumps.

Disclaimer: I am net long 1700 shares of BIZM (long 11,700 shares in one account and short 10,000 shares in another account); I am short 3200 shares of POLR; I have no positions in any other stock mentioned and no relationship with any parties mentioned above. 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.

My new venture: OTC MicroCap Research

While there are plenty of people who write about microcap securities fraud and pump and dump scams, too little of the research reaches the people who need it the most: the small investors who believe in the scams. To help them I have created a new website, OTCMicroCapResearch.com. The only thing on that website will be research reports on companies, mostly pump and dumps. I will take no positions in the stocks I analyze at that website, take no payment for articles (except from content syndication websites) and I will do my best to distribute my analyses so that the investing public can see it and learn to avoid pump and dump scams that way. I do not claim that there is anything particularly new about what I am doing, but it is something worth doing.

See my introductory post on why I created the new website.

My PacWest Equities (Pinksheets: PWEI) report published prior to the market open today (PWEI is now down over 75% from its open, although the Infitialis report had a lot to do with that).

 

Disclaimer: No positions in any stocks mentioned. The new website is owned by MorningLightMountain LLC, just like this website; I am the managing member of the company. 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.

My four monitor workspace: What I watch during the trading day

Below is a screenshot of my 4-monitor workspace with all the programs I normally use during the trading day. Click the image for a full-size screenshot. My middle two monitors are 22″ and have 1900 x 1200 resolution so this is a huge image. I describe what I have on each monitor going from top left to bottom right

Screenshot

Leftmost monitor: My trades at IB (Interactive Brokers) are at the top left, and to the right of that are a Speedtrader level 2 and time and sales window. Below the IB trades window is a 1m intraday chart of the same stock that is on the level 2 / time and sales. To the right of that is the old version of Tweetdeck.

Middle-left monitor: All these are Speedtrader Pro windows. The only window that might need some explanation is the top middle window, which is what I call the HOD list (high of day list) which shows every stock meeting certain criteria that is making or touching its high of the day.

Middle-right monitor: This has my Interactive Brokers Traders Workstation (TWS) with a large level 1 watchlist, and in the bottom right it has news on stocks I have a position in and the new “market signals” price scanner at IB. In the upper-right, mostly beneath the IB windows, is the free Prodigio RTS platform that I use for backup quotes. I also use this monitor for looking at my trade-tracking spreadsheet and the internet on Chrome or Firefox.

Rightmost monitor: The top left is Profit.ly chat, with a Speedtrader Time and Sales and Level 2 to its right, my email inbox at the far right, and IB’s top % gainers scanner (otcbb and pinksheet only) at the bottom left.

 

Disclaimer: No relationship with any parties named above (except that I am a user of and an affiliate seller of Profit.ly) and no positions in any stocks or funds mentioned (except for those positions showed on my screens, which I may no longer hold). 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.

 

 

 

 

Lying stock promoters: Bullexchange.com & the FINRA short reports

One tactic that many stock promoters use over and over again to explain why their stock promotions are followed by large stock price declines is to blame it on the short sellers. Unfortunately, FINRA abets these lies by publishing without adequate explanation data required by the SEC’s Regulation SHO. This data provides information on every share sold each day. Time and and time again I have seen stock promoters use this data to ‘show’ that the stock they are promoting is getting attacked by short sellers.

See the text of the most recent email I received from the various Bullexchange.com websites (emphasis mine):

Valued Subscribers,
Welcome New Members,
VKMD experienced a fantastic start last Thursday where many of our subscribers secured substantial gains.

However, due to a major short attack, gains were quickly reversed. We believe this was deliberate, the Finra reg sho list http://regsho.finra.org/FORFshvol20120906.txt indicates nearly 11 million shares were shorted last Thursday.

Simply put, VKMD did not end the way we hoped despite great developments we hear may be announced in coming days.

In a recent email, we had mentioned we were under new management. Due to events of the past week, the new management team has been removed and we are back under the same great team that brought you the likes of ECIT and AGRT.

