You'd Be Better Off Igniting a Pile of Your Own Money (Just About)

Up until last autumn, Toron (OTC: TRON) was in the business of "marketing, sales, and resales via the Internet of Web Domain Names or URL's and related services."

It was a tiny company with one part-time employee that, nevertheless, traded thinly over the counter for a few pennies.

Then, in August, Toron's board of, umm, director decided it was time for a change. The company filed an 8-K to disclose:

We received a resignation from Ljubisa Vujovic. Mr. Vujovic resigned as president, chief executive officer, chief financial officer, and as a director of our company. His resignation was not the result of any disagreements with the Company regarding its operations, policies, practices, or otherwise. Concurrently with Mr. Vujovic's resignation, on August 5, 2011, we appointed Michael Whitehead as president, chief executive officer, chief financial officer, and as a member to our board of directors.

Later in the filing, we find out that "our board of directors solely consists of Michael Whitehead." (Note: Toron has since added a second employee-director.)

It wasn't just a change in management, though. According to the 8-K, Whitehead's background is in the mining industry, and Toron would now be a "new mineral exploratory company," according to the website that was created on Aug. 11, 2011.

Intrigued? You'd be better off igniting a pile of your own money
Over the past month, Toron has been touted relentlessly in unsolicited emails and on message boards. In my more than six years of examining the penny stock landscape, I cannot remember a more sustained spam campaign -- I've saved nine emails since Jan. 18 hyping the stock and have deleted at least two more. Sample the absurdity:

T.R.O.N  IS READY TO BREAK INTO THE 30's THIS WEEK!!! STAY TUNED
FOR MORE BREAKING NEWS ALERTS ON TRON.OB !!!! THIS STOCK IS THE
REAL DEAL!!!!!

And:

"TRON IS READY TO RUN -- Rarely does an opportunity so ripe present itself! The possibility for huge gains is immense -- Read below"

Toron Inc is (TICKER: TRON) poised for huge growth. Many experts and Wall Street Professionals are stating that it could run as high as 7.50 in the next 60 days. If that is true (which we believe it could be), the gains would be even bigger than our last 3,000 percent gainer. 

From current prices, that $7.50 target price, by the way, would mark a preposterous gain of more than 3,600%.

But do people actually buy into this spam?
A 2007 paper by Laura Frieder and Jonathan Zittrain proved that, as their title makes clear, "Spam Works" (PDF file, Adobe Acrobat required). They elaborated:

Volume of trading responds positively and significantly to heavy touting. ... Returns in the days following touting are significantly negative. The evidence accords with a hypothesis that spammers "buy low and spam high," purchasing penny stocks with comparatively low liquidity, then touting them -- perhaps immediately after an independently occurring upward tick in price, or after having caused the uptick themselves by engaging in preparatory purchasing -- in order to increase or maintain trading activity and price enough to unload their positions at a profit.

On Monday, Feb. 6, Toron's trading volume was 4,671,439 -- higher than that day's volume for multibillion-dollar blue-chip Dow components 3M, United Technologies, Travelers, and McDonald's.

So yes, "investors" are buying into this "story." Year-to-date through Feb. 6, Toron had already doubled:

There is no rational explanation for the blue line in that chart. Though it trades over the counter, information on the stock isn't impossible to come by -- 30 minutes of Web research yields a ton of red flags. Like:

  • Well, the spam emails themselves. (One blogger identified the IP address of the sender. Country of origin: Poland.)
  • The fact that the company changed its entire business model and management team.
  • That when I emailed the only address listed on Toron's website, I got the following reply: "Delivery has failed to these recipients or groups: info@toroninc.com. The email address you entered couldn't be found." When I called the listed number, it went to a voicemail with a generic message along these lines: "You've reached investor relations. Please leave a message."
  • The company's auditor has been flagged by the Public Company Accounting Oversight Board (PDF file, Adobe Acrobat required), which wrote:

The inspection team identified what it considered to be audit deficiencies. The deficiencies identified in three of the audits reviewed included deficiencies of such significance that it appeared to the inspection team that the Firm did not obtain sufficient competent evidential matter to support its opinion on the issuer's financial statements.

  • The fact that the company has not reported a dollar in revenues, ever.
  • The company's listed office address is actually a Regus "virtual office."

The moral
I don't know if the company has any knowledge of or involvement in this relentless stock-hyping email campaign, or if the touters are just outside stockholders who saw an opportunity and grabbed it.

It doesn't much matter -- Toron isn't the first penny stock to be shamelessly pumped over email and Internet message boards, and it won't be the last.

Perhaps the SEC will jump on the case -- the agency has filed "more than 50 enforcement actions for misconduct related to microcap stocks" since fiscal year 2011. Hypesters have been warned, but they won't disappear.

I implore investors to be, well, investors in businesses, not speculators in rolls of dice. When it comes to unsolicited emails from unknown sources asking you to buy a stock, the SEC's advice for us retail investors is beautifully succinct: "When you see an offer on the Internet, assume it is a scam."

