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Preying on the Pumpers

by John Rubino on July 12, 2010 · 18 comments

When you run a website that contains Google ads you constantly have to watch out for penny stock hustlers promising ludicrous returns. They’re generally “pump and dump” operators who push up the price of thinly-traded stocks and then bail, leaving their hapless clients holding worthless paper. Dirtbags, in other words.

So it was with some interest that I heard of a young guy named Timothy Sykes who tracks the pumpers and shows clients how to bet against them. We did a quick Q&A last week; here’s an edited transcript:

Dollar Collapse: How did you figure out that penny stock scammers were easy targets, and how did you learn to prey on them?

Timothy Sykes: I actually made my first million buying the stocks they were pumping and only when that strategy stopped working did I get into short selling the same pattern on the way down…that’s the beauty of pump and dumps, you can either buy the pump or short sell the dump, or when you get good enough, trade the stocks both ways.

It’s far easier to buy on the way up, but after a decade of trading these shady stocks, I am really only comfortable betting on their inevitable failure as experience teaches me they all fail eventually. 

DC: Walk us through some of your biggest trades.

TS: When you make millions of dollars over the year by adding up tons of $5,000 and $10,000ish profits, there’s a lot of great trades to discuss, but I can think of two that really stand out, both are detailed in my book An American Hedge Fund.

Back in 2000, when I was a college freshman, the pumps were truly grand and I was on my way to earning $700,000 from my dorm room simply by buying microcap stocks when they broke out to new highs on strong volume. A simple technical pattern worked like a charm over and over and over and I wasn’t even very good at holding for more than 10-20% when in fact these stocks were spiking 50%+ within hours or days AFTER the technical breakouts occurred.

One such company was Illiinois Superconductor (ISCO at the time) which claimed to invent a product that would extend cell phone reception. The stock had tripled from $5 to $15 when they announced on a Friday morning press release they would be featured over the weekend on national news. The stock surged to the $17s in anticipation of great exposure and I bought 10,000 shares at $17, which was ¾ my net worth at the time, with the goal of selling into a Monday morning gap at $19, $20 or $21.

The news, using a very scientific approach, naively hyped this as the next Microsoft and I couldn’t wait to get out first thing Monday morning. I was using Scottrade back then and they didn’t have premarket trading so as the stock rose 19, 20, 21, 22, 23, I could do nothing but wait for the opening bell and when I finally got out at 9:40am (it took 10 minutes to execute since the trading volume was so overwhelming), I had sold my shares above $29 for a gain of $123,000. I celebrated by taking my entire dorm out to dinner that night. The best part was that I didn’t have to rush out as the stock nearly touched $40 the next day before gradually fading into oblivion as the product bombed.

So I was fortunate not to know about short selling then or else I would have surely been squeezed into bankruptcy before being proven right. But by 2004 I had learned how to short sell the very same pump and dump-type patterns and when the Asian tsunami hit in late 2004, I was ready to short any and all pumps and there were several.

I focused mainly on short selling a company called Taylor Devices Inc. (TAYD) as the stock had surged from $2 to $6 on rumors that Asian governments would use their earthquake absorption technology. I thought that preposterous given the company’s near-bankrupt state and shorted heavily in the $6s expecting to cover in the $4s. Unfortunately I learn the hard way that hype, like that with ISCO going to $40 before dropping back down to $15 within a week, can last longer than expected and I covered in the $7s and low $8s for a $180,000+ loss.

I know, I know, this is supposed to be great trades, but this was one of my best lessons and it got even better when I stuck to my guns and shorted again the next day in the high $8s and covered in the $6s for a gain of $250,000+ locking in total gain of $70,000, a horrible way to make that money, but a very decent haul for my small hedge fund at the time.

Now I have refined my strategy to focus more on paid-for stock promotion and I don’t go for home runs nor do I strike out so much, but it’s amazing that these patterns are still the exact same. I wish there was somebody like me teaching back when I first started as I would have enjoyed much greater success and not made so many bone headed trades!

DC: How do you short penny stocks? My broker won’t me let short anything under $5.

TS: This is the biggest obstacle to implementing my strategy and the problem is that most brokers out there absolutely stink for short selling penny stocks because they don’t want their customers partaking in such a “risky” strategy. That said, if you learn the rules I’ve learned the hard way over the years, the risk is lessened, so I use and recommend Thinkorswim, Sogotrade and Interactive Brokers. Sometimes all three brokers have shares to short, sometimes none of them do. Because I know the odds of successfully short selling a pumped up microcap or smallcap company if timed properly are around 80%, I try to reserve shares to short every day. I even came up with the term “ALFSS” which means Always Look For Shares to Short as it costs nothing but a few minutes to ask your broker if they can find shares to short each day.

DC: How do you track the pump-and-dump artists?

