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Hundreds of online investment newsletters have appeared on the internet in recent years. Many offer investors free of charge seemingly unbiased information about featured companies or recommend “stock picks of the month.” While legitimate online newsletters can help investors gather valuable information, some online newsletters are tools for fraud.
Some companies pay the people who write online newsletters cash or securities to “tout” or recommend their stocks. While this isn’t illegal, the federal securities laws require the newsletters to disclose who paid them, the amount, and the type of payment. But many fraudsters fail to do so. Instead, they’ll lie about the payments they received, their independence, their so-called research, and their track records. Their newsletters masquerade as sources of unbiased information, when in fact they stand to profit handsomely if they convince investors to buy or sell particular stocks.
Some online newsletters falsely claim to independently research the stocks they profile. Others spread false information or promote worthless stocks. The most notorious sometimes “scalp” the stocks they hype, driving up the price of the stock with their baseless recommendations and then selling their own holdings at high prices and high profits. Without these types of fraudsters involved in the pump and dump scam, it would be more difficult to promote this type of fraudulent conduct.Some Tips for Checking Out Newsletters
Find out whether the newsletter received payment to “tout” or recommend the stock and, if so, what it received and from whom.
Because the U.S. Constitution’s First Amendment protects freedom of speech, the SEC and other federal and state agencies cannot simply prohibit newsletters from recommending or touting particular stocks. But when newsletters receive payment for touting, the securities laws, at a minimum, require them to disclose specifically who paid them, the amount, and the type of payment (cash, stock, or some other thing of value). Under the federal and, for example, the Florida Securities Law, it is prohibited conduct for anyone, in connection with the purchase or sale of a security, to make a misrepresentation of material fact or omit to state a material fact, which would make the actual statement made, not misleading. In other words, the writer has to tell the whole truth and nothing but the truth.Read carefully what the newsletter says about payments it receives.
Be suspicious of newsletters that do not specifically disclose these items: who paid them, the amount, and the type of payment. The following examples raise red flags because they do not contain specific information:
Think twice about newsletters that bury their disclosures or put them in tiny, hard-to-read typeface. Legitimate online newsletters that have been paid to tout stocks will clearly and specifically tell investors who paid them, the amount, and the type of payment. Look for their disclosure statements in articles about particular companies or in a list or chart on their websites.Independently Envestigate the Company or Investment Opportunity
Be wary of anyone who encourages you to invest in small, thinly-traded stocks that aren’t well known and don’t file reports with the SEC. Assume that everything you read about those companies in an online bulletin board, newsletter, or chat room is untrue until you prove by your own independent research that it isn’t.Don’t Invest in Small, Thinly Traded Companies Unless You’re Prepared to Lose Every Penny
Because small, thinly-traded companies are usually the most risky investments that you can make, you should always get as much written information as you can from the company and other independent sources. The SEC and your state’s securities regulator should always be your first stops, but you may also want to visit your local library and talk with the librarian about other sources of information. There are also a number of commercial services that provide a constant stream of information about the financial condition of companies.Contact Us
With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.