Pump & Dump goes ‘legit’

When you receive an email touting the latest ‘can’t miss’ penny stock, you know to hit the Delete key. Only a major league rube falls for that crap.

But when Cringester D. F. received a slick prepaid mailer touting Guangzhou Global Telecom (GZGT) he was intrigued, so he started digging. And the deeper he dug, the weirder it got.

If you read only the boldface type in GZGT’s pamphlet (PDF), you’d assume the company was a major player in the Chinese telecom market. But what it really does is sell prepaid phone cards. And at the time of the mailing the stock was trading at less than two dollars a share. Not exactly the next Google.

Strangely, however, D. F. began to find ads touting the stock all over the mainstream business media. Investors Business Daily, Forbes, Fortune, BusinessWeek, SmartMoney, Marketwatch.com, and Reuters all carried ads. In fact, the only publication known to have declined the ad was Kiplingers, which also did a little sleuthing into GZGT. It turns out the ads were purchased by GrowthStockGuru.com, which also produced the mailer. GSG in turn, claimed it was being paid to promote the stock by Eminiar VII LLC, a “non-controlling shareholder” in GZGT.

As any Star Trek geek can tell you, Eminiar VII is the name of the planet in episode 23 of the original series, “A Taste of Armageddon.” It appears the folks behind this stock promotion were not of this earth.

Likewise for GrowthStockGuru’s alleged president, Aharon Bronfman, who doesn’t seem to exist in corporeal form. Neither Kiplingers nor I have been able to locate him on the planet. None the less, the trick worked: Shortly after the first ads appeared, GZGT’s stock price zoomed from $1.75 to $2.62 before crashing back down to about a buck. Roughly 25 million shares traded hands over three days.

D. F. was a bit appalled at how blithely these magazines and Web sites accepted the ads. But when he tried to contact them, he was mostly ignored. (And when I tried to contact them, I was also ignored.) Forbes told him it had decided to not run future ads for GZGT, while Investors Business Daily essentially said ‘tough toenails.‘ Apparently this sort of thing is not uncommon at IBD. Here’s part of what they had to say:

Most of the ads that run in Corporate News are penny stocks. Many of our readers regularly read this advertising feature searching for new and interesting investment opportunities. The section is labeled as advertising and in no way is an endorsement by Investor’s Business Daily. We also run a small disclaimer in the section stating that we can not guarantee the accuracy of the information in the ads.

The ad is still available on IBD’s Investor.com site. Nice.

A couple of things to keep in mind. One is that companies whose stock is touted are often not involved in the scam itself — and in some cases, they are unwitting victims, as their stock price goes haywire. In this case, the principals behind GZGT appear to have had a run of similar events with other companies they’ve invested in, which makes the whole ‘unwitting victim’ concept harder to swallow. (Calls and emails to GZGT’s US-based flack have yet to be returned.)

[UPDATE: Their response can be found here.]

The other thing to note is that magazines and Web sites can also be scammed. The difference between a legit advertiser and an illegitimate one is often not apparent until the check bounces. But you would hope they paid a little closer attention to what is being advertised in their pages and — in particular — would react in horror and shame to think they’d been helping out stock scammers. Apparently not.

As for Infoworld, I am assured that all advertisers are vetted carefully. In part that’s because unknown companies showing up at the door with cash in hand are rare; if they advertise here they’re usually large, well-known firms or small, well-researched ones.

This is another case of large US corporations doing business with likely criminals — unintentionally, perhaps, but also profitably. I guess the money spends just the same, regardless of how tainted its source.

Been scammed lately? Tell your tale of woe below or email it to me here. The saddest stories may elict a Cringe bag as small solace.