TS: I use several screens on StockFetcher.com and StockCharts.com and I also use great websites like StockPromoters.com and StockReads.com which spell out the compensation various promoters receive for their pumping these carcass companies, highlighting only the upside, and exaggerating as much possible, ignoring the reality that any company that is willing to pay six or even seven figures for stock promotion stinks more than cheese left out of the fridge for three weeks.

Over the years it gets easier to spot the hype and manipulation, which is why I want to get people started learning ASAP so they can become master detectives like me.

DC: Are the pumpers adapting to your strategies?

TS: No, lucky for me, penny stock CEOs and stock promoters are some of the absolute dumbest people you will never hope to meet, they are truly mental midgets. There was a CEO who had lost his medical license and in a blog post aimed at trying to discredit me, accidentally admitted to an SEC investigation just a few days before the SEC halted their stock!

I’ve seen companies that have recycled press releases from bankrupt companies while also copying that bankrupt company’s privacy policy for their website and forgetting to change the company name. SpongeTech insiders are out on $2 million bail and are alleged to have sold 2.5 billion shares thanks to the forging of legal documents signed by a fictitious lawyer and one of their “biggest customers” had the same fax number as SpongeTech executive! This niche is a comedy show and anyone with the slightest bit of intelligence has “an edge” to be able to turn the comedy into predictable profits.

The SEC has and will continue shutting down the most blatant frauds, but manipulation and pumping and dumping will always exist in some form or fashion. I will always be around to teach people to profit from it legally, by short selling these frauds and pumps and even buying them on the way up if you can be quick. Modifying a famous Jesse Livermore quote slightly “The frauds change, the players change, but Wall Street manipulation never changes.”

DC: What do you offer people who would like to try this themselves?

TS: I’ve created 10 comprehensive instructional DVD packages with over 100 hours of instructional content from the basics to advanced, the right and wrong trade setups & chart patterns, how I research and spot red flags and frauds, what data is important, etc. I also have 4 newsletters so everyone can follow along each day as I present potential trade candidates and share my real-time trade alerts.

But if I can teach people one thing, it’s to never trust anybody in finance so rather than just hearing me talk about my strategy, sign up to my free video lesson series so you can learn from the specific trades and patterns themselves.

Full disclosure: The above link is to an affiliate program that pays for referrals, so before buying a video or subscribing to a service do enough research to be sure you understand what you’re getting.

{ 18 comments… read them below or add one }

Henry Coulter July 12, 2010 at 6:57 pm

My biggest, most profitable trade was shorting fannie mae (through puts) when it was trading at around $80.00/share, and LEN when it was trading at $50.00. Since then I’ve been hooked on short selling.

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Ian July 12, 2010 at 9:10 pm

What is described here cannot be called ‘preying on the pumpers’; it would be more appropriate to apply the name ‘carpetbagger’, ready to loot and plunder, to both this fella Sykes and the pumper. Activity like this just encourages the practice, and inadvertently increases the demand (and price) for the worthless paper that the ‘snake oil CEO’ is flogging.

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MarkyMark July 12, 2010 at 9:50 pm

I think I agree with Ian although it can be hard to draw the line in relation to the morality of selling something to someone when you suspect but don’t know that it’s worth a lot less than the market price.

What if you say purchased a house in California in 2003 for little or no money down intending to profit from a bubble you see developing due to excessively low interest rates and then in late 2006 and you go and get the maximum sales price you can believing that the purchaser is likely the ‘bigger fool’ whose going to see their life savings wiped out in the crash. Does the seller of a property have any moral obligations when doing business other than not to lie or mislead the purchaser?

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Ian July 12, 2010 at 10:23 pm

Mark;
The problem is not that people are making money, it’s HOW they are doing it. Whether it’s housing or hyped penny stocks, it’s the dream of becoming wealthy by preying on the dreams of others. This is in alarming contrast to what made the US great in the first place. In the early 20th century, Americans used their strength, resources and innovation to fuel, forge, build, plant and harvest, exporting quality goods to the rest of the world. That is where the wealth came from. It’s not from flipping houses, burgers or penny stocks that you generate riches…..it is just an easy way to accumulate and squander the legacy that your grandparents left you, without having to put any effort into creating. America in the 21st century is becoming Britain of the 20th century.

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Brad Thrasher July 13, 2010 at 3:47 am

@MarkyMark

Casey Stengel said, “I don’t believe in predicting, especially about the future.”

What the future will bring is at best an educated guess or reasoned speculation. It is founded in belief or faith. It is not founded in absolute knowledge of a given outcome.

This is why it is perfectly ethical to trade on what you believe will be true.

All the best,
Thrash

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billhopen July 13, 2010 at 4:49 am

I’ve seen Tony operate here and there for couple of years….he’s a market force.
When he short’s something and calls it a scam, you’d best listen…he has a real nose for BS. Shorting scam garbage-type companies and driving them from the exchange is a service, just like a vulture clearing stinking carrion from the road. Tony the vulture makes a good living at it, he deserves his profit for services provided. CAPITALISM, crap companies must fail.

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Arctic Guy July 13, 2010 at 7:02 am

So then – Pump the DVD and Prey on the readers!

