October 2012

Back in late July, I wrote how I’d been scammed out of $13,000 through a pump-and-dump stock investment scam perpetrated by Bollinger Report. Just when I thought I was done licking my wounds from that particular hit, these scammers decided to start calling me on my cell phone and recommending yet another pump-and-dump stock scam. Their continued onslaught inspired me to research the company in question and its methods. What I found out was quite revealing and has taught me some important lessons about investing in stocks. So, without further ado…

What exactly is a pump-and-dump scam?

When company stocks are offered to the public, they go through an initial public offering or IPO. The stock is typically priced at a reasonable dollar amount; for example, Google went IPO to the tune of $85/share. However, some company stocks go IPO at very low prices (i.e., under $5/share); such stocks are often termed penny stocks. The reasons for such low prices include small company size (e.g., 5 or fewer employees) or miniscule private investment. The company’s business model is also often based on speculation; many penny stock companies are involved in exploratory drilling or mining operations where the payoff could be huge- or absolutely nothing.

Because many penny stocks trade, quite literally, in the pennies, they are also often subject to artificial (and illegal) price manipulation through so-called pump-and-dump scams. In a classic pump-and-dump, a small pool of sham investors will buy a block of penny stock shares in order to raise the stock trading price. These investors will also initiate a marketing campaign to alert outside public investors about this penny stock’s “opportunity” to break out of penny stock territory and become “legit”. The hype continues until a finite number of investors have been duped into buying shares, effectively raising the price of that penny stock. At that point, the sham investors quickly dump their shares and pocket the difference. The outside public investors are now not only left with nearly worthless shares of stock, but that remaining stock is so lightly traded that it’s hard to sell to other investors.

How the Bollinger Report fits into the pump-and-dump scam model

The Bollinger Report (http://www.bollingerreport.com) is actually a series of websites, all operating under the same Denver, Colorado-based ISP of 72.18.133.75, that promotes various penny stock companies through pump-and-dump scam operations. Here is the list of all the websites found to date:

http://www.brightonmarkets.com

http://www.equityleader.com

http://equitymarketsinc.net

http://globalequityalert.com

http://www.marketfoundations.com

http://www.breakoutfinder.net

http://www.risingsunreport.com

The Bollinger Report scam begins when potential investors go to one of the above listed sites, leave their information, including a phone number, and request more information about a stock of their choosing. The person who calls them back will discuss the mentioned stock and then start promoting (i.e., pumping) a particular penny stock. The investors are also emailed reports that tout how that penny stock is about to appreciate anywhere from 100%-500% in the next month. Once enough investors are recruited to a particular penny stock, raising its price, the calls and emails stop. At that point the price of the touted stock suddenly drops (i.e., dumps) by as much as 90%, sometimes in a matter of minutes. Investors are left with a case of vertigo and are in shock over the loss of their investment.

My personal experience with Bollinger Report

In my particular case, in late August I started receiving calls from Mr. Brad Romero of Bollinger Report. Initially, he discussed another “successful” penny stock that his company had promoted, Independence Energy Corporation (ticker: IDNG). Independence Energy is an oil and natural gas exploration company with no known land assets or revenue. If you look on the stock chart below, you will see how IDNG underwent a classic pump-and-dump “needle” lifecycle including a sharp rise to a point (the pump), followed by a dramatic drop (the dump):

When I countered Mr. Romero on his view that this was a successful (successful for who?) stock investment, he held how the company had unexpectedly made a 5:1 forward split, thus dropping its share price for certain investors. Because of this issue, Bollinger Report had itself experienced some backlash and was currently reorganizing under a different name and website (surprise!). That information should’ve ended our call right there but no: Mr. Romero now had another “hot investment tip” to share with me. That tip consisted of Punchline Resources Limited (ticker: PUNL). Located below is Punchline’s stock lifecycle- notice any similarities to Independence Energy?

Being that I received my call(s) from Mr. Romero in late August to early September, Punchline had yet to deliver its classic punchline to unwary investors. However, having already looked at IDNG, I noted that PUNL was following the same pump-and-dump pattern as IDNG. I also noted this fact to Mr. Romero, telling him outright that this looked like another pump-and-dump scam. However, neither my mentioning of “pump-and-dump” nor “scam” fazed him. He just kept cheerfully jabbering on about how Punchline was going to deliver some amazing profits for investors who got in on it NOW. I’m sure there were profits to be had, at least by a few “investors”. I then asked Mr. Romero who was paying Bollinger to pump up this stock.