Because, really, even if it's not a scam, it's most decidedly not a good investment.

Brian Richards is the managing editor of Fool.com. Brian owns shares of 3M, but no other companies mentioned. Follow him on Twitter: @brianlrichards.

Motley Fool newsletter services have recommended buying shares of 3M and McDonald's. Motley Fool newsletter services have recommended creating a diagonal call position in 3M. The Motley Fool has a disclosure policy.


Read/Post Comments (27) | Recommend This Article (57)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 10, 2012, at 7:39 PM, mhonarvar wrote:

    I bought something a few years ago claiming to be inventing a way to reduce/trap emissions.

    I bought $100 worth (was like 15 cents each).

    they did a reverse split...then changed name to Eclipse technologies (can't remember original name) then a little bit later changed to Silver Horn Mining.

    I still have 20 shares of Silver Horn Mining worth .05 each ($1 lol)

  • Report this Comment On February 10, 2012, at 7:44 PM, dbtheonly wrote:

    Another mining company has been relentlessly e-mailing me. Dozens in the past few weeks. MRSG or something like it. Then in the fine print you see that the e-mailer has been paid $300k to do the e-mailing. Easy to see where the real money is- sending e-mails.

  • Report this Comment On February 10, 2012, at 7:55 PM, TMFNewCow wrote:

    Yeah but can they procure me a light cycle?

    -- Evan

  • Report this Comment On February 10, 2012, at 8:37 PM, zymok wrote:

    I'm going to buy! I make all my stock picks now based on the coolness of the ticker symbol. Fundamental analysis was just too hard, 'cause it involves math and stuff. Reading tickers is much easier.

  • Report this Comment On February 10, 2012, at 9:42 PM, awallejr wrote:

    Well I received an email saying that I apparently won 350,000 euros from a random online lottery. I just needed to respond. I did by deleting it.

  • Report this Comment On February 11, 2012, at 1:49 AM, somethingnew wrote:

    LOL, THIS IS HILARIOUS

  • Report this Comment On February 11, 2012, at 1:53 AM, somethingnew wrote:

    Lol, Before I even clicked on the the article headline I was thinking of TRON because I keep getting emails soliciting them. WOW, If this isn't a scam I don't know what is. I looked at the profile on Msn and it had every red flag you could possibly find in a shell company. I only looked it up out of curosity because by the email I knew it was a scam and I love checking out the financials or non-financials of these type of ridiculous companies.

  • Report this Comment On February 11, 2012, at 6:55 AM, Clint35 wrote:

    That's hilarious! I was laughing through the whole article. Here's a red flag, you can't run a mining company with only two employees. I loved the ticker TRON. Did you like the movie? Well you'll love the company. But seriously, it's amazing how many people are taken in by a variety of scams. I think that's sad and I think scammers are just as evil as any other type of criminal and should be punished just as harshly. That's good advice from the SEC. Good article.

  • Report this Comment On February 11, 2012, at 9:13 AM, dbtheonly wrote:

    Oracle,

    I don't mean to be disrespectful, but if you're going to be paid to pump a stock; then I've got no faith that you'll accurately report your results.

  • Report this Comment On February 11, 2012, at 10:14 AM, Pinpress wrote:

    LOL! "Mining!" Yeah! Mining for DOLLARS!!! Maybe the next iteration will be for "Fishing!" hahahaha!!!

  • Report this Comment On February 11, 2012, at 10:16 AM, TMFBreakerRob wrote:

    You guys are all missing the point!!!!

    All it has to do is go up a couple bucks and we make a lot!! I'll have to buy a bunch next week!!!

    And I'll have to tell one of my relatives who loves these kinds of companies for the same reason I mention above!!!

    Woohoo!!! Riches are coming my way....I can see the light at the end of the tunnel!!! LOL

  • Report this Comment On February 11, 2012, at 12:25 PM, Calimesa wrote:

    What I don't understand is why does the SEC and Markets allow these types of obvious scam companies to exist. Maybe I'm just too stupid to understand the penny stock market. SMH.

  • Report this Comment On February 11, 2012, at 1:22 PM, wellbehind wrote:

    theres another one out there getting pumped pretty hard right now. NSRS. another mining company. one of the spammers is getting paid $600k. WOW!

  • Report this Comment On February 11, 2012, at 1:53 PM, Merton123 wrote:

    P.T. Barnum stated that there was a sucker being born every minute. That spam emails work is strong evidential evidence of that truth.

  • Report this Comment On February 11, 2012, at 2:52 PM, seattle1115 wrote:

    This is the first I've heard of any of this. Am I not cool enough for anyone to bother spamming me? I think I've been insulted!

  • Report this Comment On February 11, 2012, at 3:01 PM, dbtheonly wrote:

    Calimesa,

    A lot of the regulation is what these spammers/scammers/crooks are required to publish. That's why you have to look closely at the bottom of the e-mail to see who is paying for it. One trick is to spell out two hundred and fifty thousand dollars which is much easier to miss than $250,000.