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Brad Thrasher July 13, 2010 at 1:44 pm

@Arctic Guy

Cheap shot.

I’m absolutely intrigued for reasons posted by billhopen. I’m also skeptical because the market for penny stocks is insiders and the gullible. It will be very interesting to see how Tim Sykes determines the support level for a collapsing stock.

Absent a support level, shorting is beyond nuts. Vegas is more fun.

All the best,
Thrash

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brutlstrudl July 13, 2010 at 1:47 pm

I don’t see any moral argument here. This is all variations on the buying low and selling high theme. One thing I do know is that right now, all the liquidity charts are in a dive. There may not be any money out there to pay off the short. I got my my wealth buried out back, waiting for this market to make up it’s mind. Rule number one in my view is not to lose any money.

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Arctic Guy July 13, 2010 at 6:38 pm

Sometimes the truth is cheap. So “cheap shots” are in many ways good. Hence, your “cheap shot” comment is in fact a cheap shot.

This whole thing is set-up to sell the DVD. He makes – what? – a few hundred on the DVD when he could spend an afternoon and make a quarter million using his own ideas instead? Why sell your ideas on a DVD and dilute the effect when one could keep it secret and make billions? Get real people.

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Brad Thrasher July 13, 2010 at 8:42 pm

Arctic Guy,

Most of the important of life’s lessons I learned at the rink. “Cheap shot” is not a good thing.

Your “cheap shot” proves your ignorance. John Rubino disclosed an incidental potential conflict when nothing required him to do so.

Criticizing JR for his misguided conservatism is astute. To suggest he needs a quarter cent per Google click through is to ‘Prey upon the readers” is laughable.

All the best,
Thrash

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Bruce C. July 14, 2010 at 1:03 am

Very evocative interview for me.

On one hand I’m jealous. Timothy is essentially minting money legally in the comfort of his own home or office. He is a crowning example of mankind, a truly “big swinging dick.”

On the other hand, I agree with Arctic Guy. A wise old man once told me, “If somebody tells you he wants to make you rich, then run!”

On second thought, maybe Timothy hasn’t reached the ultimate state quite yet. Maybe the odds caught up with him.

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Brad Thrasher July 14, 2010 at 2:07 am

Bruce C .,

You don’t do a background check before investing? On the other hand maybe not as you appear to afford cred to anonymous internet poster. Good luck with that. Yes get your investment advice from anonymous internet posters, lol.

All the best,
Thrash

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Peter UK July 14, 2010 at 8:15 am

@Arctic Guy
“This whole thing is set-up to sell the DVD. He makes – what? – a few hundred on the DVD when he could spend an afternoon and make a quarter million using his own ideas instead?”

I have to agree here, I have often questioned the many: “let me show you how to make a million in 5 mins” ads and promos; generally requires: to ‘subscribe here’, ‘send no money’…yet etc. Remember the guy in the 50s who put one advert in NYT: “Last time to send your dollars in!” He got $10,000+, good psychology………..

To get inside info on scams and pennies (often after the fact), these offers great insights and entertainment:
http://thestreetsweeper.org/pennypincher.html
and:
http://www.thefinancialinvestigator.com/

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Bruce C. July 14, 2010 at 8:44 am

Thrash,

What?

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Ian July 14, 2010 at 1:59 pm

1) if the idea is so profitable, why would anyone share it?
2) by participating in the ‘pump and dump’, you are actively helping the owner of the shell company…and he’s the one with the printing press.
3) you are not ‘hurting’ the originator of the shares, you are simply taking money from others just like you.
4) accumulating money is not the same as creating wealth.
5) this entire commentary, including posts, is a sad example of what is wrong with society today.

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Arctic Guy July 15, 2010 at 8:27 am

“Cheap shot” is a term that’s easy for one to toss about and place another on the defensive when being caught in a contradiction or otherwise logically untenable position.

For example:
Reporter: “Mr Madoff, is it true you are cheating people out of their life’s savings?”

Madoff: “Now that’s a cheap shot!”

Reporter: “Heir Hitler, there are reports that people are dying.”
Hitler: “That’s a cheap shot!”

Wife: “Sure you were cheating! I found you in bed with her!”
Husband: “You are a cheap shot artist!”

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Jesse July 29, 2010 at 8:40 am

Ian has some romantic notions about US industry; the reality is that the legacy our forefathers left us with was two world wars that destroyed the manufacturing base of the rest of the world, making the US the world industrial leader by default resulting in a protracted industrial boom bubble, with US wages rising to dramatic and unsustainable heights. Now people think US workers are entited to inflated wages even though the rest of the world has caught up and in many cases surpassed the efficiency of our manufacturing base.

In addition, the increasing regulatory and tax barriers the US government has in place discourage the kind of entreprenuership that used to take place in the US.

So save your moralizing about hard work. A fool and his money are soon parted, and without people shorting this stuff on the backside, all you would have is the “pump” and no dump.

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