This article was updated on Jan. 25, 2022. 

Unethical investment websites have intentionally hyped crypto and SPAC scams to naive investors in exchange for ad money and it is creating unprecedented bubbles, market volatility, and big losses for naive investors.

Thanks to click-bait business models, financial journalism has entered a new phase of Google-inspired Yellow Journalism. Today, more financial websites are blatantly pursuing advertising dollars by promoting SPACs, crypto scams, and IPOs to unsophisticated retail investors who they know will suffer large financial losses.

The growing trend of unethical financial journalism, combined with online brokerages that offer “free” stock trades, is the driving force pushing novice retail investors with little or no investing experience into new instruments that are masterfully managed by professional traders, pump-and-dump operators, and investment banks.

In the process, unsophisticated retail investors, many of whom have never heard of a balanced stock-bond portfolio, are being lured in IPOs and SPACs with the express or implied message that they can make a lot of money quickly.

Unfortunately, we all know that’s not true.

Greedy Financial Websites and Editors Behind the Crypto Hype

During the week of Jan. 17, 2022, Bitcoin declined from November 2021 and has wiped out more than $600 billion in market value. Over $1 trillion has been lost from the aggregate crypto market. This could rank as one of the largest pump-and-dump scams ever as wealthy investors dumped the hype currency that has zero investment fundamentals.

To power this misleading message, some second-tier financial websites (websites that don’t produce original reporting, equity, or strategy research) have assembled teams of contributor-editors-writers dedicated to tracing new crypto hype, IPOs, or SPAC news as soon as they appear on the EDGAR database, NASDAQ or NYSE websites.

How powerful is this combination of social media-free stock trading crowd behavior?

Let’s take the case of Robinhood, one of the largest online stock trading company abusers. Robinhood has hyped day-trading as a viable activity, despite its pathetic history of losses for non-professionals. History will show that Robinhood stole from the poor and gave to the rich, a total perversion of the original legend.

According to the “RH Top 100 Fund,” a weighted index of the most traded stocks among Robinhood’s users, “the hivemind-like behavior and frictionless access to free trades may have been day-trader’s biggest pitfall in 2021. Robinhood’s users struck gold at the beginning of last year, peaking at a 102% increase, blowing every other major index out of the water. Yet, throughout the rest of 2021, the “RH Top 100 Fund” took significant dips, eventually ending the year at -55.3%,” Richard Smith,  author of the Risk Rituals Newsletter, said. 

As part of the race to get the new SPAC or IPO information posted, these same sites have failed to post any forms of disclosures about how SAPCs of IPOs work in the short- or long terms. Worse, they all knowingly fuel the frenzy to chase ad clicks.  How else do you explain this price chard for GameStop. 

Nor, do the unethical sites mention that these types of glittery and highly-touted investments are highly speculative, volatile, and can suffer serious and fast price declines. It’s true, some of these sites mention that they are being compensated when readers visit a brokerage firm’s website, but these disclosures fail to mention the high-risk nature of these investments.

Some of these sites also fail to mention that long-term, passive investing strategies using stock-bond portfolios should be the core of any legitimate financial planning strategy. When I mentioned this to one second-tier website editor, he told me they would be adding those types of stories later.

What’s driving this foray by financial websites into unethical Yellow Journalism is advertising, or more specifically the ad clicks these sites generate when unsophisticated investors read the basic story about the new potential companies and how they plan to shake up the established world.

Then, investors click on a brokerage firm’s name and the website generates ad revenue.  In one case, one second-tier site is making about $25,000 a month by pushing SPAC and IPO stories without any caveats about how they work or explaining the long-term investment history of SPACS and IPOs.

SPACs Benefit Hedge Funds and Inside Owners, Not Public Investors

Many financial reporters I spoke with who have over 30 years of experience covering markets have never heard of SPACs until recently. Many had to look up the definition since IPOs were the accepted method of going public and SPACs, a sub-set of IPOs, were rarely used.

For people who know about Robin Hood, hedge funds, GameStop, Reddit, the gamification of investing, and payment for order flow, SPACs were just another esoteric, hard-to-explain investment vehicle.

But what they have in common with the entire GameStop- RobinHood saga is hedge funds.  Because of their role, position, and priority in the IPO process, hedge funds take a risk-free profit from SPACs before a dollar in public money is invested in the new company.

This is why Jeremy Grantham, the co-founder and chief investment  strategist of Boston’s Grantham Mayo Van Otterloo, said SPACs are “a complete rip-off because the hedge funds take the premium for themselves.”

When the SPAC goes public, the risk is added back into the pricing, and supply-and-demand, hype, information, and misinformation all get traction and all the risk is now assumed by less-sophisticated retail investors.  The prices gyrate until they find an equilibrium, however temporary, and then the game of musical chairs starts again.

A SPAC is a Special Purpose Acquisition Company, a shell that is created for the specific purpose of merging with some private company to take that company public more quickly than could have been the case with a normal initial public offering (IPO) process.

