Investor Marketing: Don’t Put it in the Mayonnaise Jar
The Wolf of Wall Street is having a moment — again. Featured on Netflix's Top 10 list back in September, the movie introduces a new generation to the murky world of stock promotion through the real-life story of Jordan Belfort and his brokerage house, Stratton Oakmont. For years, penny stocks have gotten a bad rap because of criminals like Belfort. Associated with pump-and-dump schemes, these low-priced equities can attract vulnerable investors looking to make a quick buck. Often volatile, illiquid and perhaps, justly under-valued, micro and small cap stocks are frequent targets of the lucrative and shady stock promotion industry.
Unfortunately, these types of firms are still very much active, promoting worthless stocks in multiple channels all over the Internet from Discord to Reddit to Facebook. Anyone can get burned by the hype of stock market social influencers as seen in Dumb Money (currently out in theatres), the true story behind the GameStop saga when a group of working-class investors on the Reddit Internet forum r/WallStreetBets short-squeezed some very big hedge funds.
Third-party promoters come in all flavors, each with their own approach to marketing highly speculative stocks. Some primarily focus on promoting potential investments, publishing informational newsletters and websites, or disseminating stock information through cold calling, email campaigns, and social media. These promotions frequently include specific investment recommendations or persuasive sales pitches to entice potential investors to invest “live and in real-time” alongside them. Other firms act as intermediaries, seeking to facilitate direct transactions between buyers and sellers. In some cases, they might be hired to promote a specific stock or, alternatively, actively engage in the direct sale of a security themselves. Many of these firms also run “trading education” platforms promising to teach traders how to make millions, but in reality, turn out to be pyramid schemes.
As seen in the movies, most stock promotion firms are notorious for their aggressive sales and marketing practices. Often backed by shady organizations, these bad actors engage in outright fraud, market manipulation, insider trading, or other illegal activities that artificially inflate a stock's value by enticing investors and companies to buy in to their service offering. Once a price reaches a certain point, these firms rapidly sell their holdings, causing the stock to plummet and leaving investors in the lurch. Struggling small caps can easily fall prey to these predatory firms due to shoddy due diligence and misguided investor relations advice. On occasion, they may even be complicit in the scheme, with the hope of sharing in the resulting profits.
Over the years, several high-profile cases have shed light on the extent of deceit within the penny stock promotion industry. Earlier this year, the SEC charged cannabis executives Justin Costello and David Ferraro, an associate of Costello’s, for promoting the stock of several microcap companies on social media without disclosing their own simultaneous stock sales as market prices rose — a classic ruse. The SEC alleged that they had secretly acquired large quantities of penny stocks hyped on Twitter, and then sold their shares at inflated prices, reaping millions while leaving investors with worthless paper.
Unscrupulous individuals are always looking to exploit weak companies, and the capital markets as a whole, work hard to ensure market integrity. The SEC, FINRA and CFTC are increasingly using data analytics to identify and initiate new investigations of suspicious trading, including both potential insider trading and market manipulation over periods of months or years, with a focus on alleged fraud and market manipulation using social media. The OTC Markets Group, a self-regulating body, has worked hard in recent years to ensure safety and change its public perception (see our Thursday Pudding from October 26).
The penny stock promotion industry is rife with bad actors, though to be fair, not all are operating illegally or unethically. As a small cap, it's crucial to conduct thorough research before getting involved with these types of firms. If a marketing pitch seems too good to be true, it probably is. By being aware of the risks and learning from the fallen, small caps can better protect themselves from the false promises and misrepresentations that pervade this shady corner of the financial world.
When TWOWS, a popular Discord server for microcaps states on its website that it puts “the WOW back in TWOWS” (WOW stands for Wolf of Wall Street), it should not only give you pause, but the runaway-and-don’t-look-back instinct. Ironically, the TWOWS website claims to avoid get-rich-quick schemes.
And the refund mentioned on its website? Well, we’re not holding our breath.