We are hard at work on our next pick, and we will see you some time in October!

Your Dedicated Team at TBX
http://bullexchange.com

Searching the large text file linked above yields the following information for VKMD for the given date (formatted by me to enhance legibility):

Date      |Symbol      |ShortVolume   |ShortExemptVolume    |TotalVolume     |Market
20120906      |VKMD       |10843159        |0                                |37378406         |O

This data appears to show that out of 37,378,406 shares traded, 10,843,159 shares were sold short. This is not false, but it doesn’t mean that short sellers or market makers increased their net short position by 10 million shares. Rather, this shows all sales where the shares being sold were not already in the seller’s possession. This includes speculative short sellers, both retail traders and market makers. But far more important are market makers selling large blocks of stock. In those cases, a large shareholder might tell their broker to sell one million shares and then rather enter one big order, the broker will give the order to a market maker such as NITE to slowly sell the shares over the course of a day. The market maker sells the shares short and does not take possession of the shares it is selling until it has completed its share sales. For Reg SHO reporting purposes, these are short sales, but the market maker is not taking a speculative short position — at the end of the day the seller delivers the shares to the market maker who then delivers those shares to the buyers of the stock.

So the next time a stock promoter links to the FINRA Reg SHO short data to show that a stock dropped because of short sellers, you will know that they are lying. In fact, many times the large block sellers whose shares are sold in such a way to make them show up as ‘short sales’ in the FINRA data are the stock promoters or the people who pay for the stock promotion. So the promoters are not innocently wrong — they lie through their teeth even though they know better.

Read more about Bullexchange.com:
Awesomepennystocks.com sues Bullexchange
Awesomepennystocks.com drops lawsuit

 

Disclaimer: No relationship with any parties named above and no positions in any stocks or funds mentioned. 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.

Global Gaming Network (GBGM): First the pump, now the big dump

The GBGM pump has been one of the more interesting pump and dumps of late. It started on Friday June 8th around the open with pump emails from PHD-Trading.com (disclosing $200,000 in compensation). I thought the email was simply spam because I could not remember ever signing up to pump websites with that email ([email protected]). I thought that email address had simply been scraped off of TimothySykes.com (where it used to be displayed on the chatroom rules page). Only much later  that day did I get around to actually looking and I had only ever received one pump email to that email address, from ThePennyStockJerk.com, a website affiliated with BestDamnPennystocks.com. All the BDPS websites had already sent teaser emails talking about their new low-float pump that they would pump Monday at the open (for BestDamnPennyStocks.com and a few premium email lists) and at the open on Tuesday (all the other websites).

It was the strong price action of GBGM that made me look into it — plus Jarmall’s questions about GBGM that convinced me that the price action was not indicative of a pure spam pump. That led me to sign up to the free email list of PHD-Trading. The welcome email I received shortly thereafter was quite informative. At the bottom of the email, the name and address (as required by the CANSPAM law) was GS MEDIA | 2885 Sanford Ave SW #16525 | Grandville, MI 49418. I know from my pump research that GS Media is one of the legal entities tied to BestDamnPennystocks.com (BDPS), which of course was scheduled to have a new pump the very next trading day.

I thought this was a good opportunity to potentially front-run the BDPS pump, so I tried to find any other links between PHD-Trading.com (and GBGM) and BDPS. One link was that BDPS had sent teaser emails saying that their upcoming pump was a low-float stock. GBGM, while having tons of shares outstanding (461 million!), had its float listed as 1.2 million shares on OTCMarkets.com. Another connection was the fact that PHD-Trading.com had both a free email list and a paid product, sold through Clickbank — while there are other stock promoters who sell access to a ‘premium service’ through Clickbank, none has used it as extensively as BDPS. There were other links as well, but I won’t disclose them in a free blog post.

