Newspaper ads push questionable stocks

The Baltimore Sun

Check your e-mail, and chances are it holds several get-rich-quick offers to buy a hot stock in a tiny, unknown company.

The promotion of penny stocks, for years a staple of Internet spam and "boiler rooms" running illegal pump-and-dump schemes, has recently burst forth in splashy full-page ads in major daily newspapers.

Penny stocks are volatile, risky, thinly traded securities issued by minuscule companies that are disproportionately known for having big losses, meager sales, cozy insider management and scant or unverifiable financial data.

Unscrupulous promoters typically work by "blast" faxing or flooding the Internet with new releases so that investors will read the dubious news and bid up the hyped shares. Then the promoters can cash in by selling the stock, typically in huge volume.

There is a certain formula to these advertisements: breathless claims for a miraculous-sounding product or trove of commodities, comparisons to well-respected brands, and an exhortation to the reader to get in on the ground floor by investing in the unknown company.

"How much would you pay to slow or stop the aging process?" asks one ad from the Aug. 24 issue of USA Today for a company called MitoPharm, which makes what it calls a "true anti-aging drink" called Restorade. "This industry is making smart investors overnight millionaires," the ad states.

Maria Terrell, a spokeswoman for the International Newspaper Marketing Association, said: "It's not a newspaper's responsibility to verify the facts of an ad being placed." But she added that the recent ads, for newspapers and investors alike, were "definitely something to pay attention to."

In April, a small unknown company called Nano Chemical Systems Holdings bought a full-page ad in the business section of The New York Times, replete with frothy lines like, "Don't miss this incredible investment opportunity!"

In the ad, Nano Chemical Systems Holdings of Seaford, Del., a former publisher of history textbooks, described its plans to become a leading biofuel maker and compared itself to Intel and Microsoft. "These two industry giants made early investors rich beyond their wildest dreams," reads the copy, adding that "in much the same way, Nano Chemical Systems Holdings is positioning itself as one of the companies that can help make the alternative energy revolution possible!"

Neither the ad nor Nano Chemical's Web site discloses that the company's main business is manufacturing industrial waxes and lubricants.

The ad made no mention of the fact that in January 2006, the Securities and Exchange Commission issued subpoenas to Nano Chemical related to its issuance of news releases, among other things. The company has said it is cooperating with the SEC's investigation.

The fine print at the bottom of the Nano Chemical Systems Holdings ad did disclose that a company named GIA Consulting had been paid more than $232,000 by an unnamed third party to prepare and place the ad as well as "other informational advertisements." While the ad said GIA Consulting did not own any shares in Nano Chemical Systems Holdings, it gave no contact details for GIA Consulting or specific mention of the third party.

Alex H. Edwards III, the interim chief executive of Nano Chemical Systems Holdings, said he thought GIA Consulting was "a shareholder who placed the ad because they thought the company was undervalued." He said he did not know where GIA Consulting was based or that the ad was coming out. Attempts to locate GIA Consulting were unsuccessful.

Asked about the ad, Abbe R. Serphos, a spokeswoman for the Times, said: "It has been the long-standing policy of The New York Times to accept advertisements that promote stocks or securities as long as those securities are registered with the Securities and Exchange Commission or the attorney general of New York State."

She added: "In a few rare instances companies with unregulated securities have managed to place ads in the paper. When we learned of them, we took steps to make sure their ads do not appear in the paper again."

Nano Chemical Systems had registered its securities offerings, according to filings; the stock trades on the Pink Sheets for about 5 cents a share.

By May, other tiny, unknown companies, among them USA Superior Energy (an oil company), Trend Exploration (mining) and BioStem Inc. (stem cell storage), were subjects of full-page ads, some in color, in USA Today, the nation's largest-circulation daily newspaper.

The ad for BioStem, for example, said the firm was "capitalizing on the new cord blood stem cell industry with its potentially life-saving medical applications."

Those are high ambitions for a company formerly known as National Parking Systems, and whose main business today is still running parking lots and "vehicle immobilization services" in Atlanta, where it is based. None of that information is disclosed in the ad.

Neither is BioStem's previous incarnations as the Web Views Corp. (an Internet company) and the Cascade Mountain Mining Corp.

Neither does the ad give any indication of BioStem's shaky financial position, including accumulated losses of more than $15.5 million, according to SEC filings.

The ad says BioStem will be acquired by Cryobanks International Inc., a private, untraded company based in Altamonte Springs, Fla., that is "a leader in the collection, processing and banking of stem cells."

But the USA Today ad omits mention of the suspected role of Cryobanks in a money-laundering scheme in Ghana.

That role is described in an amended lawsuit filed by federal prosecutors in Federal District Court in Brooklyn in August 2004 against Shankar's Emporium and various related participants and bank accounts.

The civil complaint contends that in early 2004, at least $59,800 obtained in connection with the scheme was placed in Cryobanks International by Kazi Management VI Inc., a firm incorporated in the U.S. Virgin Islands.

Kazi Management and its related entities are owned or controlled by Zubair Kazi, who is the chairman of Cryobanks International and, through a Kazi Management entity, a major investor in Cryobanks. Kazi also is the second-largest KFC franchisee in the United States, according to the Cryobanks Web site. Calls to Kazi in Studio City, Calif., were not returned.

In November 2005, the Shankar entities settled the case for $1.3 million without admitting wrongdoing. Alan Burger, a lawyer for Cryobanks in the case, declined to comment.

When asked about the BioStem ad, a spokeswoman for USA Today said: "Advertisers are responsible for the content of their ads, as well as for complying with any legal obligations associated with those ads. USA Today does occasionally review ads on an as-needed basis."

To be sure, the fine print in the newspaper ads reveals more than the typical Internet-based solicitation.

For example, in its USA Today ad, BioStem discloses that a firm called ATN Enterprises LLC prepared the ad and paid a second firm, Discovery Stocks, $37,500 to place it. The ad also discloses that ATN "has been hired by third-party consultants and is contracted to receive" 1 million "free-trading shares" of BTEM, and thus has an inherent conflict of interest in promoting BioStem. It also says that Discovery Stocks can trade in the shares. Calls to ATN's head, Roy Campbell, in Miami Springs, Fla., were not returned.

Steve Clark, the head of Discovery Stocks, said: "I'm not promoting the stock. It's essentially a direct-response advertisement."

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