White Collar

Misleading Press Releases and Market Hype: Verifying Claims and Avoiding Microcap Fraud

By: Lucosky Brookman
Misleading Press Releases and Market Hype: Verifying Claims and Avoiding Microcap Fraud

The dissemination of false, misleading or improperly exaggerated press releases remains a pervasive problem in the microcap stock markets. Savvy investors must watch for "red flags" revealing unreliable releases and verify material claims through due diligence before relying on hype.

The Heightened Importance of Press Releases for Informing Microcap Investment Decisions

Press releases issued directly by microcap companies themselves are often a major source of information for investors evaluating possible investment decisions. This results from the typical lack of traditional Wall Street analyst coverage or ratings guiding investment decision-making for very small public companies.

In the absence of independent analyst assessments, press announcements released by microcap managements end up carrying inordinate influence in driving investor perceptions, sentiment and trading surrounding these stocks. This reality places great responsibility on microcap firms to ensure their press communications are accurate.

Intentional Use of False Claims and Exaggerations in Microcap Press Releases

Unfortunately, the limited scrutiny of microcap markets means some unscrupulous issuers are unafraid to intentionally publish objectively false, grossly misleading or improperly exaggerated claims via official press release channels as a means of improperly manipulating market perceptions.

Common issues observed include microcap companies:

  • - Materially overstating financial results, growth metrics or performance to appear more successful.
  • - Announcing fictitious new customers, major contracts or commercial transactions that simply did not occur.
  • - Misrepresenting the current status, progress or success of product development pipelines or pursuit of regulatory approvals.
  • - Making completely unsupported claims about competitive advantages, market share gains, or comparisons to industry leaders.

The sole purpose of press releases containing such inappropriate claims is to artificially and improperly "pump up" investor perceptions of the company and, in turn, its stock price and valuation. But any artificial share price inflation created eventually corrects once the misleading nature of the press hype is uncovered.

Watching for "Red Flags" Revealing Unreliable Microcap Press Releases

Given press release misinformation risks, savvy microcap investors watch for certain "red flags" that may reveal a release contains unreliable claims:

  • - Announcements lacking specifics or relying on vague claims that would not allow objective independent verification.
  • - Press releases strangely timed late in the day after markets close or late on Fridays, suggesting an aim to avoid scrutiny.
  • - Material announcements failing to provide customary supporting evidence like verifiable names of referenced customers or vendors.
  • - Major claims that seem to directly contradict objective data in the company's actual financial disclosures and filings.

Importance of Verifying Material Press Release Claims Through Due Diligence

Robust due diligence is essential for investors to verify with objective sources that material claims and data points contained in microcap press releases are accurate and truthful before making an investment decision based on any market hype.

Experienced securities counsel with expertise in microcap company analysis can conduct efficient scrutiny of concerning press releases on behalf of clients to identify any red flags or confirm the veracity of material claims before capital is committed. Relying on press hype alone without verification risks loss by exposing only the false inflation eventually destined to collapse.