Micro-Cap Fraud:
Detecting a Scam
The Securities and Exchange Commission is tasked with tracking markets – big-cap, mid- and small-cap markets, and the micro-cap market, which forms a portion of the Confident Trader Portfolio. Their objective? To identify securities fraud, regardless of how and where the fraud plays out.
There’s stock fraud at every level of market. Blue chips? Okay, Enron, Adelphia, Bear Stearns, Citibank – one-time blue chip darlings that lost billions in assets with their houses of cards and easy access to company dough for lavish parties on Greek isles. Yeah, I’m talking to you Dennis Kozlowski, ex-head of conglomerate Tyco, who spent a couple million bucks of shareholder money on a party in Greece – complete with
waiters dressed as Greek slaves. I hear it
was tastefully done.
The point is, scams and rip-offs are out there whether we’re talking the bluest of the blue or a start-up micro-cap with big a vision and small bank account. And the SEC tracks scammers, insider trading and other nefarious activities across all markets. So, are you safe from a micro-cap scam? No way, baby. Even astute investors get pulled in to questionable hedge funds, funny off-shore currency trading and other odd-ball “investments.” To my way of thinking, you might as well take your nest egg, drive to the local casino and bet the whole bundle on red. You’re either going to be stinking rich or bumming a ride home.
Playing It Safe With Micro-Cap Trades
Some of these are going to be old hat to small and micro-cap vets, but if you’re new to this market, here are some tips and information to keep you from getting burnt by the hottest micro-cap to hit the planet since Intel. (That was a long, long time ago in a galaxy far, far away.)
First, do not buy any stock of any quality from any man or women who cold calls you. If you get one of these calls, or emails or junk faxes touting the next high-flyer, please, please run away as fast as you can.
Finding the Research
You’d think a publicly-held company would have a paper trail from here to Timbuktu. Not so. Some of these minis don’t file reports with the SEC, making it impossible to track down the people and the money behind a penny stock. That’s why Confident Trader avoids pink sheet penny stocks altogether.
When information is scarce on a company and all SEC filings are not in place – it’s public information available on the web – run, run away. There are plenty of rock solid small caps and micros that have a long history, and are held in high esteem by the SEC. So, before investing in any unknown quantity, check to make sure all SEC filings are in place.
Then conduct the research. Who are they players? Google each name of company officers. If they still have a pulse, they have a presence on Google. What’s the cash situation? And what’s the company’s Unique Positioning Statement or Unique Selling Position for our friends in the UK and Australia.
Where Does the Stock Trade?
Many small companies trade on the OTC Bulletin Board or OTCBB. This is a fully automated, digitized quotation system that delivers:
• real-time quotes
• volume data
• last sale price
NASD maintains tabs on OTCBB but the OTCBB is NOT part NASDAQ. Point? Hucksters will tell prospects the stock is a NASDAQ listing to give it more creds. Before you invest in any micro, it’s a good idea to find out where the stock is traded. There are a lot of stock markets around the world (somebody’s always trading), but if the only place a micro-cap is traded is on the Mozambique exchange, you might have trouble executing a trade quickly.
Further, the OCTBB posts the occasional shell company (rip-off) and frankly, there are safer, more viable choices that deliver better results. As a result, Confident Trader does NOT employ any OTCBB stocks in its portfolio.
Diversification With Micros
There are a couple of mutual funds that focus solely on micro-caps, usually tracking an index like Barclay’s Russell Micro-Cap Index Fund (symbol: IWC). This is an exchange traded fund that mirrors the Russell Micro-Cap so you can be sure of liquidity when it comes to locking in some profits.
Unfortunately, this mutual buys and holds a basket of stocks. No trading. No investment analysis. Just a basket of stocks that track a market index – up or down!
Confident Trader actively monitors and trades micro-caps to improve results. The companies that make up Confident Trader Portfolio are diversified, vetted and analyzed regularly so those who follow the portfolio see better results than an unmanaged body of stocks.
If you’ll notice, our portfolio once held as many as 52 different companies. Today, it’s down to 18 companies as profits were taken off the table during this latest down turn. And when signals indicate a market upturn, we’ll be right back in the market with our profits in the bank.
Here’s the bottom line on your bottom line: due diligence. I spend hours (sometimes days) tracking down little tidbits about a company before featuring the company in the monthly Confident Trader Newsletter.
Review the company management (even give them a call to talk to their director of investor relations), always check the charts to make sure the market agrees with your assessment, and never put your money where somebody else’s mouth is. You can go your own way, and should because the rewards far outweigh the time and effort expended.