I have front-run BDPS pumps in the past, and it is a risky thing to do. It worked well once and another time they delayed the pump, likely because I had front-run it. I am fairly sure they have delayed other pumps when they were frontrun. However, when I first remember hearing about their HoleinOneStocks.net website back in autumn of 2010, the premium subscribers got one pump a full day before any other BDPS websites (since then they have never gotten a pump earlier than the main BDPS website, so don’t up for them!). If PHD-Trading.com was truly a new BDPS-related website then it would make sense that they woudn’t delay the pump. I bought 40,000 shares at .265, taking a substantial risk (if I was wrong and BDPS didn’t pump GBGM then I would likely lose 50%). I shorted 5,000 shares at Interactive Brokers at .29 to reduce my risk prior to the close and then held over the weekend, selling into the opening spike Monday.

Here is my long trade:

Partly because of me shorting at .29 on Friday and partly because I made some stupid trades, I lost $766 on subsequent trades on GBGM. Click the links to see them: trade 2, trade 3, trade 4, trade 5, and trade 6.

As with almost all BDPS pumps, GBGM has now dropped big from its highs just a week ago and is now well below its price at the beginning of the pump. As with all pump and dumps, it will go even lower in the long run. I do not recommend buying pumps or trying to front-run pumps — those are both very risky and most people who try it lose big. The easiest profits anywhere are from shorting pumps, particularly from the worst promoters. For example, after 41 trades this year shorting the pumps of crappy pumpers, I have made $8800 and my dollar-weighted average profit margin is 11.15% with no losses over $90. (I have had a bad year short selling and have actually lost $1900 on my pump shorts not including my crappy pump shorts or the $8400 I have made with longer-term pump shorts.)

Below is a listing of all the compensation listed from various promoters that I have seen on GBGM. The total compensation is certainly lower than the total disclosed below because some promoters have paid part of their compensation to other promoters.

First are the various legal entities / groups that comprise the BestDamnPennyStocks.com group of pump websites.

BestdamnPennystocks.com (BDPS) discloses, as usual, the most compensation:

BestDamnPennyStocks.com expects to be compensated $500,000 Cash by a non-controlling third party for a GBGM investor relations services.

There is JackpotPennyStocks.com, an affilaite of BDPS:

JackpotPennyStocks.com expects to be compensated $20,000 from a non-controlling third party for GBGM Investor Relations services.

Another group of BDPS-affiliated websites, exemplified by GetRichPennystocks.com, was paid $30k:

GetRichPennyStocks.com expects to be compensated $30,000 cash from a non-controlling third party for GBGM Investor Relation Services.

PHD-Trading.com started the pumping last Friday and prior to that no penny stock traders I know were aware of the website and it appears that got their email list from some other pumper. They have their disclaimer as an image, copied below the quote:

PHD-Trading.com expects to be compensated two hundred thousand dollars for GBGM advertising investor relations services.


(click image to embiggen)

StockMister.com is a 2nd-tier or 3rd-tier pumper that is run by the same company as StockExploder.com (which of course disclaimed the same compensation). Here is its disclaimer:

StockMister.com’s parent company Micro-Cap Consultants, LLC has been compensated up to Two-Hundred and Fifty Thousand Dollars Cash by a third party (Online Marketing Media LLC) for a 1 Week Marketing Program regarding GBGM, Micro-Cap Consultants, LLC has also been promised an additional compensation of up to Two-Hundred and Fifty Thousand Dollars Cash by the same third party (Online Marketing Media, LLC) for the same 1 Week Period of Marketing Efforts regarding GBGM.

Stockmister paid for IPR Agency LLC (see my prior blog post about Tim Sykes looking to sue them for libel) to promote GBGM as well:

We have been compensated up to eighty thousand dollars to conduct one day of investor relations marketing for GBGM by a third party, StockMister LLC.

StockLockandLoad.com is run by a pumper who also runs StockBomb.com and Pennystocklocks.com and Stockrockandroll.com.

StockLockandLoad.com has been compensated twenty-five thousand dollars for this one-day profile on GBGM by MJ Capital, LLC.

