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Before making any investment based on information in an investment newsletter, independently and thoroughly investigate the investment opportunity. For more information about how to evaluate a potential investment, read our publication Ask Questions.
- Touting – promoting a stock without properly disclosing compensation received for promoting the stock.
- “Pump and dump” schemes – pumping up a company’s stock price by making false and misleading statements to create a buying frenzy, and then selling shares at the pumped up price.
- Scalping – recommending a stock to drive up the stock price and then selling shares of the stock at inflated prices to generate profits.
- Undisclosed conflicts of interest – falsely claiming to provide independent analysis or failing to explain conflicts of interest (or biases), including financial incentives, that may influence the investment recommendations.
- False performance claims – misrepresenting the track record of the newsletter’s investment recommendations.
Some investment newsletters claim to be sources of unbiased information, when in fact the newsletter publisher will make a lot of money if the newsletter convinces investors to buy or sell particular stocks. Do not take comfort because a newsletter encourages you to purchase or sell a stock through your own brokerage account. Even if you do not give the newsletter publisher any money to place trades for you, the newsletter publisher may profit from your trading activity. For example, you may purchase a stock (causing the stock price to rise) and then the newsletter publisher may sell its shares of that stock (profiting at your expense).
If a newsletter promotes a particular stock, read carefully what the newsletter says about compensation it receives and look for these red flags:
- No disclosures. Be suspicious if the newsletter does not disclose having received any compensation.
- Vague disclosures. Be skeptical of newsletters that do not specifically disclose who paid them, the amount, and the type of payment. The following examples raise red flags because they do not contain specific information:
“From time to time, the Newsletter may receive compensation from companies we write about.”
“From time to time, the Newsletter or its officers, directors, or staff may hold stock in some of the companies we write about.”
“The Newsletter receives fees from the companies we write about.”
- Buried disclosures. Be wary if the newsletter’s disclosures are difficult to find or appear in tiny, hard-to-read print.
- Questions about your stock purchases. Be careful if a newsletter representative asks you detailed questions about your stock purchases like how many shares you bought, when you purchased the shares, or which broker you used to buy the shares. The newsletter publisher may make money based on the amount of shares its subscribers buy.
Even if a newsletter makes specific disclosures about being compensated for promoting a stock, be aware that fraudsters may include such disclosures to create the false appearance that the newsletter is legitimate.
Online Investment Newsletters
Hundreds of online investment newsletters have appeared on the Internet in recent years. Many offer investors free of charge seemingly unbiased information about featured companies or recommend “stock picks of the month.” While legitimate online newsletters can help investors gather valuable information, some online newsletters are tools for fraud.
Some companies pay the people who write online newsletters cash or securities to “tout” or recommend their stocks. While this isn’t illegal, the federal securities laws require the newsletters to disclose who paid them, the amount, and the type of payment. But many fraudsters fail to do so. Instead, they’ll lie about the payments they received, their independence, their so-called research, and their track records. Their newsletters masquerade as sources of unbiased information, when in fact they stand to profit handsomely if they convince investors to buy or sell particular stocks.
Some online newsletters falsely claim to independently research the stocks they profile. Others spread false information or promote worthless stocks. The most notorious sometimes “scalp” the stocks they hype, driving up the price of the stock with their baseless recommendations and then selling their own holdings at high prices and high profits. To learn how to separate the good from the bad, read our tips for checking out newsletters.