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FBI Agents Manipulate Stocks
by Tom Barrett
Editor@USInvestorClubs.org
There have been many revelations in the last year of bungling and wrong-doing at the Federal Bureau of Investigation. None have hit so close to home as the arrest of two FBI agents in connection with a scheme to manipulate stocks. In addition to providing information that helped in the manipulation of some thinly traded stocks, one agent is accused of passing on information about the progress of an investigation into the matter to a retired agent working for with one of the companies.
The purpose of this article is not to warn readers about the rogue FBI agents. They have been caught, and it is doubtful that there are others. If there are, with these revelations they will surely fade quietly into the woodwork as quickly as possible.
No, the reason I bring this story up is that it highlights an old problem, one that we tend to forget unless dramatic events such as the FBI story remind us. It is the old scam of traders who manipulate thinly traded stocks. And, although there are many very legitimate penny stocks, unfortunately these types of stocks are the ones most often manipulated.
Before I go too far, I have a confession to make. I was once a penny stock broker. I didn't know it at first, but I was. I had made a career decision. I took the advice of career counselors: I looked at what I enjoyed doing, and figured out how to make a living doing it. I enjoyed investing, and I enjoyed talking. Voila! I decided I should become a stockbroker.
I interviewed a number of firms. They thought they were interviewing me, but I was confident I could get a job at whichever one I chose. After all, I had a genius level IQ, and a strong background in marketing. What firm wouldn't want me? I soon found out just how dumb I was. I decided on a firm that had nice offices, mostly because they didn't allow smoking. Little did I know that I had entered the shady world of penny stocks.
It didn't take long before I realized that we were being encouraged ("pushed" would be a more accurate term) to sell only stocks that the firm traded. In addition, every morning we were given a "chop sheet" that listed the stocks we were supposed to push that day, with the "chop" (commission percentage) listed beside each. I quickly found that the stocks with the biggest commissions (some as high as 20%!) went down as fast as they went up, and my clients lost money. I started buying the ones with the smallest chop, and found that I could often make money for my clients. I realized that the firm, often in collusion with other firms, was running the price of the stocks up artificially, then selling the firm's position at the top. They didn't need technical analysis to determine the top - they decided where the top was going to be.
The firm eventually got into a lot of trouble when the head trader was accused of stock manipulation. They changed their name, and decided to become a "real" stock brokerage. I had long before realized my mistake and had enrolled in the College of Financial Planning. With the knowledge gained in my studies I was able to help lead the company into the world of legitimate stock brokering by teaching our brokers how to select "real" stocks and how to buy mutual funds. As a result, I became the Branch Manager and Options Principal, and was named Vice-President of Communications for the new firm. This position included the job of Editor of the firm's newsletter, "Market Watch," with a circulation of 20,000 each month.
Today we don't hear the phrase "penny stocks" too often. Nowadays they are called "bulletin board stocks." But little else has changed. They are still low-priced, thinly traded securities, and thus ripe for fraud and manipulation. These days, however, it is not so often the brokerage firms that do the manipulating. They are much more closely regulated than twenty-five years ago. Now the crooks have to be much more creative.
Their two favorite avenues are faxes and the Internet. On tactic is to send out "analysts' recommendations" by fax. Those of you who read my columns regularly know how I feel about most analysts' recommendations, so I won't go into that here. These are different. The faxes are designed to look like the recommendations from the major firms, but they are actually nothing more than tout sheets put out by the brokers that brought them public, the company itself, or a PR firm hired by the broker or the company. In any case, they aren't worth the paper they were faxed on. Anyone who follows these recommendations is as dumb as the people who line up to buy lottery tickets.
The way the crooks use the Internet is sneakier. They go into stock chat rooms pretending to be investors. "I just heard from someone on the inside that XYZ is about to get a government contract (or get a new drug approved, etc., etc.). I bought 20,000 shares at fifty cents. It's going to the moon! $5, here we come!! Joe Trader." "Joe" is actually a stock manipulator who owns half a million shares at ten cents. As soon as he and his buddies can sucker enough people into running the stock up to a buck, he's out of there. XYZ will see ten cents again long before it will ever see $5.
I am not down on bulletin board stocks. I am warning you about stock manipulation. It is easy to manipulate a stock that trades a few thousand shares a day. It is next to impossible to manipulate IBM or the QQQ, which trade millions each day. Most of today's big name stocks started out as penny stocks; every stock has to start somewhere. And as I said at the beginning of this article, there are many legitimate bulletin board stocks to choose from. Just beware of stocks that are pushed through mass fax broadcasts or a flurry of posts in chat rooms. Remember two old sayings: "If it sounds too good to be true, it probably is." And, "He who buys off a hot tip usually gets burned."
Do your homework on bulletin board stocks just like you would on a $50 stock. Check out the balance sheet. Do they have more debts than assets? Look at their earnings. Are they spending more than they're making? Common sense stuff. Most important: Do they have a real product or service, or just a good "story"?
Most con artists will tell you that they don't have to work very hard to "con" their "marks." The "mark" wants to believe the story, no matter how far-fetched because of their greed. The con artist depends on this greed to make their con work. Stock manipulators are just con artists in business suits.
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