Penny-Stock Pumpers: Today's Outrage

A regulator's complaint highlights the need for more transparency of stock promoters.
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NEW YORK (TheStreet) -- If you can't trust people who anonymously post stock trades on Twitter, whom can you trust?

Twitter is certainly the Web destination for fans looking to discuss Justin Bieber's hair or Lady Gaga's latest outfit in 140 characters or fewer. But the social-networking platform has become a great window into the world of microcap-stock traders.

The most remarkable thing is the unbelievable gains of many Twitter stock traders in picking penny stocks. The success rate was staggering. Of course, the

Securities and Exchange Commission

had to go and tarnish that good image.

The SEC on Tuesday cracked down on a Canadian husband and wife who set up accounts on Twitter and


and built a Web site called PennyStockChaser. Regulators argue that Carol McKeown and Daniel Ryan, who reside in Montreal, fraudulently touted U.S. penny stocks through tweets, posts, emails and texts and "failed to adequately communicate that their rosy predictions for touted stocks were accompanied by their sales of those very same stocks."

The SEC claims McKeown and Ryan sold the shares on the open market while PennyStockChaser predicted massive price increases for the issuers, a practice known as "scalping." The couple allegedly received shares of the touted companies through their two corporations, Downshire Capital and Meadow Vista Financial, as compensation from affiliates of the touted companies or third parties.

The couple regularly worked penny-stock traders into a froth with promises of massive gains. They told followers that

MSE Enviro-Tech

"will move 400% to 900%" and hit their stock-price target of $5. When

Atlantic Wind & Solar

shares closed around $2 in October 2009, PennyStockChaser said the stock was "poised to go into break out mode" and would head to $10.

It turns out that McKeown and Ryan received 430,000 shares of Atlantic before selling 360,000 shares for $780,600 in net proceeds, according to the SEC's complaint. The two allegedly sold 533,334 shares of MSE stock for $240,000. That normally wouldn't be such a big deal, except for the fact that the two failed to disclose any of this to followers of PennyStockChaser.

Those are just two instances the SEC outlines in its complaint. In total, McKeown and Ryan directed PennyStockChaser's touting of at least 65 U.S. companies in the past year, including

Converge Global


Biocentric Energy Holdings


Bluewave Group


Avro Energy


. The couple allegedly pocketed at least $2.4 million in net proceeds from their scalping scheme.

It's a shame Bernie Madoff didn't have his own Twitter account for trades, isn't it?

Even if the SEC's claim makes it seem as if Twitter is the Internet Wild West of Wall Street, the image isn't really that far off. The SEC highlights one difficulty for penny-stock investors, and that's deciphering whether stock pumpers are receiving compensation for their recommendations. It's one thing for penny-stock companies to pay for coverage and have it disclosed. It's another to be part of a scalping scheme.

If anything, Twitter and other social-networking sites that allow traders to post their buys and sells need to institute a disclosure policy. Just as Congress continues to wrangle with a financial-reform bill that is trying to shine more light on complex derivatives, traders posting on Twitter should work toward greater transparency.

"Transparency in the Twitter world does not exist, but it should," John Welsh, a daytrader who tweets his stock trades on

Twitter as johnwelshphd

, writes in an email. Welsh has been an outspoken critic on Twitter of traders who tend to disclose only winning trades.

"Too may traders only take victory laps after winning trades, and not enough admit losses," Welsh says. "When following a person on Twitter, if a person does not disclose losers, it means they are lying. Every great trader I know discloses losers. With the SEC cracking down on Twitter stock scammers, transparency may become required, and 95% of Twitter traders would disappear."


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-- Written by Robert Holmes in Boston


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