The Big Small Con

The first question is always the same: Does Microsoft/General Electric/Insert the name of a major corporation buy other companies?

That might sound silly, even ignorant but it's the first tip-off that somebody is about to be scammed.

I've been asked that question by acquaintances, neighbors, even strangers. They're only looking for me to say, “Yes. Those companies do buy other companies.” But I don't even need to ask, “Why do you want to know?” I know why. They only want verification and validation that the “tip” they've heard – that some big-name company is about to buy a little-known company – is possible. And they're itching to buy in before the news breaks.

These people think they have inside information. They think they're about to get to get rich on a not-yet-disclosed buyout of some ridiculously small company.

The tip of course has been passed along through a circuitous route of friends and family from someone “in-the-know.” And these people think they've found an easy way to make big bucks. But the company's always some tiny, penny stock that you cannot find any legitimate information on. (The only information you can ever find is a litany of press releases from the actual company touting its prospects.)

Therein lies the thread that runs through scams and cons – big and small. People think they're profiting from something illegal or unethical at the very least. And the scammers and con artists use that to their advantage. Bernie Madoff's massive Ponzi scheme had whiffs of that. (Did the sophisticated feeder funds think that Madoff early-on was front-running using information from his legitimate market-making operation?)

This particular scam: Penny-stock companies are constantly selling shares of their worthless stock. The executives often are selling new shares that they have. That's how the executives make their pay and they find unsophisticated or gullible investors to buy the stock.

The only thing growing with these companies is the number of shares outstanding. Not revenue. Not earnings. Not even headcount.

And the buyers lose and can lose big. Thousands of dollars lost. Tens of thousands. I've seen it happen.

Here is how to know if you're about to fall for a stock scam: You think you're in on something that the public doesn't know. A friend or a “good source” tells you about this “impending news.” (These are people who would never fall for an email scam.) The stock trades for less than $1 a share and doesn't trade on a major exchange. The only news you can find on the company: press releases issued by that company.

And you think you're about to make easy money.