Michael lathigee says, with all the commotion in the stock market, many people are feeling more desperate than ever. While our emotions are complex, with regard to what we are seeing, I want to lump most of those emotions into two categories: Fear and Greed. As you know, fear and greed drive the stock market. I know I’ve talked about this before but it never hurts to keep this in mind as we watch the volatility do its damage. Fear of loss and greed to recoup those losses pretty much run the show.

1. Michael Lathigee: Trading the Wicked OTC Looks Easy – It Isn’t!
Michael lathigee says, with all the commotion in the stock market, many people are feeling more
desperate than ever. While our emotions are complex, with regard to what we are seeing, I
want to lump most of those emotions into two categories: Fear and Greed.
As you know, fear and greed drive the stock market. I know I’ve talked about this before but it
never hurts to keep this in mind as we watch the volatility do its damage. Fear of loss and greed
to recoup those losses pretty much run the show.
As people seek ways to recoup their losses, many fall victim to get-rich quick schemes. The
OTC or Penny Stocks attract many new investors, because the stocks are so cheap and people
think they can’t lose much. Think again. The OTC is full of traps for the unwary.
“The OTC” is often used as a catchall phrase for the Over the Counter Bulletin Board (OTCBB),
which is actually a collection of different trading markets: The OTC market, the Pink Sheets and
the Grey Market. There are some very good companies that trade on the OTC for a variety of
reasons, and a good broker can help you find them, but there are significant problems with
companies listed on the OTC.
•
Stocks quoted on the OTCBB must comply with SEC requirements, but stocks
considered Pink Sheets securities do not. Thus there is a severe lack of information on
the company. They may be in the middle of a buy out or bankruptcy and you won’t find
any official reports. An online search will probably just turn up the promoter’s press
release touting the wonderfulness of this company.
•
Another problem is that many of these stocks have a severe lack of liquidity. Many trade
at such low volumes that you have no guarantee that you’ll find a buyer when you want
to sell. As a result you might be forced to take a lower price - or no price at all - and
watch your investment totally tank.
•
Which brings up the third problem. Price. The spreads can be huge; big enough to wipe
out any profit by the time you’ve paid transactions fees both ways. Also, the OTC doesn’t
have fixed quotes. This means you could bid on one price, but by the time you get a
seller – which could be days or weeks – the price has moved.
On top of that, or because of those factors, scams show up regularly. Here is an excerpt from
my upcoming book on The Pump and dump scam.
One of the easiest and fastest scams that appears every so often on the OTC involves a private
company being vended through a public shell. It’s called a Pump and Dump. This is now it
works.
The promoter of the scheme sets up a shell company, which is in itself illegal, but people still do
it. They set up a shell for a private company with say 50 people and each person has a certain
number of shares. The promoter brings in all his friends and associates into the deal and has
them purchase all the shares. Then the promoter buys them back at a slightly higher price.
Now the promoter owns 100% of the shares, or 100% of the float.
Then the promoter targets a private company – perhaps a very legitimate company needing
cash. Call this ABC company. The promoter takes this private ABC company into the shell, and
now that private company becomes a public company. The promoter does all the paperwork
and the company is now a public entity.

2. Now, suppose that promoter puts a value on ABC company of perhaps $2M, plus the shell is
worth $1M, so now ABC company has a $3M valuation. The promoter has put up $1M, so he
could say he owns 33% of ABC Company
Now remember that the promoter controls all the free trading stock. Now, suppose ABC
Company issued $10M shares total, that’s a 10M share float. Of that float, 7M shares could be
owned by the management and 7M shares might be owned by the management team and sits
in escrow where it can’t be traded. That leaves 3M shares, which are controlled by the promoter
and ripe for plucking.
What happens next is the promoter goes out and promotes this company. He uses spam mail,
newsletters and advertising. He basically blasts this company into every conceivable media
channel. So the promoter sells the hell out of it, he promotes it heavily to all the brokers, who
sell it heavily to their clients.
The stock moves up from 20 cents to 80 cents, and maybe continues up to $2 dollars. Then the
promoter dumps his stock at the higher price and the stock comes right back down to $.20 and
the promoter walks away with a tidy profit.
But, where does that leave the legitimate company? The company thought the promoter was
legitimate. They thought they had 100 long-term investors, but they actually only had one
investor, the promoter.
The promoter has sold all the stock he purchased for a nickel and sold for $2 dollars. The
company has no investor relationships, only unhappy shareholders. If they manage to survive
the beating, they still have to go out and rebuild a shareholder base. Only now they have a
serious handicap, because they’ve gotten a stinky reputation. That company might have been a
very good company with good fundamentals and good management that just needed some
more investment capital. But now they might not survive at all.
That is the Pump and Dump. So, when you get those flashy 10-page flyers promoting the next
great break-through oil exploration company or the company with the cure for cancer for a nickel
a share – be very, very wary. These hot tips are loaded guns. Remember, most brokers are
paid by commission and even competent dealers can get blasted in this scam.
Another version if this dodge has the promoter run this scam from the very start. The promoter
finds a moose pasture, promotes it as uranium mine, vends it into public and the rest is history.
At least in this case, there isn’t some hopeful company getting slammed, just a moose pasture.
In my next article I’ll talk about another OTC scam called the death spiral. Keep up to date on
articles written by Michael Lathigee at http://www.michaellathigee.co