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10 Ways to Detect Stock Manipulation
By now, Bernie Madoff is a household name and most investors have been alerted to be wary of classic Ponzi scams that involve using the deposits of new investors to pay above-market returns to old ones. The $50 billion Madoff scandal set off alarm bells in the market and opened the eyes of many investors to the fact that the regulators at the Securities and Exchange Commission were AWOL. Since then, many investors have been lulled into believing that the SEC has cleaned up its act and is diligently monitoring the market for similar confidence games. If you believe that, you could be in for a rude surprise.
The reality of the situation is that you’re on your own. If the regulators couldn’t stop investor carnage at Fannie Mae or Enron, don’t think they are going to protect your “little” investment into the next hottest small or middle market company. The SEC has long since abandoned its mission to protect the retail investor. Even if you had concrete evidence of market manipulation, its doubtful that they would take your complaints seriously. Everything they do is shrouded in a cloud of secrecy. So in the rare event that they do initiate a formal investigation, defrauded investors would still be kept in the dark. Of course they do make the occasional exception for people like the CEO of Goldman Sachs who got the SEC to stop naked short selling when Goldman’s stock price was under pressure. If you have that kind of clout and leverage, then maybe the SEC has an ear for you.
So if you’re a stock picker, it’s really up to you to do your own due diligence. This is especially true of lightly traded small cap stocks. But even a rigorous financial analysis is virtually useless if your raw material is made up of misleading statements or 'cooked books.' How many times in the last 10 years have you heard about companies restating or withdrawing their financial statements? Unfortunately, it happens too often. No matter how skilled you are at reading income statements and balance sheets, you can still easily be fooled. All it takes is blind faith in corporate officers and regulators.
There is this assumption that the Securities Act of 1934 is being enforced rigorously and that, given the penalties and criminal sanctions against fraud, everything is kosher. That fatal assumption can be ruinous to your portfolio.
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