In 2020, there were 480 IPOs (including 248 SPACs) compared to the 406 IPOs listed in 2000.

The year 2020 could be marked as when the SPAC phenomenon became a retail frenzy.  Financial websites covered this as a get-rich-quick story, with little or no mention about how SPACs work, their potential downside, and who is getting the lion’s share of the risk-free profits.

For their part, some unethical financial websites didn’t find this a problem. The reason is that the ad clicks began to payoff instantly. This meant that writing a story of the mechanics of SPACs could wait until later, or better yet, not be written at all.

In the interim, the SPAC and IPO frenzies dominate the news as they generate ad clicks as more retail investors piled into the scrum.

So How Bad are SPACs?

In a Jan. 22, 2021 interview with Bloomberg, Grantham, called SPACs a “completely reprehensible instrument.”  Grantham has a similar reputation in the industry as Warren Buffett, so his declaration that SPACS should be “a completely illegitimate instrument” carries some weight.

In the Bloomberg interview, Grantham said “SPACs should be a completely illegitimate instrument.

“They are just an excuse for people with reputation and marginal ethics to raise a lot of money and take 20% of it for themselves and then to take a quick dash around the country for six months and are a complete rip off in the sense that the professional hedge funds then always liquidate before taking any real risk and take the premium they can get and the few warrants and leave the half of the marketplace that retains it who put their money up with, on aggregate, a very bad return, and of course, they’ll make some money in the late stages of the bubble.

“But if you look at the first six years, they have a handsomely sub-average return for taking all the risk.  They don’t have enough legal requirements and enough restraints, enough checking.”

The Role of Yellow Financial Journalism in Crypto Hype

The fuel to the fire and the Pied Piper leading many investors to IPOs and SPACs are a few profitable financial websites that are driven primarily by ad dollars. When an editor at one site was asked why there were no educational articles on SPACs, how they work, and their investment performance a few months after their listing, he said that article could come later.

In the interim, he was focused on researching new, more effective Google words and phrases, so the site’s SPAC stories could get a higher Google ranking and more clicks.  This is modern financial web journalism now being practiced by some unethical websites.

So, when investors complain about being led to the slaughter as IPO and SPAC investments lose money, they should remember which financial websites gave them the “hot tips” in the first place.

GameStop. Robinhood. TruthSocial. rivian. Virgin Galactic. The gamification of investing. Unethical financial and crypto exchanges and websites.  And now, a suicide.

These are all being fueled primarily by inexperienced novice investors, many of whom will soon be in the red.

Americans have one of the world’s lowest levels of financial and political literacy.  Now, they are all coming into the market to get rich quickly.

Worse, some unethical online brokerage firms and financial websites target less experienced investors to invest in upcoming IPOs without telling them that IPOs have poor long-term return records.  This is made worse because novice investors are not told they should have a diversified portfolio before gambling on IPOs.

The most recent tragic example happened when a 20-year-old trader thought he lost over $700,000 in his options account held at Robinhood.  When he looked at his screen, and maybe he was somewhere in this abnormal Gamestop price chart, it showed that Robinhood restricted his account as it posted a negative balance of $730,000.

According to CBS News, the firm sent him an email at 3:26 a.m. demanding that the trader take “immediate action,” demanding payment of over $170,000 in a few days.

The trader asked Robinhood for clarification but got a canned email response from the firm saying they would look into it. As per its business model, Robinhood had no humans answering its complaints, nor does it list a customer service phone number. Despondent, the trader thought he had lost more money than he could ever pay back. And if any experienced trader saw this chart, he would know it was a horror show in the making.

Within 24 hours, the trader had committed suicide. His family has filed suit against Robinhood, charging ” accusing Robinhood of wrongful death, negligent infliction of emotional distress and unfair business practices,” CBS News said.

This is a classic case of violating the “know your customer” rule. Before the likes of Robinhood and other no-commission brokerage firms, there were higher standards. These included asking customers how familiar they were with trading options and futures (the most leveraged forms of investments), their net worth, and whether they understood that certain forms of trading should only be used with non-essential money, i.e., money that if it was lost would not mean they would lose their house or be without food.

Robinhood also doesn’t think paying experts who can explain how more complex options strategies work or even how to read a statement is essential.  If they did, this suicide could have been prevented.

Unethical Financial Web Sites and Trading Firms

Just like Robinhood sells its trading data to its unsophisticated options trading customers, some financial websites are disproportionately pumping out stories on new, highly speculative IPOs. These stories about upcoming IPOs cite big numbers and the implied promise that there will be a big payoff for small retail investors who jump into the IPO frenzy.

Unfortunately, this is not true.

These websites get paid big ad money from brokers who are the intended destination of an IPO story. Even for second-tier financial websites, this avalanche of IPO hype stories can generate $25,000 per month in revenues.

The problem is not the IPOs themselves, but the journalistically unethical way these stories are promoted, which excludes prudent long-term proven investment strategies and advice. 

