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Howard B. Sirota

Tuesday, September 29, 2009

How To Avoid Stock Market Frauds

How To Avoid Stock Market Frauds

Stock market fraud is rampant throughout history and widespread today. There is no magic bullet to avoid becoming a victim of stock market fraud, because frauds are committed by the "brand name" investment banks and "prestigious" public companies. A number of the most-recognizable names on Wall Street are crooked to the core. Some of the most prominent businessmen in America have committed outright fraud, been slapped on the wrist, and continued their previous ways while sprinkling out funds to worthy causes to polish up their public image. The name-brand auditing firms regularly have audit failures where the sheer magnitude of the fraud defies explanation except that the auditors simply failed to examine the records to verify the claims of management and failed to obtain confirmation with third-parties.
That said, the vast majority of stock frauds are committed by small-time crooks in small-time companies in the micro-cap market. With few exceptions, principally small local banks, each and every stock traded on the Bulletin Board and the Pink Sheets is a worthless company being promoted by crooks and a manipulated stock. The auditors are small-time no-name accountants who are literally in on the fraud and act as the auditors for every fraud by the same promoters and boiler rooms.
The SEC and FINRA not only permit the major investment banks to commit fraud, but actually actively protect and defend the members of the "Too Big To Fail Club." When that fails, a slap on the wrist suffices for the SEC and FINRA, and the public be damned. The SEC and FINRA vigorously prosecute the small fish after the fact, which is little or no comfort to the victims. The small-cap swamp's denizens are serial swindlers; the brand-names are intermittent miscreants.
Public investors must be on their guard because the stock market is often a crooked craps game. The following tips are not perfect protection against stock market frauds, but, in my experience, filter out the vast majority of stock frauds.
1. Stop and think. Be skeptical. Why are you being solicited to invest your money in this stock or deal by this promoter or broker-dealer? Because you're special? Lucky? They like you? Is that why they're letting you in on the ground floor of this remarkable opportunity and not keeping it to themselves? Remember that Warren Buffett isn't calling you to share the gains in his proprietary ideas; to the contrary, Warren Buffett has been granted by the SEC a special exemption from the reporting requirements applicable to everyone else in the world permitting The Worlds's Greatest Investor to delay disclosing his stock purchases. Warren Buffett doesn't need your money.
2. Never accept or reply to cold calls or unsolicited mail. Register your phones with DoNotCall.gov and hang up on any violators. These are callers from boiler-rooms, many run by organized crime, and the person calling you about the Next Great Opportunity will, after the shift, commute home by public transit if he or she has carfare home.
3. Never open an account with a no-name broker-dealer. Pay special attention to names similar to a brand name or names that sound WASPY or British. A.S. Goldmen was not Goldman Sachs. D.H. Blair was a name with more flair than its principal's own name.
4. Never buy stock in an issuer being promoted by a no-name broker-dealer.
5. Never buy a stock traded on the Bulletin Board or the Pink Sheets.
6. Never invest with people or firms with a history of wrongful conduct. Check each and every name of the people and firms involved on www.sec.gov under Litigation Releases, on www.finra.org under Broker Check, on www.Google.com and www.123people.com.
7. Never buy stock in an issuer using a no-name auditor. The difference between arithmetic and accounting is that, in accounting, the result can be any number you want.
8. Never buy stock of a foreign issuer, even if listed on The New York Stock Exchange. You cannot enforce your legal rights in Russia, The People's Republic of China, Argentina, India or anywhere else outside America. Canada has always been and remains today a hotbed of stock fraud. Every Canadian penny stock is a fraud. Every Canadian small-cap issuer with a fabulous resource discovery is a fraud. Particularly avoid companies based in secrecy and tax-haven jurisdictions such as The Bahamas, Bermuda, The Cayman Islands, The Isle of Man, Lichtenstein, Switzerland, etc.
9. Never buy stock of an issuer based in Salt Lake City, Utah. Historically the epicenter of worthless penny stocks and crooked transfer agents for shell companies, Salt Lake City has morphed into the world capital of pyramid schemes and phony vitamin and supplement hucksters, plus assorted other miscreants. Law-enforcement in Utah is non-existent due to rampant corruption and the indifference of the leaders of Utah to inflicting damage upon people outside the insular confines of Utah.
10. Stick to public companies which are actively traded on the NYSE or NASDAQ, have meaningful revenues and earnings, significant institutional shareholders, and analyst buy recommendations by several brand-name brokerage firms. Another alternative is to buy DIA, SPY and QQQQ to be diversified over 600 major public companies with minimal transaction costs.
The SEC and FINRA don't protect you. You have to protect yourself in The Wall Street Jungle.