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Stock Newsletter Fraud

Many investors are attracted to small cap investments because of the opportunity of making a large, quick profit. Unfortunately, most sophisticated investors also know that with the hope of a great profit comes tremendous risk. In trying to reduce the amount of risk with any investment, investors seek out and rely on research, information and professional reports.

With the advent of internet, investors now have at the touch of a button and click of a mouse, research from the four corners of the investment world. This is especially important for the small cap investor who feels with all the available information now more than ever armed with the tools and analysis to invest in such small cap stocks.

However, among the information that is available is information which falls under the category of promotion in the form of investment letters and analysis. The unsophisticated and even more experienced investor will sometimes be fooled by what appears to be a professional report, when in fact they are faced with unadulterated advertisement. The wolf dressed in sheep’s clothing is no other than a paid promoter pushing a stock under the guise of independent research called the investment newsletter.

Many investment newsletter writers are being paid to write positive reports for the company’s that have paid them. In a world where many investors have to rely on professional reports to make important investment decisions, such biased and paid newsletters can lead the unwary down a path of misfortune.

Section 17(b) of the Securities Act of 1993 makes it unlawful for any person to publish or circulate any letter, investment service, or communication which describes a security without disclosing that the publisher is receiving compensation and the amount of such comopensation. The disclosure is not only required when the publisher is promoting the stock positively, but merely describing or discussing the stock.

So how does this section help the investor?. All investment newsletters must disclose any compensation that the publisher is receiving. Accordingly, you as the investor should be on the lookout for statements in newsletters which fail to fully disclose any compensation or disclose compensation paid to the publisher by the company he or she is recommending.

Where can you find the publisher's disclosure?

You will find the publisher’s disclosure in the disclaimer section of the newsletter. When reading any disclaimer, be mindful that compensation is given in different ways. Compensation doesn’t only mean the payment of money but can include:

The issuance of shares to the publisher or any other compensation which ultimately benefits the publisher for publishing the newletter recommendation.
The hiring of the publisher as consultants or advisors.
The publisher purchasing shares of the company before its recommendation and sale of such stock immediately after the stock recommendation.

Examples

Here are a few examples that should forewarn you that the publisher of the newsletter is receiving compensation for the investment newsletter:

“ the publisher may from time to time have a position in the securities mentioned”
“the publisher has been retained as an advisor”
“the publisher has been retained to provide consulting services.”
“ The Publisher will therefore benefit from any increase in share price as to the stock of any Company advertising herein which is held by the Publisher.”
“Members of the organization, its officers, directors, employees, and associated individuals may have positions in investments referred to in this newsletter and may add or dispose of the same. “
“the publisher may provide investment banking services.”
“The publisher reserves the right to buy or sell stock in any featured company”
“The publisher may receive compensation for the efforts in presentation, and dissemination of information on companies featured on our Website and within our newsletters”
“We receive fees from the companies we write about in our newsletter."
“The publisher will trade in these positions prior to stock pick announcement.and its administrators, representatives or employees reserve the right to liquidate or sell all or portions of these positions immediately after the stock pick announcement in our newsletter”
“we may be paid a fee by the company referred to in this newsletter”

Problem With These Disclaimers

The problem with all of these disclaimers is that they hint at the fact that they have received compensation directly or indirectly but never indicate the amount of thecompensation which is unlawful. If you come across any such statements, then be aware that the publisher is not giving an impartial professional analysis of the company that he or she is recommending. He or she is being compensated to promote the stock. Our only advice: stay away or invest and be prepared to lose money.