Novice investors with small portfolios (say under $100,000)  have no business investing in IPOs unless they already have a diversified stock and bond portfolio, six months of savings, participate in their employer 401(k) to the maximum, and, hopefully, own a house. That’s a very conservative model not often presented on sites catering to Millennials (age 25-34) that disproportionately tout IPOs.

That may be unrealistic and asking a lot, but IPO investing should be made with throw-away money.

Studies have shown that in 2019, new US listings as a whole generated investor profits of 4.8% (January to October 2019) when weighted for size, according to Dealogic data. Out of the 133 companies to list in the US through this same period, 42 lost money for investors in trading, which means that 68% of deals in the US generated a positive return. Another study in Germany found that less sophisticated investors are more prone to making investment decisions based on emotions and sentiment than financial factors.

Worse, many novice investors enticed into buying IPOs are buying on hype, brand-name recognition, and emotion, not financial fundamentals (earnings estimates, financial ratios, sales, or market values) of the company going public.

Unethical Financial Journalism?

The same websites promoting upcoming IPOs also don’t bother to explain the whole IPO process. It’s boring and doesn’t generate clicks and ad dollars.  However, companies that go public already have the inside price allocated to their institutional, banking, and money management investors.

The crowd of small retail investors lured by the unethical websites is not getting “the insider price” or “getting in on the ground level.” They only get the market price on the first day of trading.  Nothing more.  Worse, the early days of IPO pricing are volatile and emotionally driven.

These early prices don’t indicate the company’s future direction. That’s why mutual funds managed by experienced professionals do not buy IPOs until at least six months after listing.

IPO Hype is Robin Hood’s Problem

Many unethical websites promoting IPOs and SPACS generate revenues from spending excessive time deciphering Google keywords and keyword combinations.

This journalism problem is similar to why Robinhood recently made the news. Robinhood makes money by grouping orders and then selling the order flow to hedge funds. These profits offset the losses from the “free commissions.” Those hedge funds then trade in front of RobinHood customers. This is why the hedge funds pay dearly for the data.

In the lawsuit, Massachusetts Secretary of the Commonwealth William Galvin referred to RobinHood and said, “The worst aspect of what they do is the way they are gamifying the idea of investing.” He later said the firm “is a very reckless company when it comes to these investors. They’re interested in expanding their market base; they’re not interested in serving their investors.”

Robinhood is a broker-dealer and is subject to state and SEC regulations. This is why they were charged with violating the famous “know your customer rule,” which allowed their unsophisticated investors to enter shark-infested waters.

Google Ad Words Distort Financial Journalism

Financial websites have a similar obligation. Although unregulated, sites that disproportionately promote IPOs can be considered journalistically unethical when they push unsuspecting investors into risky trades without explaining the risks. This violates another fundamental concept in journalism: giving preference to advertisers over their readers.

Giving large advertisers extra-favorable coverage and special considerations began with mass advertising in print journalism after the Civil War. In the Google world, preferential treatment to advertisers is done by discovering keywords that direct unsuspecting viewers to advertisers.

If you are a novice investor and have indicated an interest in the latest hot topic, such as IPOs, look at your emails and the list of news stories flowing out of financial websites. You’ll see most of the latest IPO candidates waiting for your investment. There is a good reason for this.

Significant financial sites have large budgets and produce various business and investing stories. They have great content, and much of it is original and educational. The second-tier sites are more driven by Google ad revenue tricks involving keywords that follow the latest fads.

The problem is many of these financial sites are doing some of the same things as RobinHood. The difference is that it’s happening in the journalism world.

Consider these statements from Massachusetts Secretary of the Commonwealth William Galvin:

In his CNBC interview,  he said Robinhood “market[ed] itself to them [inexperienced customers] as a device by which they can become wealthy without having the expertise or the skill.”

He then said RobinHood took “unsophisticated investors, most of whom have no experience, and basically [made] this into a game, causing them to suffer losses. They’re bringing them aboard on something these people have no idea about.”

This is precisely what many sites promoting IPOs are doing today.

Be A Real Investor: Build a Boring Stock and Bond Portfolio

The financial websites promoting IPOs without regard for their customers will not change. Their business model relies on Google ad clicks. It’s a sad example of how many online journalistic sites have had to bend their ethical obligations to generate revenues. Online and print journalism will only become more focused on Google ad words in the future. This will skew their coverage, directing unsuspecting investors to risky, new products and offerings.

New investors should realize that any licensed investment professional would never suggest IPO investments unless they own a basic stock and bond portfolio. The adage—“Investing is a marathon, not a sprint.” “Trees don’t grow to the sky for a reason.”  “Beware of bulls, bears, and pigs.” And “Never meet a margin call.”—are all valid today because they are correct.

Avoid the IPO hype. Stick with getting your information from top-tier, brand-name financial and investment advice websites. If you are a young, inexperienced investor, build a dull stock and bond portfolio. And most of all, protect your money. No one cares about it as much as you do.