It may have one of the biggest bloopers in the stock market this year.
In October, when Twitter announced its impending IPO, thousands of eager stock buyers raced to be the first to invest.
Unfortunately, they swooped in a tad too quickly. Instead of buying Twitter shares, those investors wound up purchasing thousands of shares of a bankrupt electronics company, Tweeter Home Entertainment Inc. Twitter’s stock isn’t expected to debut until mid-November on the New York Stock Exchange, using the ticker symbol TWTR.
The Tweeter mix-up is not the only example of investor folly tied to recent news events, say securities regulators.
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“Twitter was the biggest reason we’re alerting investors, but we’ve seen other circumstances where investors buy large quantities of bankrupt companies,” said Gerri Walsh, vice president for investor education at the Financial Industry Regulatory Authority, or FINRA, which oversees the securities industry. “It doesn’t happen every day, but it does happen when there’s big news about a company or an IPO.”
News events can rattle investors, both those who make their own mistakes or those who fall victim to scam artists.
Currently, there’s also a buzz connected to another source of potential stock scams: legal marijuana. Now that 20 states allow medical marijuana and two — Colorado and Washington — have legalized recreational use, FINRA is warning consumers about scams involving cannabis-related stocks.
“When the next big thing is in the news,” said Walsh, “fraudsters start swimming like sharks.” And with more than 20,000 companies listed on U.S. stock exchanges, investors have plenty of opportunities to either fumble or be defrauded.
Here’s how to avoid those mistakes:
• Check the symbols
Most U.S. stocks have three- or four-letter ticker symbols, some of which can sound confusingly similar. Check the symbols carefully, especially if it ends in the letter “Q.”
When a company enters bankruptcy, a “Q” is often added to its ticker symbol. That’s your tip-off that the stock is risky. (It’s also how Tweeter’s symbol TWTR became TWTRQ.) Typically, those stocks no longer qualify to be listed on the NYSE or Nasdaq but instead are traded on over-the-counter markets, such as the OTC Bulletin Board or the Pink Sheets.
Twitter wasn’t even officially listed on a stock exchange when some investors pounced on TWTRQ, the home-entertainment company, whose shares had been trading over-the-counter at less than a penny a share since 2007. But on Oct. 4, when would-be Twitter investors mistakenly flocked to buy its shares, TWTRQ’s share price soared nearly 700 percent, closing at 5 cents in the trading frenzy. In that one day, more than 14 million shares traded hands.
Four days later, FINRA stepped in and changed Tweeter Home Entertainment’s ticker symbol to THEGQ, “so the confusion would not continue,” Walsh said. The company’s shares promptly plummeted back down to their penny-a-share status.
In any case, investors should always check to make sure the ticker symbol is correct.
• Ask “Why me?”
Before a company going public and actually issuing shares, scam artists may try to entice unsuspecting investors into “exclusive,” pre-IPO offers that supposedly no one else can obtain. These come-ons can arrive by phone, email and tweets, or online via social media sites or investing blogs.
“When somebody comes to you with a deal, you need to ask some hard-hitting questions: Why me? Why would they give me this opportunity?” Walsh said, especially when the offers are unsolicited.
• Check the licensing
“So often, the frauds we see are unregistered professionals selling unregistered securities,” Walsh said. Use FINRA’s Broker Check, at http://brokercheck.finra.org, to be sure the investment broker is registered and doesn’t have a serious complaint history.
If it’s an IPO, check that it’s registered with the Securities and Exchange Commission.
• Know where it trades
If a company is listed on the NYSE or Nasdaq, there are certain standards of financial soundness that must be met to be listed. But over-the-counter stocks aren’t required to meet stringent standards; they often trade infrequently and can have highly volatile prices.
• Do your research
Check the SEC’s EDGAR database to get details on a company’s revenue, growth projections and history. Read the company’s prospectus. Remember that just because a company has registered with the SEC does not mean it’s necessarily a good investment. On its website, the SEC notes that it reviews a company’s filing for compliance with reporting requirements but that “is not a guarantee that a company’s disclosure is complete or accurate.”
Also, look beyond a company’s self-promotions. One upstart medical-marijuana company issued more than 30 news releases in the first half of this year, FINRA said, touting its “rosy financial prospects“ and growth potential. The company’s name popped up frequently online via sponsored links, investment profiles and spam email, including one promotional piece claiming the stock was “poised to light up the charts!” But the company’s balance sheet showed only previous losses, and it had no current business plan.
Do a quick Internet search of the company name or its CEO and other principals to see what turns up.
“It’s really important to check out if they’ve got a criminal record,” said Walsh, who recommends checking the Federal Bureau of Prisons’ Inmate Locator to see if company officials have ever been imprisoned.
Without disclosing company names, FINRA says the CEO of a “heavily touted” medical-marijuana company spent nine years in prison for operating one of the largest drug-smuggling operations in U.S. history. In another instance, a medical-marijuana CEO had previously been indicted in a multimillion-dollar Ponzi scheme involving home mortgages.
• Beware frequent changes
A lot of unscrupulous companies change their business model to align with changing economic conditions or what’s creating media buzz, Walsh said. “One year they’re in gaming and casinos; the next year, it’s investments in China. One year it’s oil and gas; the next year, it’s clean-energy production.”
One cannabis company that FINRA followed announced it was switching from the coffee business to “the rapidly emerging medical-marijuana industries.” Another low-priced stock changed its name four times in the past 10 years.
Those signs may not necessarily prove anything is amiss, Walsh noted. “But when you see from year to year (the company) has been changing its ticker symbol or it doesn’t show revenue … it should be a red flag for any investor to be wary.”
• Be cautious
When looking at an initial public offering, investors should not leap in too quickly, as IPOs can be risky. For tips on IPOs, go to SEC.gov and search for “Investing in an IPO.”
Also, some investors mistakenly figure that buying a company’s shares during bankruptcy is a shrewd investment because the share price will jump when the company is reorganized. But that’s often not the case. Typically, when a company emerges from bankruptcy, its old shares are canceled and the company resumes trading with a new ticker symbol, as happened with General Motors. In most cases, the old shares become worthless.
When it comes to investing, the advice is consistently classic.
“Just check before you invest,” said Mark Leyes, spokesman for California’s Department of Business Oversight.