How to tell when penny stock picks are fraud

My estimate is that more than 90 percent of websites and e-newsletters covering penny stocks are deliberately fraudulent.  That is, they exist solely for the purpose of inflating the value of a handful of penny stocks.

Why would they do this?  Because somebody else — perhaps the company issuing the stock, an unscrupulous stockbroker, or the mob — has accumulated a large position in the penny stock in advance.  These people pay the website to tout the stock, and since it doesn’t take much to boost the price of a penny stock, they can quickly get out with a big profit, at your expense — if you were a sucker who bought in to the site’s recommendations.

So how do you tell the difference between a “real” site, which covers legitimate penny stock news, and a fraud site?  It’s easy: penny stock fraud sites actually admit what they’re doing.

Naturally, fraudulent penny stock sites don’t put it on their home page, but just go to the “Disclaimer” section (usually buried in the footer) and you will see it all, in writing. (The Disclaimer section is where the bad penny stock sites put all the legalese that they hope will prevent them from being sued for stock manipulation.)

Here’s the kind of text to look for, taken directly from a prominent site, with names removed to protect the guilty:

[] has been compensated by a third party, [Penny Fraudster, Inc.], fourteen thousand dollar [sic] for a one day advertising services contract, which has already ended. [Penny Fraudster, Inc.] and their affiliates may have shares and may liquidate it, which may affect the stock price.

You see: they are admitting that somebody paid them to boost a stock, and that this same person will sell out once enough suckers have inflated the price of that stock.  Isn’t it nice when somebody tells the truth for once?

The funny thing is that this text is actually in a different font from the rest of the disclaimer, because obviously the incompetents at the site just cut and paste it from someplace else, hoping that would protect them legally.  (It won’t, but that won’t get your money back.)

Here’s another example:

[] received amounts from third party(ies) for publication of the information contained in this website, as follows: (a) $5,000 CAD from a third party for [Pumped Penny Stock, Inc.].  This compensation may constitute a conflict of interest as to [our] ability to remain objective in our communication regarding the profiled company.

You may wonder why these sites admit their participation in an obvious fraud.  It’s simple: if they don’t, the SEC can prosecute them on BOTH manipulating stock prices AND lying about their conflict of interest.  By admitting the conflict, they hope to reduce their penalty if caught.

To paraphrase a popular ad, 5 minutes scanning a penny stock site could save you $5,000 in losses.  Happy trading!