    Also sometimes the owners of the stock will set up a separate corporation to pay for the advertising so that they do not appear to be pumping the stock directly.

    In short you should read the complete e-mail very closely. I assume that every unsolicited e-mail stock pick is a scam. It takes serious persuasion to convince me otherwise.

    For why the SEC doesn't do more, I'd point out the political speeches that claim that "mindless Federal Regulation is stifling the American Free Enterprise System"

    Mr. Richards,

    I disagree, we'd be better off burning the money in the back yard. 1. We could cook hot-dogs over it. 2. If these scams stopped working then maybe the scammers would move on to something else.

  • Report this Comment On February 11, 2012, at 4:10 PM, Kloris wrote:

    I adhere to a simple rule. If I get unsollicited spam touting a stock I consider it fraudulent and bad to begin with. And I regard all companies and products that spam to be malicious. Good stocks, products and companies do not need spam.

  • Report this Comment On February 11, 2012, at 4:43 PM, sikiliza wrote:

    Ha ha ha... I try to check my potential investments with people around me. If no one has ever heard of the company, then beware. Some of these things are easy to beat via simple due diligence. Pull up the company's SEC filings, listen to earnings calls and make sure that there are real live people behind the company, if you can visit their stores, try their products... get familiar with them.

    Peter Lynch's principles are as relevant today as they were 20 years ago.

  • Report this Comment On February 11, 2012, at 9:11 PM, Merton123 wrote:

    Penny Stocks is a place where an enterprising investor can make money. For example over in Courdelane Idaho one family owned a hotel. A couple of generations later the stock had become dispersed among the descendents. Mr Hagadone went to the various family descendants bought up the shares and got control of the hotel for a low price.

    I agree the an enterprising investor should ignore all emails touting penny stocks. On the other hand where the market is efficient for small cap to large cap stocks this could be an area where an enterprising investor could make a lot of money. This is what Warren Buffet did during his early years.

  • Report this Comment On February 12, 2012, at 12:31 PM, Darwood11 wrote:

    Great article.

    Thee are legal ways to lose money quickly, and it's easy. The Powerball was up to $336+ million. Here in Illinois, even governor Quinn bought a ticket. That's our political leadership!

    According to the online Chicago Sun Times, it was reported that the closest any Illinois resident

    came to the jackpot "were the seven people who matched four of five numbers and the Power Ball. Each of these players will receive $10,000."

    For the four, the payoff was better than many of these hyped stocks.

    At $2 a ticket, there were "only" 168 million tickets out there. Of course a few spent $3 for their tickets for the "Power Play" option, which is an opportunity to lose 50% on each ticket purchased!

  • Report this Comment On February 12, 2012, at 12:32 PM, Darwood11 wrote:

    Oops, make the last sentence "an opportunity to lose 50% MORE on each ticket purchased!

  • Report this Comment On February 12, 2012, at 11:32 PM, BuyloPESellHiPE wrote:

    Reminds me of the song by Phil Collins, "Jesus he knows me". So many people get duped everyday for a pocketful of miracles!

  • Report this Comment On February 13, 2012, at 10:08 AM, TMFBent wrote:

    Need proof that buying this stuff will kill you financially? Look no further than TMFStockSpam, who does nothing but red thumb promoted stocks.

    http://caps.fool.com/player/tmfstockspam.aspx

    number 18 player on CAPS without a single long position...

  • Report this Comment On February 13, 2012, at 11:33 AM, dinixlr8 wrote:

    Tron spelled backwards is Nort. No ReTurn on your money!

  • Report this Comment On February 13, 2012, at 1:47 PM, Kloris wrote:

    I did a small analysis.

    Google finance shows that this stock has been trading for 92 days. The average number of shares being traded is 429,467. Of the 92 days, less than the average has been traded for 71 days.

    If you remove the trading that took place since february 2nd (pretty much when the spamming emails and pumping of the stock started), the average number of shares being traded per day drops to 216,959; almost half of the average including the pumping of the stock.

    And of the 92 days of trading, a whopping 51 days saw less than 100,000 shares being traded per day. And a total of 23 days, less than 10,000 shares were traded. Which means that there have been more days where less than 10K shares were traded than days that more shares were traded then the average.

  • Report this Comment On February 16, 2012, at 6:48 PM, TMFBrich wrote:

    Two quick updates.

    1. The company issued a press release that said the following: "The Company has become very concerned about the variety of negative spam emails that have been sent out recently and the false statements that have been issued as a result. Toron Inc. is in no way a part of these spam emails in any manner."

    2. This morning I emailed their listed investor relations email ... and this time it was operational. Their response, in part: " Mr. Richards, Thank you for your Email. Yes the info@toroninc.com email does work for Toron Inc."

    -Brian Richards

  • Report this Comment On February 17, 2012, at 3:03 PM, AsparagusPee wrote:

    Cute video on The Onion about dumping money in a hole:

    http://www.theonion.com/video/in-the-know-should-the-governm...

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