Trader’s Narrative

More than two years ago, I mentioned a tiny company called MitoPharm (MTPM) which came to my attention from a massive email campaign which was pumping the stock on the OTC BB. As well, the promoters had targeted my Google Adsense channel so this blog was showing their ads and promoting their scheme. I wrote at the time that I wished I could short MitoPharm because it was obvious what was coming after the pump.

Rather than fall, the price actually went higher after I wrote about it. Apparently the promoters were really pushing this thing before cashing out. Some mistook this to mean that I was wrong and that this was actually a legitimate company with a real, effective product. The product by the way, was a supposed ‘anti-aging’ supplement.

It took a bit longer but the inevitable happened. As MitoPharm’s stock price cratered, incredulous investors who had bought the company’s promotional material hook, line and sinker found the blog postings on google and came to leave angry, shocked and surprised comments. Some even clung to the hope and wish that everything would eventually be ok if they just held on.

But as you can see from MitoPharm’s chart, hope has no place in the stock market (keep in mind that due to splits the price axis is distorted):

I just heard from a reader that the SEC has filed charges against a group of people for publicizing misleading information about the company and its (non-existent) products. MitoPharm, David M. Otto, Todd Van Siclen, Pak Peter Cheung (CEO), and Houston-based stock promoter Charles Bingham and his company Wall Street PR Inc. are all named in the $1 million suit.

Right now the Pink Sheets information page for MitoPharm categorizes the company as “Caveat Emptor” which is the worst label they could give them. Technically the shares are valued at $0.0001 but for all intents and purposes, this company is done. Stick a fork in it. There hasn’t been a disclosure from the company in a long time and their website seems to be offline as well. You can read the whole sad story in the SEC litigation (pdf).

The charges are allegations made by the SEC and not proven, of course. I suspect this will be settled out of court, unless the SEC wants to make an example out of MitoPharm’s “pump and dump” scheme to deter others. But then again, they’re risking an acquittal at trial, if it goes that far. Either way, this will take a while to shake out.

According to Marc J. Fagel, Director of the SEC’s San Francisco Regional Office:

“Attorneys are supposed to function as gatekeepers in the securities industry. Otto and his firm used phony documents to corner the market in a start-up company’s stock, and then profited at the expense of unsuspecting investors when the stock-promoting campaign caused the share price to briefly skyrocket before plummeting back down to earth.”

From the SEC press release regarding the case:

The scheme began in late 2006 when Otto, who was hired by Cheung, arranged to purchase a publicly traded shell company as a merger partner for MitoPharm. Otto and Van Siclen drafted opinion letters to MitoPharm’s transfer agent filled with false statements in order to secure supposedly ‘freely tradable’ stock certificates for individuals and entities secretly controlled by Otto.

The SEC’s complaint alleges that Cheung hired Bingham on Otto’s recommendation, and they embarked on an aggressive public relations campaign that centered on the misleading promotion of two key products - ‘Restorade’ and ‘Stamina Solutions’ - that did not exist. They developed promotional materials that falsely stated that both Restorade and Stamina Solution were ‘[a]vailable as functional beverage or as a soft gel capsule.’

According to the SEC’s complaint, Cheung had a graphics artist create renderings of what the containers for MitoPharm’s products could look like in order to accompany the written text of MitoPharm’s Web site and other promotional materials. Written materials and Web profiles created by Bingham and others were disseminated to investors with the fake images and present-tense descriptions of the products.

The SEC further alleges that as the promotional campaign caused the stock price to rise above $2.30, Otto sold his shares for more than $1 million and Bingham netted an additional $300,000. The massive selling of the stock caused the price to fall to a nickel per share by November 2007.

The SEC’s complaint alleges that the defendants violated the antifraud and other provisions of the federal securities laws. The SEC seeks injunctive relief, disgorgement and financial penalties from the defendants as well as penny stock bars for Otto, Van Siclen, and Cheung, and an officer-and-director bar against Cheung.

Well that was fast.

I happened to check up on the scam du jour only to notice that Pink Sheets has slapped it with a TOXIC label:

Buyer Beware. There is a public interest concern associated with the company, which may include a spam campaign, questionable stock promotion, known investigation of fraudulent activity committed by the company or insiders, regulatory suspensions, or disruptive corporate actions. During the time it is labeled Caveat Emptor, any stock that is not in the Current Information category will also have its quotes blocked on pinksheets.com.

Looks like the promoters didn’t get their money’s worth before the stock collapsed under its own weight:

Notice how the sudden fall was followed by a continuous decline in volume? Well, except for that massive spike a few days later. The volume pattern is now one of disinterest as this penny stock fades away.

A lot of good it did them to fill inboxes with email spam touting this POS. The red arrow shows when I wrote about PERT’s pump and dump. Calling the implosion of these kinds of stocks is as sporting as dynamiting fish in a lake.