Another pumper is Pennystockcrew.com. They win the award for smallest font used for a text disclaimer:

Penny Stock Crew has received $20,000.00 in cash compensation from Hunter Marketing LLC for the one day profile of Global Gaming Networks […] Penny Stock Crew is owned by: ODD Marketing LLC , 433 Plaza Real Suite 275, [Boca Raton, FL] 33432

PennyStocksProfile.com is a small-time pumper most noted for riding the cottails of AwesomePennystocks.com pumps SNPK and GWBU this year. Unfortunately, they use an image rather than text for their disclaimer, which makes me retyped it. The image is copied below the quote.

PennyStocksProfile.com is owned and operated by PLVP LLC. The company has been compensated $10,000 by Online Marketing LLC for publication of this information.


(click image to embiggen)

Another annoying pumper is Investors Alley Inc. (a Quebec corporation) group of at least six websites that used an image to show its disclaimer:

Please be advised that Investor Alley Inc. expect [sic] to be paid up to twenty five thousand dollars from a third party- Micro Cap Consultants – to perform promotional and advertising services for a one day profile of GBGM.


(click image to embiggen)

Stock Connection is a 5th tier stock promoter with a number of websites, including PennyStockPickAlerts.com:

PennyStockPickAlert has agreed to be compensated fifteen thousand dollars for a three day public awareness marketing campaign for GBGM from the third party InterVcap LLC.

Another pumper that promoted GBGM is GlobalInvestmentAlert.com, with which I was not familiar prior to this pumps:

GIA, Inc expects to be compensated up to $100,000 by CF, Inc for one weeks coverage of GBGM.

 

 

Disclaimer: I have no position in any stocks mentioned and I have no relationship with any people mentioned, except for Jarmall who is a member of Tim Sykes’ Trading Challenge (I work for Tim with that). I trade pump and dumps and OTCBB / Pinksheets stocks. 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.

Ten easy steps to 1000% gains: How to create a pump company from scratch

One thing that most investors and traders do not know about the crazy, slimy underworld of OTCBB and Pinksheets stocks is that a large proportion of the companies are created for the sole purpose of being used in pump and dump schemes. Below is a guide to how penny stock operators create listed companies for pump and dumps. Not all of these steps are used in every pump and many pumps do not involve many of these steps.

(Note: I am not an expert on this so it is quite possible that there are significant errors in this post. As always I welcome corrections.)

The Ten-Step Guide to Creating a Pump and Dump

Option 1: Start from scratch

1. Create a corporate shell.
2. Use a Regulation S placement to sell stock to a few close associates. These ‘seed’ shareholders often pay just a few thousand dollars for the stock.
3. Do a reverse merger with some company with a promotable product or technology (the best companies have cool new technology in the development stage so they can be hyped without worrying about actual sales or profits). You can buy some technology that doesn’t work but sounds like it should to laypersons for a couple hundred thousand dollars or a chunk of shares in the public company. If you have no good ideas and have no connections, start your own mining company, lease a mining claim for $10,000 and pay an engineer $5,000 to say it is worth digging.
4. Fund the company by selling convertible debt to insiders / friends. Bonus points are earned for using front companies based offshore to hide the identities of the beneficial owners of the debt.
5. Do a large forward split to get the share count into the tens or hundreds of millions. (These first five steps can take up to a year or more in order to ensure that all your shares are free-trading and not restricted shares.)
6. Contract a stock promoter to promote the stock at an arbitrary price ($1.00 per share or thereabouts is common for big promotions).
7. Sell some shares at a pre-arranged price in large blocks to the promoters or friends. Use these sales to create a bit of a price history at a high price.
8. Install a friend or compliant stooge as the company’s President/CEO and make sure that he follows your instructions.
9. Have the CEO/President start putting out press releases to coincide with the start of the promotional campaign. This way people unfamiliar with pump & dump campaigns will interpret the new volume in the stock as legitimate investor interest (and not the blatant stock promotion it is). It is much harder for the SEC to go after promoters who lie and exaggerate than it is for them to go after corporate officers who lie, so stick to verifiable facts and positive opinions in the press releases.
10. As soon as the promotion starts, start selling your shares on the offer and let the stock slowly uptick to keep traders interested. Because you controlled the company from the very beginning, all the shares being sold belong to you and your associates. Selling shares slowly while letting the stock go up slowly seems to be the most effective way to sell the largest number of shares. Careful manipulation of the price action by providing bid support is also important (it is also illegal but very hard to prove).

