The popularity of making quick moves via stock-trading apps in 2020 and the string of hopeful headlines relating to COVID-19 vaccines could create a deadly mix for investors who don’t do their homework.
Not surprisingly, it’s prime time for con artists who may push phony stock schemes that are pegged to the pandemic.
The Securities and Exchange Commission has spotted a variety of bad deals, including wild claims that a small, little-known publicly traded company is on the verge of rolling out a cure for COVID-19 or another may be supposedly developing a product or service that can prevent or detect the virus.
Potential victims might spot one of these hot stocks via Facebook, Twitter, an unexpected email or a phone call out of the blue that touts the next sure thing.
In an alert issued Dec. 14, the SEC warned of a “significant uptick in tips, complaints, and referrals involving investment scams.”
How a phony stock pitch can play out
Savers and everyday traders are warned once again to watch out for the microcap stocks, many that trade at a few dollars a share, but carry a great deal of risk.
Many times, you’re looking at a tiny company that isn’t followed by analysts or isn’t required to disclose much financial information because it’s not traded on a major stock exchange, such as the New York Stock Exchange or the Nasdaq.
And yes, microcap stocks are fertile ground for those running elaborate schemes to rip off unwary investors.
“It’s treacherous territory for retail investors,” Joel Levin, director of the Chicago Regional Office for the Securities and Exchange Commission, told the Detroit Free Press.
Levin said the investigation of any COVID-19 related fraud has been a high priority for the SEC since the beginning of the pandemic.
“Starting in February 2020, the SEC began suspending trading in the securities of companies that claimed to have developed treatments for the coronavirus where there were questions regarding the accuracy and adequacy of information in the marketplace,” he said.
As of mid-December, the SEC has suspended trading in 36 companies in response to a broad range of questionable claims, including access to testing materials, development of treatments or vaccines and access to personal protective equipment.
In addition, the Enforcement Division of the SEC opened up more than 150 coronavirus-related inquiries or investigations through the end of September. Many of those cases are ongoing.
On Dec. 18, the SEC announced charges against California-based biotechnology company Decision Diagnostics and its CEO, Keith Berman. The company allegedly, according to regulators, made “false and misleading claims in numerous news releases that the company had developed a working, breakthrough technology that could accurately detect COVID-19 through a quick blood test.”
Investors don’t want to get caught up in speculative plays and hype.
“Remember that fraudsters can be quite good at producing professional-looking websites boasting current productivity levels and profits,” according to an alert by the North American Securities Administrators Association and the Financial Industry Regulatory Authority, Wall Street’s self-regulatory arm.
Photos of a vaccine or medical equipment production sites can easily be faked, according to authorities.
Moviegoers had a front-row seat to the workings of the old-boiler room operations in the movie “The Wolf of Wall Street.” While that movie came out in 2013, the high pressure sales tactics, the phony promises and in some cases out-and-out Ponzi schemes continue.
The SEC warns savers that some of these so-called sure bets are being made as part of fraudulent “pump-and-dump” schemes.
The SEC notes that “fraudsters typically spread false or misleading information to create a buying frenzy that will ‘pump’ up the price of a stock and then ‘dump’ the shares of the stock by selling their own shares at the inflated price. Once the fraudsters dump their shares and stop hyping the stock, the stock price typically falls and investors lose money.”
The promoters, of course, claim to have inside information that could send the stock price soaring.
The investor can lose a good chunk of his or her life savings buying stock based on unreliable claims.
If the SEC halts the trading of stock where there’s suspicious activity, you might not be able to sell that stock in a given time frame. The SEC can suspend trading of a stock for up to 10 days in order to protect investors. How trading resumes after that will depend on the exchange where the stock is listed. The stock price would likely be trading at a much lower price after a trading suspension.
The SEC has the authority to halt trading activity because of serious concerns, including suspicious information being issued in a company’s news releases and concerns about schemes to drive a stock’s price up or down.
In June, the SEC charged a penny stock trader in Santa Cruz, California, with conducting a fraudulent pump-and-dump scheme involving the hyping of a biotechnology stock.
False claims, according to the SEC, were spread through an online investment forum, including the notion that the company had developed an “approved” COVID-19 blood test.
Big names may not be big winners
Even if you’re considering buying stock in a well-known name, such as Pfizer or Moderna, you want to study some of the latest Wall Street commentary and the latest developments relating to the virus.
While Pfizer’s first shipments of a COVID-19 vaccine generated national headlines, the rollout hasn’t been a slam dunk for the stock.
Pfizer stock closed at $39.21 a share on Dec. 14, the day after many watched the inspiring Sunday morning footage on CNN of trucks filled with the vaccine leaving the Pfizer plant in Portage, Michigan. The stock was actually down that Monday, dropping $1.91 a share, or 4.6%, from the Dec. 11 close of $41.12 a share.
Pfizer closed Thursday at $36.81 a share, down slightly from its close of $37.17 a share on Dec. 31, 2019.
Two points to consider: Pfizer isn’t the only player in the COVID-19 vaccine competition and it may not have much pricing power.
A Dec. 13 report by Morningstar analysts noted that other companies including Johnson & Johnson, AstraZeneca, Sanofi, GlaxoSmithKline and many more could one day roll out a vaccine too.
If it’s true that more vaccines will be available, those vaccines “will likely significantly stem the pandemic, but also reduce the profitability of the COVID-19 vaccine market,” according to Morningstar’s analysis.
“We expect the pricing power of the vaccines to be low with so many potential competitors, especially with several receiving government funding and stating a commitment to low vaccine pricing,” the report noted.
On Dec. 18, the Food and Drug Administration granted emergency use authorization to the Moderna COVID-19 vaccine. But this year’s massive money play for shareholders came long before that FDA approval.
Moderna stock closed at $19.56 a share on Dec. 31, 2019, but ultimately hit $169.86 a share on Dec. 8 — gaining 768% in less than one year.
Moderna stock has fallen significantly since early December. Moderna closed at $125.88 a share on Dec. 22 — losing nearly 9% that day alone. It closed Thursday at $104.47, down 6%.
Lately, some market watchers are expressing concern about a new strain of COVID-19 that has cropped up and how the new vaccines will address those mutations.
Melissa Joy, president of Pearl Planning, a wealth adviser in Dexter, Michigan, said a few clients have been looking into vaccine plays in recent weeks.
“Ironically,” Joy said, “the vaccine’s broad success with multiple companies offering promising solutions is great news for humanity, but dampens the investor case.”
In a stunning development, she noted that in Pfizer’s case, the stock was trailing returns for the Standard & Poor’s 500 index for the year through mid-December despite the company’s huge development in shipping vaccines. The broader market was up roughly 16% while Pfizer’s stock was up more than 8.5%.
“In some ways, this could be a parable for investors’ current obsession with shiny and new things. Pfizer seems to represent more of the status quo because of its history and robust lineup,” Joy said.
Most U.S. adults are expected to be vaccinated by June 30, according to Morningstar’s research.
While the vaccine news is encouraging for the country — an effective vaccine is necessary to end the pandemic — many experts say it’s not necessarily a sure bet on higher stock prices for all the drugmakers.