Penny-Stock Promoters Adapt Pitches to Reflect Down Market
By AARON ELSTEIN
Penny-stock promoters are finding new ways to lure prospective customers amid Wall Street's sharp retreat and a cooling economy.
Once-ubiquitous sales pitches for "the next Microsoft" or other hot Internet and technology stocks are being replaced with offers claiming to shelter investors from the plunging market.
Take a recent mass e-mail with an address from Callyourbrokers.org. It dangled a "recession proof stock" to prospective investors. StockGenie.com, a stock-promotion Web site, acknowledging the failure that some of its past picks, is now pushing stocks that offer "security."
Richard Walker, enforcement director at the Securities and Exchange Commission, says promoters seem to be changing their marketing efforts, offering investments that, on the surface, seem less speculative than what they pitched a year ago. "Promoters have seized on public anxiety about market volatility," he says. "But when you scratch the surface, you'll find it's same kind of stuff they've always touted."
Bob Davis, editor of SecuritiesSleuth.com, (www.securitiessleuth.com), a Springfield, Pa., newsletter that tracks penny stocks, agrees that the bear market has forced promoters to tone down their pitches and offer investments that don't sound too risky. "I think their success rate is down, and they are compensating for that," he says.
One sign of tougher times for promoters: Trading volume has tumbled on the OTC Bulletin Board, the lightly regulated quotation service where many stocks recommended by paid promoters are quoted. About 5.2 billion shares quoted on the Bulletin Board changed hands last month, compared with an all-time high of 25.2 billion in March 2000, according to the National Association of Securities Dealers, which runs the stock-quotation service.
But whether investors benefit from the stocks penny promoters are pushing as shelters from the storm is another question.
Shares of i2corp.com, for example, which hit a high of 28 cents late last month, were promoted as a "recession proof stock" in the e-mail addressed from Callyourbrokers. But the shares were down 36% from their high, trading for 16 cents Monday, on the OTC Bulletin Board.
The Las Vegas company, which isn't related to i2 Technologies Inc., the Dallas software maker, doesn't have any revenue yet, according to regulatory filings. It also says its "current cash on hand is not sufficient to meet ongoing operating expenses," and the company is looking for capital from "various sources." Nonetheless, i2corp.com says it expects to generate up to $12.5 million in revenue over the next two years from the European Internet-casino market.
Torsten Prochnow, the owner of the Callyourbrokers Web address, denies sending out any e-mail touting i2corp.com's stock. Mr. Prochnow of Timmendorfer Strand, Germany, says he stopped promoting penny stocks after running afoul of U.S. securities laws last year.
Mr. Prochnow and his partner, Dennis C. Hass, were accused by the SEC of misleading investors by publishing "baseless financial projections" about a company whose stock they were recommending in press releases and on a Web site they controlled. They agreed to return $111,530 in trading profits and each pay a $50,000 fine to settle the allegations last September. Neither admitted wrongdoing.
Some stock promoters are catering their pitches to soothe investors' fears of high risks following the recent stock crash. For example, StockGenie, based in Port Washington, N.Y., acknowledged that some of its picks last year soured because of "a meltdown in the Internet sector." The company, which had pitched stocks in now-defunct companies such as WelcomeTo Search Engine Inc. and Pro Net Link Inc., is promoting shares that offer investors a "sense of security."
One stock is MerchantOnline.com, a Boca Raton, Fla., company that makes products to help ensure that online transactions are secure. "There appears to be a market for [the company's] product, since individuals do purchase items over the Internet," StockGenie says on its Web site. "And if these individuals and new babies had a real sense of security, they might buy more." StockGenie officials couldn't be reached.
Meanwhile, some stock promoters appear gentler: One apologized to customers for recommending a stock that failed to take off.
Shane Nelson, a freight-train conductor for Norfolk Southern Corp. who says he operates a Web site called Redhotmicrocaps.com as a hobby from his home in Bethany, Ill., e-mailed his 4,200 subscribers last week after a stock he recommended proved a dud.
"We are sorry last night's pick was unappealing to you," Mr. Nelson wrote on the evening of April 9. "Our previous two were up over 100% after our release and we expected big things from this one as well. However, things do not always work out as planned. We feel very strongly about our next featured company and we believe it is very undervalued and that it has a lot of potential for growth."
The stock he was pitching was REII Inc., a rental-property manager based in Naples, Fla. According to its annual report, REII posted a loss of $88,000 last year, or two cents a share, on revenue of $196,000. It saw its thinly traded stock reach as high as nine cents earlier this month on the OTC Bulletin Board.
But the stock fell to three cents after Mr. Nelson started recommending it. Mr. Nelson says he shares his customers' disappointment, because he and his partner bought 35,000 REII shares at seven cents each before recommending them online. According to his Web site, "It is our express intent to profit from the sale of any shares we have received." The stock has continued to hover around three cents since last week.
"We value our members and don't deceive them in any shape or form," Mr. Nelson said in an interview. "We sent the e-mail because we liked the stock, but obviously our members didn't and we wanted them to know we heard them."