Option 2: Purchase control of a publicly-traded shell company

1. Purchase control of a traded shell company on the OTCBB or Pinksheets. Last I checked, such companies, depending on the details (OTCBB companies are more valuable than Pinksheets companies, operating companies with few operations are more valuable than shell companies), the publicly traded shell can cost from $100,000 to maybe $500,000.

2. This step is not necessary.

3.  Same as step 3 above — do a reverse merger with a company (that you control) with a promotable technology or product. You can use the reverse merger to dilute the existing shareholders into irrelevance.
4. Same as step 4 above  — fund the company by selling convertible debt to yourself and friends. Again, if there are lots of other shareholders, you can use unfavorable debt deals to dilute them into irrelevance.
5.  Same as step 5 above — do a stock split to increase the number of shares outstanding. Unlike when starting from scratch, you have a number of shares of your company that are still in the hands of the public. You will thus want to support the stock price or manipulate it higher during and after the stock price. Real companies share prices drop in proportion to the increase in number of shares during a stock price. You are looking to increase the market cap of your company drastically so you will have to keep the price from dropping. The few public shareholders of your stock will benefit handsomely but they should have mostly been diluted into irrelevance by steps 3 and 4.
6. Same as step 6 above — contract with a stock promoter.
7. Similar to step 7 above, but there are already shares out there and a trading history, so it is best to use wash sales and matched trades between multiple accounts to build a trading history at the current (high) price that you wish to start the promotion at. (Caution: this is illegal.)
8. Same as step 8 above — install a friend or stooge as company CEO/President.
9. Same as step 9 above — have the CEO issue press releases to coincide with the promotion.
10. Same as step 10 above.

For an investment of some time and up to $5 million dollars for the most expensive of promotional campaigns, it is possible to realize over $100 million in profits. It is quite possible to put together a pump like this for under $1 million (and for just a few hundred thousand) and you can still expect to realize returns in excess of 1000%.

An example of the 10 steps to creating a pump & dump

Following are the steps allegedly taken by the insiders and promoters of RCYT (promoted in February 2010). All quotes below are from the SEC complaint (pdf). See also the SEC litigation release about the lawsuit. Note that many of the steps were completed in a different order than I have above. First, though, meet the defendants in the lawsuit:

A. Defendants

8. Recycle Tech is a Colorado company. From February 16, 2010 through June 2010 its principal place of business was Miami, Florida. Its common stock is quoted on the OTC Link (formerly, “Pink Sheets”) operated by OTC Markets Group Inc. under the symbol “RCYT.” From no later than February 2010 to June 2010, Recycle Tech purported to be a development and engineering firm specializing in “green building.”

9. Sepe, age 54, is a resident of Miami. At the time of the scheme, he was a longtime acquaintance of Halperin and is listed as the officer or director of several private Florida companies.

10. Halperin, age 63, is a resident of Aventura, Florida. He is an attorney licensed to practice law in Florida and is the sole member of the law firm Ronny J. Halperin, P.A. Halperin also served as CEO of HydroGenetics, Inc., a Florida corporation, from January 2009 until April 2009, and served as its director from 2009 until late 2011.

11. Gonzalez, age 33, is a resident of Miami and a friend of Sepe’s nephew. Since February 16, 2010, Gonzalez has been the CEO and President of Recycle Tech.

12. OTC Solutions is a Maryland limited liability company formed by Thompson in 2007 as a marketing and advertising company. From no later than January through March 2010, it was associated with “Explicit Picks” and “Ox of Wall Street,” both stock promotional newsletters.

13. Thompson, age 35, is a resident of Bethesda, Maryland. From no later than January through March 2010, he was the sole member of OTC Solutions.

