This phone call is becoming all too common for me…
“Brian, what the hell just happened to my stock?”
This time around it was a popular up and coming tech stock, and boy did it get hit hard. I’ll get into the stock itself in a minute.
After he told me the ticker symbol, my friend asked me, “You research pump and dump stocks Brian, was this a pump and dump scam?”
I told my friend that pump and dump stocks usually have very similar characteristics, and I’d be happy to fill him in… if he wanted to know what to look for.
Since the stock in question dropped by over 70% in just the past 30 days, he was all ears… He had nothing more to lose but a couple of minutes.
First off, a pump and dump stock has to have been involved in a paid promotion. This happens when someone holding “non-related third party shares” pays a stock pumping service to promote the stock.
They’re usually looking for the shares they’re holding to jump in value so they can dump their shares to unsuspecting sheep for a huge profit.
In these cases, a company like Research Driven Investors (a notorious pumper) would receive a wire or a cash payment of anywhere between $2,500 and $1,000,000 to paint a very favorable picture of the stock in question.
Usually they “leave out” facts like the company they’re promoting has $0 cash, or they’re losing money at a ridiculous rate, or they don’t file with the SEC…
“Stuff like that”, I told my friend.
“Since the stock dropped so hard in such a short time, I’ll take a look into it and get back to you.”
After I hung up with him, I immediately started to do some research.
So what’s the stock in question?
None other than OCZ Technologies Group (OCZ)…
Looking at the chart, you can see it’s been a rough ride for investors. The real heavy hit came on October 10th, just days ago. The stock plunged over 40% on that day alone… leaving investors wondering what the hell just happened, including my friend.
Now, I checked out my sources to see if OCZ was being pumped, and as I guessed, it wasn’t. It’s usually just really crappy penny and sub-penny stocks that get pumped, and OCZ Technology makes real products.
Here’s the thing…
When investors hear about a stock being pumped, it’s usually fraud that comes to their minds. But in the case of OCZ, we’re not seeing any history of pumping.
What’s happening at OCZ is different.
You see, the CEO has resigned in what’s become a true media frenzy. The company is late with their SEC filings due to admitted mis-accounting issues with various rebate and incentive programs.
Now what I learned when listening to the conference call was disturbing no doubt. First off, the company has “no idea” when they’ll be able to file their quarterly report. And they’ve said the results would be “materially lower” than they previously expected.
Due to the massive collapse of the stock price, securities lawyers are coming out of the woodwork in droves. There’s over half a dozen pending class action lawsuits to date!
The law firms are “investigating whether officers and directors of OCZ breached their fiduciary duties to shareholders by permitting and failing to correct insufficient controls and improper procedures that led to the disclosure of false and/or misleading statements…” as one filing describes.
The bottom line…
As I told my friend, OCZ doesn’t appear to be a pump and dump. While the stock looks a lot like penny stock pump and dump charts we show here on a regular basis, OCZ has other issue that caused the massive price drop.
While my buddy was upset to hear the news… he thanked me for my time and research.
Like all stocks we buy in the market, any of them can become victims of mismanagement, misrepresentation, and even accounting fraud! Remember, stock investing does involve elements of risk, including what I just mentioned.
By doing your homework, you lower your odds of seeing the stocks you invest in fall apart like OCZ just did… but you never fully eliminate the risk. That’s just part of stock investing… taking the good with the bad.
Until next time,