The inner workings of a pump n dump bucket shop:
This story really opened my eyes to how sophisticated some of the more big time stock promoters are/were:
I had landed a client who wanted me to do a write up on them, it would be a pretty PDF that was downloadable, introducing new investors to the companies management and showcasing their products. Pretty standard promotional material that potential investors would need if they were interested in the company.
During one of the initial meetings with this company, they asked me if I knew anything about an IR firm that was actually headquartered close by. I had heard about them before but knew nothing about them, so the CEO put me in touch with his contact there and asked me to go check them out to see if it was worth signing them up.
I called them and told them I was representing my client and wanted to come see their operations, they were more than happy to oblige.
Their offices were in a fancy part of town, nice big building, fancy lobby with security and people with suits walking up and down the hallways.
This IR company handled investor relations for a large number of small cap stocks. Basically, any time an investor needed to reach IR, they do not call the actually penny stock's head office, these guys were the outsourced IR for these companies.
It was all very impressive, a well polished and professional looking operation.
The one part that people did not usually get to see was the back part of this office. There was a large space dedicated to about ten desks that had a computer and 2 screens on each desk. There were ten young guys all tapping away on their keyboards.
Strolling over to the desks, it became apparent that these guys were on various stock forums, chatting away with each other!
I did not get a good look because I was on the opposite side of most of the screens, but it seemed that, each screen could have four browser windows, each browser window could potentially be a different alias on some chat board.
With ten of them in that room, they could easily be creating the illusion that some stock was getting a lot of chatter and excitement on some chat boards!
This was all part of the service that this IR firm offered. They charge tens of thousands of dollars per month for these kind of services, but their clients obviously get results because this firm seemed to be very busy.
If you are ever looking at some penny stock and you see 5,10 or 20 people all chatting up that stock, it is likely that those aliases are simply some promotion firm at work!
It is their job to create excitement and generate hype, it is all they do all day, every day.
I have even seen a tactic where one or two guys will pretend to be bearish on a stock and go on the attack, only to be "convinced" later on that the stock is actually very good and will rally soon. The tricks are endless and these guys pros and manipulating emotions.
This is just another example of how the odds are stacked against you right from the beginning. In your efforts to do some research on a penny stock, you may find yourself reading some forums and thinking you are getting unbiased opinions. You are not!
Be ever weary!
IMPORTANT EDIT: I forgot an important fact to include here! These IR firms were often paid in tradable stock! I think there are regulations these days which have banned this practice, but there are loopholes to it.
Basically this meant that if you were the CEO of penny stock WXYZ and you wanted to hire this IR firm, you would not write them a cheque for $50,000/month, you sent them a bag full of your shares! If you stock was trading at 10c, this firm would get 500,000 free trading shares. This is a win/win for the penny stock and the IR firm (assuming they do their job).
For the penny stock it means you do not have to lay out any cash, you simply hand out stock which costs you nothing (penny stocks are notorious for increasing the authorized shares, ie dilution). For the IR firm it means that they can potentially make a lot more money than if they were simply paid in cash. Having 500,000 shares @10c means that if they could pump the stock up to 20c, they have basically made $50,000 more! This is why they would game the message boards and farm out the promotional activities to other promoters, to try maximize their gains.
Here again we have another potential reason why a stock can suddenly fall for no reason at all. If this IR firm's CEO decided he wanted to buy a new Porsche this weekend, he could simply pick a random clients stock that he was no longer working for and dump all the shares he had in it. He does not care about the potential of the company and where the stock was going in six months from now, he simply wants to cash out.
Very often we would see a penny stock blaming a falling stock price on a promoter or IR firm they had hired in the past that held a large block of stock.