So why can’t you sell short OTC bulletin board stocks? Would such blatant pump and dump schemes proliferate if unobstructed short selling was allowed?

Short answer: no

On January 11th, 2008 Permanent Technologies (PERT) released a statement to publicize their reverse merger into a public shell:

PRNewswire-FirstCall via COMTEX/ — Permanent Technologies, Inc. (Pink Sheets: PERT.PK) announced that effective immediately its stock trading symbol has changed to “PERT.PK.”

They also announced that they have up to date financial information:

The Company further announced that Pink Sheets has determined that the Company is in full compliance with Pink Sheets’ “Guidelines for Providing Adequate Current Information,” having earned the “Current Information” designation.

The most recent filing I could find was a quarterly report for September 30, 2007. According to that, they have $309,790 in assets and $249,870 of that is non-tangible (Patents). Oh, and there are no sales or revenue to speak of.

What they do have is spam emails promoting the stock. Lots and lots of it.

Before flushing my stock spam, I usually do a quick scan. I’ve noticed that the amount of spam I’ve received pumping PERT outnumbers the other stock spam put together.

Some huckster out there is promoting the heck out of this. Unfortunately, a lot of people are falling for this scam and buying (see the chart to the left).

Sadly, you can’t really short over the counter stocks. Or this would be trading at 0.000000001 per share. So consider this a free public service announcement (like the previous one about MitoPharm).

I can’t caution against all of the stock spam out there nor is it my place. Everyone is responsible for their own due diligence. As Lord Overstone said, No warning can save a person determined to grow suddenly rich.

If you’re thinking of buying PERT, you may be interested to see what happened to MitoPharm (MTPM) a few months after the deluge of its stock spam went dry.

A few months ago I warned my readers about a penny stock on the pink sheets called MitoPharm (MTPM), saying I wished that I could short it. Immediately after, the price of the shares doubled (from $1 to about $2) which lead to some childish comments about my motives and my intellectual capacity.

Fast forward to now and I have people leaving ALL CAPS comments calling MitoPharm a “rip-off” and “a scam” while others are shell shocked and just want to know what happened.

Well, I tried to warn you. It was the least I could do since the people behind the scheme were targeting my Google Adsense account to promote it. This is part of the reason why Google and I parted ways.

Depending on which data source you use, the graph of MitoPharm will have a different price axis. That’s because on September 4th they announced a 250% stock dividend (issued September 14th 2007). So for each share outstanding, four were issued.

I don’t think this had anything to do with the collapse. This was a pure “pump and dump” scheme. If you want to see other examples, check out these other penny stocks. I’ve received email spam promoting each of them:

Symbol:CLRL — Email received October 22, 2007
Symbol:FFDH — Email received November 2, 2007
Symbol:HYBT — Email received November 4, 2007

There’s even a website which tracks the penny stocks touted in spam emails. I just can’t remember the name now although I’m sure I have it bookmarked or on delicious somewhere. If you know it, drop me a note.

Finally, I have to say that it is possible to make money from this sort of schemes. But, you have to be very careful and know the game. If you ride along with the promoter and exit before the “dump”, you should do fine. If on the other hand, you mistakenly believe that this is an investment, God help you.

For the past few days I’ve noticed that someone has bought a slug of ads targeting my blog’s audience through Google Adsense’s site targeting feature. After seeing the same ad over and over again I got curious and being careful to not click my own ads, I instead typed in their URL in my browser.

I don’t want to give them more attention than they deserve so I won’t mention the site’s name or address. But it was a website that was touting a single stock on the pink sheets: MitoPharm (MTPM) as the best thing since sliced bread.

The company seems to be about some new concoction that is supposed to make you younger and give you more stamina. Yeah, ok. The company’s site talks about “mitochondrial decay” and “ATP-dependent cellular operations” which makes about as much sense to me as the current US administration.

So I asked a friend who does know a thing or two about biochem and her verdict was thumbs down. What a shocker, eh? She didn’t think much of their claims made much sense. Including this one: “The maintenance of youthful mitochondrial functions, therefore, is imperative to retarding the aging process” According to her the “therefore” is completely out of place.

Now I feel used. Like a latex glove after a proctology exam. I mean, look at this chart:

I can’t help but feel dirty at the thought that my blog was used as a means to pump up this pink sheets penny stock. I’m thinking of shutting down the site targeting feature of Adsense or atleast being more vigilant about what kinds of ads show up.

I know the promoters behind this use many different channels and ways to get unsuspecting people to buy their stock but still, I just feel… you know, dirty.

And since it is on the pink sheets, you can’t short it. Which is probably why it runs up like crazy in the first place. Ugh.

Now, if you’ll excuse me, I’ve got to go scrub myself under scalding water with a brillo pad for the next hour or so.