What is an Investment Newsletter?
The Securities and Exchange Commission (“SEC”) recently issued an Investor Alert warning about the use of investment newsletters and emails as tools for fraud. In this digital age, sensible people know they should be wary of online financial advice, but there are still many who can’t resist the allure of the “guaranteed profits” that will be generated by a “once in a lifetime opportunity” that they learn about via email in their inbox.
The SEC notes that there are different kinds of investment newsletters. Some address general securities topics, explaining the qualities of different types of stocks, bonds, or funds, and suggesting why they might be attractive.
Others may present analysis of specific securities, and offer recommendations as well.
Whatever the type, some investment newsletters are legitimate, many are created by investor relations firms to deceive investors into purchasing securities at inflated prices particularly in the penny stock markets. According to the SEC, the people behind these publications may use them for:
• Touting: promoting a stock without making proper disclosure of compensation paid.
• Pump and dump schemes: driving a stock’s price up by making false and misleading positive statements about the company. As more people buy, the stock rises and volume increases. The promoters and their clients will sell on the way up and on the way down.
• Scalping: recommending a stock while failing to disclose that the people making the recommendation are selling into the interest created.
• Undisclosed conflicts of interest: falsely claiming to provide independent analysis, or failing to explain conflicts, including financial incentives, that may influence the recommendations made.
• False performance claims: Misrepresenting the newsletter’s track record.
Newsletters may claim to be a source of unbiased information, but their publishers can still make a bundle on the trading activity of readers if they own stock in the companies they recommend.
The SEC warns that when dealing with newsletters that promote specific stocks, readers should make sure to read the disclosure information provided. Claims of no compensation should be regarded with suspicion, and vague disclosures should also be seen as red flags. They would include statements like: “From time to time, the Newsletter may receive compensation from companies we write about”; or “From time to time, the Newsletter or its officers, directors, or staff may hold stock in some of the companies we write about.” Potential investors should also be wary if the newsletter tries to hide its disclosure information in an unobtrusive place, or offers it in print so tiny it can barely be read.
Investors should be aware that individuals and entities promoting stocks must declare the amount and kind of their payment, and name its source, if they wish to remain compliant with SEC regulations.
The agency also cautions the public to be wary of newsletters that request personal information, and then have their own staff, or boiler room employees, make calls using hard sell tactics to pitch specific securities.
Potential investors should immediately reject any newsletter promising implausibly high rates of return, exerting pressure to buy RIGHT NOW!, or if the scheme promoted just sounds too good to be true.
Anyone considering subscribing to a newsletter or thinking of taking its recommendations seriously should investigate the publication and the people behind it. The SEC advises that the public search its website and contact the appropriate state securities regulator to check for enforcement actions. Some newsletters are written by registered investment advisers; their background may be checked at the SEC’s IAPD page.
Investors should always conduct their own due diligence, and never rely on only one source of information about any potential investment. The internet makes it very easy for fraudsters to reach out to hundreds of thousands of people with the click of a mouse, and just as easy to hide their own identities while doing so. Extreme caution is advised.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, or to [email protected]. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com
