Thursday, January 13, 2011

50 Cent Pushes Penny Stock as the Ghost of Jonathan Lebed Strikes; More 1999 Redux

More and more of the bubble activities of 1999 seem to be behind every corner as the Bernanke Put (buy anything, the Fed will make sure it all works out) permeates as an echo boom to the Greenspan Put.   If you were not around in that era and thus are unfamiliar with the Jonathan Lebed story wikipedia has the Cliff Notes version here.

Jonathan Lebed (born September 29, 1984) is an American notorious for using internet technology to hype stocks. Between September 1999 and February 2000 Lebed made hundreds of thousands of dollars by posting in internet chat rooms and on message boards encouraging people to buy penny stocks he already owned, thus, according to the SEC, artificially raising the price of the stock. The SEC under Arthur Levitt prosecuted him.

In 2001 Lebed and the SEC negotiated an out-of-court settlement in which Lebed forfeited $285,000 in profit and interest he had made on 11 trades without admitting any wrongdoing — allowing him to keep close to half a million dollars. The case was controversial — the SEC had never prosecuted a minor — and produced significant media interest. Lebed contended that his activity forecasting stock prices was no different from and no more illegal than what professional Wall Street analysts do every day, only he utilized the internet.

For the long version please see Michael Lewis' excellent essay from 2001 here.   (yes that same Michael Lewis).  I was more of a Tokyo Joe guy back in the day.

Yun Soo Oh Park, owner of an Internet investing site that was one of the hottest sources of stock picks on the Web, has settled a civil complaint brought last year by the Securities and Exchange Commission. Mr. Park, known to his subscribers as Tokyo Joe, neither admitted nor denied the S.E.C. charges, but agreed to pay $754,630 to settle the case.

In the case, filed in January 2000, regulators said Mr. Park defrauded his customers by buying ahead of his recommendations and selling as subscribers were getting in. The S.E.C. said that on 13 occasions, Mr. Park failed to tell subscribers that he was trading ahead of them, an illegal practice known as scalping

Remember if Goldman Sachs does it, it is "business as usual on the Street" but when small fry do it, it's punishable by the SEC.  Right Martha Stewart?

Flash forward 10+ years and switch internet chat rooms and message boards with Twitter, toss in a little celebrity and you have the case of 50 Cent.  It appears Mr. Cent was not aware of the story of Lebed and Tokyo Joe and promoted a penny stock he has a heavy personal stake in .....although based on some tweets shortly after his "buy buy buy" recommendation, was quickly offered some 'counsel'.  Ahem. 

Go shorty... it's your birthday.

Via ProPublica:

  • Over the weekend, the popular rapper 50 Cent urged his 3.8 million Twitter followers to buy the stock of a microscopic company in Florida. The penny stock jumped 290 percent on Monday. The rapper, who owns 7.5 million shares and warrants for 22.5 million more in the company, had a paper profit that was briefly worth almost $5.2 million on paper.
  • "HNHI is the stock symbol for TVG there launching 15 different products. they are no joke get in now," went one promotional tweet  from the rapper. 
  • The company, H&H Imports, sounds like it might be related to the famed maker of New York bagels. No such luck. H&H is a Clearwater, Fla., company that distributes headphones favored by Curtis Jackson, the real name of rapper 50 Cent. It's the parent company of TV Goods Inc., which markets its products through infomercials and the QVC channel, has virtually no revenue ($293,000 in its most recent quarter), and loses money
  • As the Twitter hype (Twype?) wore off, the stock fell from 39 cents to 30 cents a share on Tuesday and a further 4 cents Wednesday morning, meaning 50 Cent gave back just over 290 million cents ($2.9 million dollars). The company has a miniscule market capitalization of $63 million. It traded for 10 cents last week.
  • Strip away the involvement of a celebrity and the use of social networking and this story bears some resemblance to one of the oldest stock market games around: The pump and dump. In their classical form, such schemes work this way: Insiders talk up the attributes of a worthless stock (the pump) and then sell when its price jumps (the dump). So far, 50 Cent appears to have avoided violating laws against this sort of behavior because he has not sold H&H stock.
  • A spokesman for the rapper pointed out that the 7.5 million shares are restricted -- meaning they can't be sold until certain conditions are met. The warrants allow him to buy up to 22.5 million shares, which gives 50 Cent a powerful incentive to talk up the stock. They can only be profitable if the price of H&H rises above certain thresholds. He paid $750,000 for the shares and warrants.
  • "This kind of stuff has given the SEC headaches for a long time," says Rick Sauer, a former Securities and Exchange Commission attorney who wrote a book about fighting stock fraud at the agency called "Selling America Short." "It's probably OK unless he knew the stock was bad and touted it anyway, which is hard to prove."
  • Several hours after his first tweet about H&H, 50 Cent tweeted some suspiciously sober cautionary notes. I'm taking a wild guess that they were suggested, though not copy-edited, by a worried lawyer. And the initial promotional tweets were wiped from Twitter, though they live on forever on the web.
  • But is what 50 Cent did really that different from what happens all day long on CNBC when professional money managers take to the airwaves to praise the stocks of companies they already own?
  • Back in the days of the Internet bubble, the SEC charged a 15-year-old kid, Jonathan Lebed, with engaging in a serial pump-and-dump operation, which netted him hundreds of thousands of dollars.  Michael Lewis, in a famous piece in the New York Times Magazine, argued at the time that there was little distinction between Lebed and the Merrill Lynches of the world. Indeed, a few years later, then-New York Attorney General Eliot Spitzer wrung a $1.4 billion global settlement out of Wall Street for promoting stocks that they privately didn't believe in.

I'm just waiting for the barber to start pumping some F5 Networks or the cab driver to tell me how I need to be in wheat futures. 

No positions

Disclaimer: The opinions listed on this blog are for educational purpose only. You should do your own research before making any decisions.
This blog, its affiliates, partners or authors are not responsible or liable for any misstatements and/or losses you might sustain from the content provided.

Copyright @2012