Brad didn’t seem to understand my question so I rephrased it. In essence, I told Brad that Bollinger could not be making any money if all it did was send out free stock alerts to subscribers. So, how did the website make its money?

Brad cheerfully replied that Bollinger Report made its revenue through ads and through third parties that wanted to raise awareness about a particular company. Hmm…now we were getting somewhere. Since I had some time to kill, I asked Brad about these third parties and who they were.

Unfortunately, Brad was not aware of their exact identities at the moment (however, the following website discloses the sham investors in IDNG). He then quickly redirected my attention to Punchline, asking if he could email me additional information about the company. I happily agreed to that offer, figuring it’d provide me with some critical details about Bollinger Report, or whatever the scam had decided to call itself. Unfortunately, that report never showed up in my inbox.

The end result- and a lesson learned

I watched Punchline’s rise until it unexpectedly decided to drop in mid- to late September. And just as unexpectedly, my calls from Mr. Romero stopped too. Who would’ve thought? The hard lesson I learned here, if you go back to my post from July, is that investment scams are out there and scammers have no qualms about cold-calling/emailing prospective investors in order to scam them out of their money. Thus, before you plunk down your hard-earned dollars on an offer that’s just too good to pass up, carefully consider who might be benefiting from that offer.

Scam update (April 14, 2013)

The Bollinger Report URL is no more. However, the IP address that Bollinger operated under (72.18.133.75) is still active and contains two other penny stock/pump-and-dump domain names: gainhunter.com and brightonmarkets.com.

Brighton Markets, along with Bollinger Report, both promoted prior pump-and-dump stock scams Independence Energy (OTC BB:IDNG) and Punchline Resources (OTC BB:PUNL).

Until late February, Gain Hunter was still touting shell companies such as Green Innovations Ltd. (GNIN:OB) to investors through email. With the rise, and the inevitable fall of GNIN, both Gain Hunter and Brighton are still online but their websites have been completely stripped down. Another online incarnation of the Bollinger Report is likely in the making and the group is probably biding its time until things cool down.

While perusing the skeleton site of Brighton Markets, I was intrigued by its disclaimer. Here is an excerpt from the site:

“We are engaged in the business of marketing and advertising companies for monetary compensation.”

Perhaps most enlightening was the following passage:

“Please be advised that BrightonMarkets.com has been paid in the past by third-parties, and expects to continue to be paid by other third parties, to perform promotional and advertising services. These services include the issuance of this release and the other opinions that we release concerning a profiled company. BrightonMarkets.com has not investigated the background of the hiring companies. Anyone viewing this newsletter should assume the hiring parties or affiliates of the hiring parties own shares of the profiled company of which they plan to liquidate, further understanding that the liquidation of those shares may or may not negatively impact the share price.”

In other words, groups like Brighton Markets are hired by inside traders of companies whose stock they then promote to naïve outside investors. Those inside traders, meanwhile, are simply trying to raise the stock price of the company that is about to be shut down. When enough outside investors have bought the company’s shares and raised its stock price, these insiders quickly start selling. Such a sell-out not only lowers the company’s stock price, and oftentimes in the space of a single day, but the glut of sell orders makes it virtually impossible for later orders by panicked outside investors to be executed. Those hapless outside investors are now stuck with their worthless shares.

It’s too bad that Brighton Markets didn’t provide their disclaimer as follows: “Before you invest with us, please watch the movie “Boiler Room”.

Let’s say you’re running a small business from your home or in-town office. Maybe you’re a freelance worker, self-employed or just making money in your spare time. Many small business owners and other individuals eventually form LLCs (limited liability corporations); however, is such a move right for you? Sure, having the LLC distinction on your business may look snazzy, but is it worth the trouble? To answer this question, let’s first consider what an LLC actually is (and isn’t).

A really brief history of the LLC

Way back in ancient 1977, Wyoming businesses petitioned the state to create a commercial enterprise system similar to the German Gesellschaft mit beschränkter Haftung (GmbH or, in essence, a company with limited liability), which itself had been around since 1892. In response, Wyoming passed the LLC Act, which was modeled on the GmbH. What did the German GmbH and the American LLC have in common? Both enterprises allowed businesses to be taxed and run like partnerships while being protected from personal liability like corporations. This new corporate model quickly spread and was enacted across all states. In 1997, the IRS allowed the LLC distinction to be applied not only to partnerships but also sole proprietorships, further validating this business model.

