As I write this article gas hovers around four dollars a gallon, the cost of heat is expected to go up this winter, and the presidential candidates are dueling over energy policy. Whether it's global warming, the insatiable worldwide hunger for oil, or the ever unstable Middle East, energy is on everyone's radar screen; especially the con man's.
Con men always use the hot topic of the day to lure victims. In the 1980's oil and gas schemes were the fraud du jour. In the 1990's technology investments were hot and so were the fraudulent schemes surrounding them. Now, “energy stocks” are hot. Swindlers are using faxes, e-mails, and even cell phone text messages to hype the latest “hot” energy stock that promises high returns with little risk.
In a FINRA Investor Alert they give as examples from e-mail messages and fax spam the following sales pitches:
"If you have $5,000 in the S&P 500 and you ride it out for the rest of the year, you'll walk away with $5,700." "But put that $5,000 into this Texas dynamo and you'll stuff your pockets with $26,500 in as soon as four months."
"It is easy to conclude that everyone should have an alternative energy stock in their portfolio." "Put [ the stock they are pushing ] on your radar screen today, as it is about to take off!"
Just yesterday I received an unsolicited fax from “Eye-On-Energy News Bulletin.” The fax touts the stock of Uranium Hunter Corporation. It hypes the price of uranium saying it is up “1,600% over the last few years.” It goes on to state that new uranium production “is only meeting 50% of the world's current demand.” It also states that “over the past three months Uranium Hunter Corporation has been on the rise and is still nowhere near its historical high of over $1.45 per share!” The fax then makes the statement “This overlooked opportunity could see a huge increase with another URANIUM RUSH surpassing its own high, making savvy current investors unbelievable returns.” Is all this true? Maybe. But, if you look closely at the fine print at the bottom of the fax you would discover that Eye-On-Energy was paid $50,000 by a “third party” to send out their bulletin.
Often, these are nothing more than Ponzi schemes or Pump and Dump scams. With Pump and Dumps the con artists promote a stock to pump up the stock's price. They then sell off their shares at a huge profit. After they sell the stock price usually collapses leaving investors with huge losses.
Ponzi schemes are scams where a thief promises great returns with limited risk. Often, the thief sells his victim a phony stock. Usually those who buy into the scheme early do see the promised returns because the crook uses new investor's money to pay the promised dividends to the earlier investors. He robs Peter to pay Paul. In the end, the thief runs out of new investors and the scheme collapses.
Here are some things to watch for if you or your clients are pitched a hot “energy” stock:
• Statements relating growth in the touted company with success stories of other energy related companies. Sometimes the only similarity is the use of “energy" in the company profile.
• The use of headlines from respected financial news sources regarding energy that can easily be taken out of context.
• Statements about how much easier it is for lower-priced stocks to skyrocket in value in comparison to higher-priced stocks.
• Penny stocks selling for less than $5 per share. These stocks tend to be more speculative than others.
• Inflated price targets or predications of the touted stock's rapid growth.
• Pressure to invest immediately.
Here are some things you and your clients can do to avoid being the victim of one of these “energy stock” scams:
• Ignore unsolicited faxes, e-mails, and text messages touting any stock.
• Get the company's background. You can learn about the company by checking the Securities and Exchange Commission's EDGAR database online at www.sec.gov/edgar.shtml . If the company is not registered with the SEC it is a red flag. If the company is registered with the SEC read all its reports carefully. SEC Form 8-K will tell you if the company has changed its name or trading symbols. Stock promoters often change a company's name and trading symbol to align it more closely with a current event or issue. SEC Form 10-K contains a wealth of information. Along with other information this form will give you the nature of the company's business, risks it faces, legal actions involving the company, the identity and background of the company's executive officers, and most important, the company's financial statements.
• Find out where the stock trades. Most unsolicited spam recommendations involve stocks that can't meet, or choose not to meet, the listing requirements of the major exchanges. Instead, these stocks are usually quoted on the OTC Bulletin Board or in the Pink Sheets. There are no minimum quantitative standards that a company must meet to have its securities quoted on the OTC Bulletin Board or in the Pink Sheets. Many Pink Sheet companies have no obligation to file annual or quarterly reports or to publicly disclose current material information. Many of the securities quoted on the OTC Bulletin Board or in the Pink Sheets don't have a liquid market. They are infrequently traded and can move up or down in price quickly. This may make it difficult to sell the stock at a later date.
• Check out the salesman touting the stock. The fastest way to check out a broker and their firm is to do a FINRA web search at www.finra.org/Investors/ToolsCalculators/BrokerCheck . You can view an adviser's most recent Form ADV online by visiting the SEC website at www.sec.gov . You can also get copies of Form ADV for individual advisers and firms from the state securities regulator, or the SEC, depending on the size of the adviser. You can check on a Certified Financial Planner's disciplinary history by visiting the Certified Financial Planner Board of Standards Inc.'s website at www.cfp.net . If the salesman or his company is not registered anywhere it is best to steer clear of them.
Con artists will always use headline issues to attract victims. The energy crisis is just the latest opportunity for them to cheat the unsuspecting investor. If your clients put their energy into protecting themselves they can avoid putting their money into the pockets of con men.