14. Pudong is a Florida limited liability company with its principal place of business in Delray Beach, Florida. From no later than January through March 2010, it was a marketing and advertising company associated with “Penny Pic,” a stock promotional newsletter.

15. Fung, age 37, is a resident of Delray Beach, Florida. From at least January through March 2010, he was the sole member of Pudong.

16. Rees, age 44, is a resident of Salt Lake City, Utah. He is a corporate and securities attorney licensed to practice law in Utah. He is a partner at the Utah law firm Vincent & Rees, LLC.

1. “On February 16, 2010, Sepe and Halperin orchestrated the purchase of Recycle Tech from the professional shell provider. Sepe paid more than $200,000 to the professional shell provider for Green Building’s purchase of the majority of Recycle Tech’s [RCYT] shares. Halperin, in turn, provided a common stock purchase agreement to Gonzalez for his signature. Pursuant to this agreement, Green Building became the owner of the controlling majority of Recycle Tech’s shares. With the reverse merger completed, Gonzalez took his position as CEO and president of Recycle Tech.”

2. This step was not necessary.

3. Completed in step 1.

4. Rather than issue convertible debt, the people involved with RCYT allegedly purchased already outstanding convertible debt: “In late January 2010, Halperin retained Vincent & Rees to coordinate the purchase, assignment, and subsequent conversion of Recycle Tech’s debt into purportedly free-trading stock. Halperin also asked Rees to issue an opinion letter regarding the transactions, and he provided Rees with the necessary documents and signatures for the transaction.” The outstanding share count of RCYT was doubled by the conversion of the debts into shares: “In early February 2010, pursuant to the Opinion Letter and the corporate resolution, Recycle Tech’s transfer agent issued more than 25 million shares of stock to more than twenty Assignees, including OTC Solutions, Pudong, and Halperin”

5. This step was not taken.

6. “Four days after the February 18 press release, OTC Solutions and Pudong started touting Recycle Tech stock in their newsletters. Thompson and Fung, the respective owners of OTC Solutions and Pudong, had previously agreed to coordinate their touting with each other and with Sepe. Before they issued their newsletters, Sepe agreed to provide Thompson and Fung with 2.325 million shares each of Recycle Tech stock. Halperin provided the actual shares to Thompson and Fung.”

7. In the case of RCYT, the SEC has not alleged that the insiders/promoters engaged in manipulative trading.

8. “With the reverse merger completed, Gonzalez took his position as CEO and president of Recycle Tech.”

9. “From February 18 to 25, 2010, Recycle Tech issued seven false and misleading press releases. As CEO of Recycle Tech, Gonzalez had ultimate authority over the press releases. He drafted them, hired a public relations consultant, and provided the releases to the consultant. Gonzalez also instructed the consultant to issue the press releases pursuant to a time schedule Sepe set.”

10. “Taking advantage of Recycle Tech’s artificially raised stock price, a number of the Defendants sold their shares. From February 23, 2010 to March 2, 2010, Halperin sold 1,130,000 shares for $235,060. From February 22, 2010 to February 25, 2010, OTC Solutions sold 2,325,000 shares for $441,722. On February 23, 2010, Pudong sold 2,325,000 shares for $456,457. On February 23, 2010, Rees sold 25,000 shares for $5,982. Sepe, who did not directly receive shares of Recycle Tech stock pursuant to the conversion of debt, was compensated from others’ sales of Recycle Tech stock. Halperin wired Sepe’s company, Charter Consulting, $300,000 from his law firm account on April 12, 2010. At least $150,000 of that wire came from the illegal sale of Recycle Tech stock.”

 

Many thanks go to Janice Shell for summarizing the steps undertaken by shell companies destined for pump and dump schemes. I have added more detail and more steps and I of course take full responsibility for any errors I have introduced. David Baines often writes about the above steps taken by penny stock pump and dump operators.

Disclaimer: I have no positions in any stocks mentioned and no relationship with any people mentioned. 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.