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TheStreet Open House

The Deal: Microcap Stocks Get Undeserved Promotions

But promotions whose authors are not identified or who don't disclose their compensation, or that are not grounded in fact are often referred to as "pumps," and under SEC regulations, can be illegal. They are often designed to benefit seed shareholders who have purchased large holdings of cheap stock. The promotion can allow those seed shareholders to sell their shares to naive retail investors who rush to buy, based on the claims of the promotion. When the promotions end, the stocks often crash.

The SEC has attempted to crack down on pump-and-dump schemes over the past year by suspending trading in large numbers of dormant shell companies, which are often used as vehicles for pump-and-dumps. It suspended trading in 379 shell companies on a single day in May 2012. The commission suspended trading in another 61 shells on June 3, 2013.

On June 12, the SEC and the Financial Industry Regulatory Authority issued a statement warning investors about pump-and-dump schemes.

"Pump-and-dump promoters frequently claim to have 'inside' information about an impending development," the advisory warned. "Others may say they use an 'infallible' system that uses a combination of economic and stock market data to pick stocks. These scams are the inbox equivalent of a boiler room sales operation, hounding investors with potentially false information about a company."

"Spam e-mail is the bait used to lure people into making bad investment decisions. No one should ever make an investment based on the advice of an unsolicited e-mail," said Cameron Funkhouser, executive vice president of FINRA's office of fraud detection and market intelligence.

Seeking Alpha managing editor George Moriarty said in an interview that his organization is growing and is doing its best to deal with issues like stock promotions.

The New York-based online platform for contributor-based investment research has reacted to the Goff incident by changing its editorial processes. In the past, with few exceptions, Seeking Alpha wouldn't accept stories about companies with market capitalizations of less than $100 million or share prices of less than $1. That policy was relaxed, however, when the economy tanked, and companies including Freddie Mac (FMCC) and Sirius XM Radio Inc. (SIRI) fell below a dollar.

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