Web is a stock scammer's gold mine

The good news came quickly for a local beverage firm that appeared to be clearly on the rise. The purchase of a 44,000-square-foot production facility, a marketing agreement that would push its products around the world, and a pending distribution agreement with Coca-Cola all were part of the expansion plans for Beverage Creations Inc.

But according to the Securities and Exchange Commission (SEC), the Mendota Heights company's news releases and its plans to develop a sports water product that contained "an inhalable shot of oxygen" were part of a bogus campaign designed to pump up the share price of the penny-stock company.

The plan, allegedly hatched by an investment group from Texas along with Beverage Creations executives, was working masterfully until the SEC stepped in. In less than six months, the stock had climbed from 2 cents a share to $1.83 -- a 9,000 percent gain. Not bad for a company that, according to the SEC, had just $12,506 in the bank and credit card debt of $14,500 as recently as December.

The SEC suspended trading of Beverage Creations and sued the company and the promoters. The suit, filed March 13, alleges fraud and violations of the registration provisions of the federal securities laws. (The company has said it is cooperating with the investigation, and the stock resumed trading late last month.)

According to the complaint, Beverage Creations sold stock to the promoters and then took steps to facilitate the promoters' resale of the stock to the public without full disclosure. The stock promoters allegedly engaged in manipulative trading to create demand and push up the price of the stock.

The SEC's action and allegations against Beverage Creations are part of a long-overdue crackdown on Internet spam "pump and dump" schemes, and the crackdown appears to be working. In the past year, there has been a 30 percent reduction in pump and dump Internet spam and a 68 percent reduction in spam-related complaints from investors filed with the SEC.

"Pump-and-dump schemes are not new," said Ann Sulzberg, a special counsel in the SEC's Office of Investor Education and Advocacy. "They've used phone calls and newsletters in the past, but spam e-mails are a newer way for fraudsters to reach a lot of people at once.

"Their intent is to promote the stock so that its value climbs quickly and they can then sell their shares at a profit. As they dump their shares, the stock price declines quickly and the unsuspecting investors are left holding the bag."

Avoiding such scams

How do you avoid pump-and-dump scams? It's not that hard. Here are two cardinal rules:

Rule 1 (duh): Don't buy a stock that's promoted in a spam e-mail. If the company has to resort to spam to promote its stock, you need to question the legitimacy of the company and the news release.

Rule 2: Don't buy a stock you've never heard of from a guy you've never heard of who is contacting you by phone. Deal with reputable advisers from a company you know. "Investors should be wary of any solicitation that offers advance notice of good news or anything that promises a huge amount of growth in a short period of time," Sulzberg said. "If it sounds too good to be true, it probably is."

Sulzberg said that pump-and-dump scammers often tie their offerings to hot topics in the news, such as high-tech products or energy technology breakthroughs.

You should also be wary of any company that promotes its stock through unconventional channels. For instance, last month the SEC acted against three companies that were promoting their stock through videos on YouTube.

What else should you watch out for? The SEC offers several tips to help investors avoid stock scams:

• Consider the source. "When you see an offer on the Internet, assume it is a scam until you can prove through your own research that it is legitimate."

• Find out where the stock trades. Stocks traded on the Over-the-Counter Bulletin Board or the Pink Sheets "are generally the most risky and most susceptible to manipulation."

• Independently verify claims.

• Research the opportunity. "Always ask for -- and carefully read -- the prospectus or current financial statements and then check the SEC's EDGAR database (www.sec.gov) to see whether the investment is registered."

• Be wary of high-pressure sales pitches. Beware of promoters who pressure you to buy before you have a chance to investigate the stock. "Don't fall for the line that you'll lose out on a 'once-in-a-lifetime' chance to make big money if you don't act quickly."

Sulzberg said: "Our message at the SEC is to make sure you understand the investment before you invest. ... Never be pressured into buying any stock immediately."