Tuesday, July 6, 2010

Sketch Of Stock Frauds

Gold exploration is one area where frauds pop up because it's less clear as to what "too good to be true" is. The best exploration companies do go up ten times and, very occasionally, much more. No fraudster with any common sense would tout a phone or bank stock as a quick ten-bagger; all but the very naive would scoff, and the fraud would be spotted very quickly.

On the other hand, touting a fake exploration penny stock is feasible because there has been the occasional penny stock that has gone to dollars - and people remember. One emotion that fraudsters prey on is "I missed the boat - I should have seen that one" regret itch.

It's a sad fact that the exploration stock with the greatest percentage gain, from beginning to top, was a fraud from beginning to end. Starting at only pennies, Bre-X stock reached more than $200 at its height. Later, it was revealed that the exciting samples were all "salted;" no gold was in the rock from which they came. This scandal rocked the Canadian exchanges and resulted in a considerable tightening up of the standards for reporting sample results, resources and reserves.

An article in Gold Investing News has a few case histories of penny stock frauds, including Bre-X. It's well worth going through.

Unfortunately, the old adage "if it seems to be good to be true, it probably is" doesn't stick all that well. The best line to draw would be to assume that any penny stock touted by an Internet newsletter shouldn't be touched at all, regardless of how legitimate it appears. Finding good exploration stocks does take some time; even well-meant tips from people who know the business have to be examined skeptically. I know of no Internet stock toutsheet that came up with a penny stock that did turn into dollars, which wasn't later exposed as a fraud.

Sad to say, the above warnings won't deter someone from flip-trading a touted stock cynically. It's hard to feel sympathy for those folks unless they were clearly taken advantage of.


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