50 Cent: Penny Stock Pump & Dump?
50 Cent, aka Curtis J. Jackson III, was busily sending out Twitter messages to his 3.8 million followers last weekend. But instead of taking about new music, the popular rapper was supposedly "looking out for ya" investments by touting a little-known penny stock called H & H Imports.
That sent H&H's share price (sold under the ticker HNHI.OB) soaring some 270% in a matter of hours. The problem here? 50 Cent, through a holding company that Jackson owns and controls, is a majority owner of H&H.
According to an SEC filing, Jackson owns 30 million H&H shares or 12.9% of the company, which he acquired specifically because H&H would soon be promoting products developed by "affiliates of Mr. Jackson."
In addition to shares, Jackson has "warrants," which are rights to buy shares at a set price in the future. From the filing, it appears that about one-third of those warrants will only have value if the company manages to get its stock price up from the current 30 cent range to more than 50 cents per share. (Coincidence?)
50 Cent's tweets, according to thisis50.com, appeared designed to tout the stock and were anything but subtle:
"They are no joke. Get in now."
"You can double your money right now. Just get what you can afford."
"If you get in, technically I work for you."
What's H&H? It's a tiny Florida company that sells stuff via Infomercial. But you've probably sold more stuff on eBay that H&H has sold to date. During the six months ended Sept. 30, 2010, H&H had sold $457,231 worth of goods. Unfortunately those goods cost H&H $581,274 to acquire -- $124,043 more than it got. When you add in the company's operating expenses, H&H lost $2.4 million during the six months ended last September.
Other red flags for investors come from H&H's prospectus (a legal document filed with securities regulators when you sell stock to the public). The section titled "risk factors" takes up 6 of the 42 pages of the document.
We'll dispense with the legal mumbo-jumbo and give you the plain English summary of what they said:
- We are a development stage company and may never be profitable.
- Our auditors aren't sure whether we can stay in business.
- We don't know what we're doing. (Their words: Management has limited experience...)
- If we're to stay in business, we need to grow and we're not sure we can handle that.
- We've been losing lots of money, so to stay in business we may have to ask more people to give us more money (so we can lose it). If we ever do become profitable, issuing more stock (to get more money) would make the shares issued to those who got in early less valuable.
- If you buy our stock, you may not be able to sell it. (This was so important that they said it four different times in four different ways.)
50 Cent may have inadvertently added to the company's troubles with his tweet-a-thon. Why?
Securities laws are complicated, but promoting a stock in which you have an interest is a potential violation of securities laws, said Andrew Stoltmann, a Chicago securities lawyer. Even if you're saying something that you believe to be true, promoting shares without mentioning your personal interest in the company gets scrutinized under "pump and dump" rules. These rules are aimed at stopping insiders from saying: "Get in now" while they're quietly getting out.
But even if 50 Cent was shilling the stock because he believes in it, he could still be in trouble, Stoltmann said. And that could sweep the company into legal hot water that it can ill afford.
"The SEC loves nothing more than making a high-profile example out of somebody who is violating the rules. We don't need to look further than Martha Stewart to see that. If the department of Justice can get a clean shot at him, I'm sure they would love to take a swing," said Stoltmann. "If [50 Cent] has a managerial role, interlocking business relationships, or if he's on the board, the company could be dragged into a suit as well."
In the meantime, if you're thinking about buying H&H stock on 50 Cent's recommendation, you should know that penny stocks are the Wild West of the securities market. Fortunes are made and lost overnight. That means you might want to add a tiny addendum to what 50 Cent suggested: "Just get what you can afford"...to lose.
Update: What could make 50 Cent so enthusiastic about HNHI that he'd potentially violate SEC rules to tout this company's stock? We decided to find out and found...slippers, with night lights. More about that and HNHI's other products here.
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