How does the LLC fit into the corporate world?

There are four main types of business entities: sole proprietorship/partnership, LLC, S-corporation and corporation. Here are their distinguishing features:

Sole proprietorship/partnership: You and your partners are the business and are personally responsible for all of its debts and liabilities. Business profits are “passed-through” to you and taxed as your personal income.

LLC: You have limited personal liability for your business’s financial and legal liabilities. Business profits are still “passed-through” to you and taxed as personal income.

S-corporation: This more formal business entity can include you and your partners (also known as shareholders) as well as investors (e.g., venture capitalists). As with an LLC, you are not held personally responsible for business debts and liabilities. Also as with an LLC, profits are subject to Medicare and Social Security taxes unless they are paid out in the form of salaries.

Corporation: This entity is akin to the S-corporation except that profits are taxed twice: once under the corporation, then again when paid out in the form of a salary to you and other corporate shareholders.

Why is the LLC so popular with businesses?

Imagine that, in your spare time, you make rechargeable hand warmer mittens (a personal invention idea of mine). These mittens sell like hot cakes (no pun intended) during the football and hunting seasons, when lots of people are out in the cold for long periods of time. You’re making a handsome profit on these mittens when one of your customers reports that your product shorted his house circuits and set the place on fire. Now that customer is going to sue you over the loss of his house plus hospitalization costs. You end up losing the lawsuit and have to pay damages totaling half a million dollars. Suddenly, your business has cost you everything, including your personal savings and possessions.

How could this situation have been avoided? Had you created an LLC for your hand warmer business, the LLC would’ve been sued, not you. After losing the court case, the cash and assets of only your LLC would’ve been used to pay off the court’s award to your customer. Your own savings and possessions would’ve remained untouched.

Because many businesses have a high risk of being sued, the LLC has become rather popular in recent years. Likewise, businesses that have multiple partners also form LLCs because this insulates members from the possible bad business decisions of the other members. Other LLC advantages include the following:

Credibility: People and businesses are more likely to treat you as a real business when you carry the LLC designation than when you are only a sole proprietor/partnership. It’s also easier to obtain business loans from banks, credit unions and associations.

Less formality: With corporations, there is an excessive amount of legal and accounting paperwork and record-keeping. The LLC, meanwhile, is more of a “safe haven”, simply protecting you from personal liability.

Separate entity: The LLC is regarded as a separate entity and can be sold, transferred or inherited. When you die, the business does not die with you but lives on.

Different profit/loss structure: You and/or your partners can receive different portions of the company’s profits or losses regardless of how much actual company you or they own. This option is not available to shareholders of an S corporation, for example.

Lower tax liability: Business losses can be deducted from your personal income taxes, lowering your tax liability.

Some disadvantages of the LLC include:

Costs: A yearly state fee must be paid in order to maintain the LLC status. Forming the LLC can cost up to $1,000, especially in states like California which charge $800 to submit the business’s Articles of Organization.

Taxes: If you have employees, you must pay unemployment compensation on all those employees, including yourself. Business profits that are retained in the LLC (as opposed to being paid out as salaries) are subject to Social Security and Medicare taxes. You must also file a tax return for the LLC itself.

IRS scrutiny: Because the IRS may wish to audit your business, separate bank and credit card accounts for the LLC are a must. Creating monthly/yearly fiscal statements for your LLC is also a good idea.

The LLC: To form or not to form?

If your business carries a lot of debt because of capital expenditures and investments, you can best protect yourself by forming an LLC. Likewise, if your business has many partners, an LLC distinction shields you from legal repercussions on account of bad business decisions or even fraud by your partners.

You should also consider how much “dollar-cost-averaged” tax you will pay for the LLC. Since this type of business is treated as a “pass-through” tax entity, business earnings are taxed as your personal earned income. Social Security tax on the first $90,000 is subject to a 15.3% tax. A Medicare tax of 2.9% kicks in for all income above $90,000. This means that, if your LLC is earning under $100,000/year, you’re paying a higher tax rate. However, if the LLC is earning over $100,000/year, your “dollar-cost averaged” tax rate is lower.

Pump-and-Dump Stock Scam Alert: Bollinger Report