Friday, May 15, 2015

Be Wary of Famous People Promoting Penny Stocks

The penny stock market has the potential for significant profits, and of course, significant losses. Investing in start-ups and small companies is speculative, and high risk, but has an allure for a certain type of investor.

One problem with this market segment is the promotion of such investments to individuals who are unsuitable for the investment,

Over the years we have seen well known individuals promote such ventures. Bloomberg Business has an article regarding four-star Army general Wesley Clark's involvement in promoting such ventures, including a Grilled Cheese Truck company, and a hydroponic lettuce company.

According to the article, Clark is one of many former governors, generals, and congressmen who’ve found second careers lending their name to  companies that are willing to pay for prestige. Since he ran for president in 2004, Clark has joined the boards of at least 18 public companies, 10 of them penny-stock outfits, whose shares trade in the “over the counter” markets, a corner of Wall Street where fraud and manipulation are common.

Clark claims that these small start-ups come to him for his global connections and enginnerin background, an area of expertise which does not seem to have any connection to a cheese truck franchise. At the same time, he denies that he is lending an endorsement to the companies, and claims that "Nobody's going to invest in a company just because General Clark is a director."

Perhaps, but if the allure is his engineering background and not an endorsement, why is he making promotional videos, recommending an investment in the company and saying things like "we'd love it if you joined us with an investment" and being filmed in a replica of the oval office?

There is no question that these companies are using Clark's name, and others, to gain legitimacy, and there is nothing wrong with that. Having a famous and respected person as your spokesperson does lend credibility. But does that mean that we should be investing in the company?

The answer to that question is in the last sentence of the article:

The bottom line: Since 2004, Clark has joined the boards of at least 10 penny-stock companies. All but one lost value during his tenure.

For more information - Wesley Clark, Penny-Stock General - Bloomberg Business

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The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions and representation of investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.

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