Your best friend calls you to tell you about a company that has developed a technology so unique that the profits about to be generated will make all investors filthy rich. He read about it on a blog site that his buddy from the the local Pizza Parlor referred him to. Needless to say these two well-meaning, but over-zealous, soon to become poor investors were about to become victims of stock fraud and more specically THE RIG!
The Rig targets those investors looking to hit that grand slam home run….make lot’s of money in a short period of time. We Blue Collar Investors know that this is just a dream, not a reality in most cases. But I’ll bet that each and every one of you know people who are susceptible to such a temptation. Lottery tickets, slot machines,betting at the track, and penny stocks are all strike it rich dreams that oftentimes end in economic nightmares. I first became aware of the Rig in 1996 when David Faber, investigative reporter for CNBC, reported his findings about a company called Solv-Ex. The company announced that it had developed a technology that would reduce American dependence on Middle East Oil.Ultimately, Solv-Ex went from a market value of $1 billion to ZERO and so many average people were hurt.
Here is an example of how a rig works:
The crooks (hope that word isn’t too strong) choose a location like the Cayman Islands (remember the movie The Firm?) where scrutiny is non-existant and legal documentation not required. There, a series of offshore funds are set up with each particiapting crook contributing millions of dollars. They do have full control of these funds but somehow there names do not appear associated with the company. Usually there is a “front man” playing the role of CEO.
The funds then invest in a shell company in the US that has a dormant publicly traded penny stock. This eliminates the need for detailed filings with the SEC. Next warrants (similiar to options) are sold to the offshore funds which now have the right to purchase millions of shares of this shell company for very little money.
Now the stage is set to pull in our friends who met at the pizza parlor. Stories about a business hard to understand, track, or even locate are sent out to inexperienced reporters in the hopes that one will write a story about this future “gold mine”. Once written, this article is mass produced, posted everywhere and anywhere and is the initiator of even more such stories. Incredibly inexpensive options are also given to friends and family of the crooks as well as to experts who may influence average investors and sometimes even mutual fund managers.
More and more investors are now talking about this company. Time for the crooks to act (timing is everything with rigs). They start selling shares back and forth between their funds causing volume to intensify. This seems to give more credence to this company and motivates investors to take a “bite” on this penny stock. Will their investment of 60 cents per share turn into millions? The answer is YES, but not for them….for the crooks!
As volume increases, more and more investors step up to the plate looking for the grand slam homer. Talk of this company, on the cutting edge, is in full swing in chat rooms. Perhaps an institutional investor can be duped, after all, they are human too. As this occurs, we get nearer and nearer the time when the insiders are ready to exercise their warrants and sell their shares. This is when your best friend and his buddy at the pizza parlor are about to lose everything.The share price drops to zero or close to it. Fortunately, as a Blue Collar Investor, you knew better. We continue to hit those singles and doubles and hope to one day put the crooks out of business.
Last Week’s Economic News:
In July, inflation rose at a much higher rate than analysts expected. This was despite a drop in energy prices.Retail sales fell as consumers were more cautious about their spending habits. On a positive note, the trade deficit narrowed for the second month in a row. For the week, the S&P 500 was up .2% to 1298 for a year-to-date return of -10.4%.
My Readers Pick their Favorite Stocks:
Here is a list of stocks that more than one reader has written to me about over the past few weeks:
I randomly selected WAB as an example to sell an in-the-money strike. Here is how the buy-sell would play out:
1- Buy 100 x WAB @ $57.56
2- Sell the September $55 Call (WAB-IK) @ $4.10
3- Deduct the intrinsic value of $2.56 (57.56 – 55) for a true profit of $154 per contract.
4- This represents a 2.8% 1-month return or 34% annualized (154/5500).
5- In addition, we have a downside protection of 4.4% (256/5756).
If you like this equity,this buy-sell is a great example of a relatively safe (downside protection of 4.4%)
investment, with a nice return (2.8%, 1-month profit).
Thanks to all of you for sending in your great selections.
Thanks so much to all of you who asked to be placed on the Early Notification List. I am currently preparing for a series of seminars I will be giving on behalf of Norwegian Cruise Lines in a few weeks (I am forced to take a cruise! Oh well, such is life). Once preparations are complete, I will be finalizing the dates, times and fee for the webinar. Those who choose to sign up from the Early Notification List will be given a REDUCED fee as well as a FREE GIFT as my way of saying thanks for your support and confidence in my system. To sign up for Early Notification, send your contact information to me @:
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Wishing you all the best in investing,