Did 50 Cent Cheat the System by Pushing Penny Stocks on Twitter?

Filed under: Lynnette Khalfani-Cox

The Internet is abuzz about 50 Cent's recent tweets urging his 3.8 million Twitter followers to invest in a start-up company that makes headphones. It seems the rapper, actor and businessman made a fortune - around $8.7 million to be exact -- after he promoted the company, known as H&H Imports on Twitter.

(But let's not forget that those millions that 50 Cent supposedly reaped were paper profits. You don't make money in stocks until you sell. That's when you lock in a real profit (or loss). And it doesn't mater if those shares are penny stocks, Nasdaq stocks, or shares listed on the New York Stock Exchange.)

In any event, some people are calling 50's social networking prowess a strike of entrepreneurial genius. After all, who wouldn't love to leverage their name, fame and brand to make millions in a single day? Others are speculating about whether 50 Cent broke the law or violated SEC regulations in Tweeting so enthusiastically about H&H, a company in which in he owns 30 million shares, or roughly 13% of the business.

The only sure-fire way to know if 50 Cent crossed the line is if the SEC takes action against him or H&H, which goes by ticker symbol, HNHI. And the SEC isn't talking, as reporters from Esquire magazine recently found out. But the SEC never comments on pending investigations -- even those that wind up without any action being taken.


In my opinion, however, the biggest risk to 50 Cent right now isn't the prospect of drawing heat from the SEC. It's the risk of alienating fans and or raising the ire of irate shareholders who bought shares of H&H only to see the stock come crashing back down in recent days.

Before 50 Tweeted about H&H, company shares were selling for about 10 cents apiece. After the tweets, they rose by as much as 240% and have since fallen dramatically.

Personally, I don't think 50 Cent was in any way trying to promote H&H as some sort of classic "pump and dump" scheme, as some have implied. First of all, no one knows whether 50 Cent sold any shares after they peaked. There's no evidence that he did. And if he did, we'll only know if he or the company comes out and says it, or if it's made public in an SEC filing. However, it would be really bone-headed for someone like 50 Cent to risk intentionally burning his fans financially, while he makes out like some rich, Wall Street bandit.

I do think, though, that some of 50's tweets were in a gray area that he should have avoided. For example, in one of his tweets, he told his followers that they could "double" their money. That's a no no. You can never guarantee profits in the equities market and no one should ever promise an investor an exact return on stock -- especially not a 100% return, which is what you net when you double your money.

That's why CEOs, CFOs and others in the C-suite at publicly-traded companies always refrain from making specific promises to investors about how big a profit they'll net. I don't know if 50 Cent is on the board of directors or has a managerial role at H&H. Turn on CNBC or take a look in the Wall Street Journal and you'd be hard-pressed to find an executive from a major public business touting his company's shares the way 50 did.

Also, in one of 50's tweets, he mentions that H&H will be coming out with 15 new products. Was this information already publicly available, or disclosed in SEC filings? If not, some people might perceive a major shareholder and investor like 50 Cent as having "inside information" about H&H's business plans.

Again, this is territory 50 Cent shouldn't have waded into. It was likely careless enthusiasm in promoting a business in which he's involved, though, as opposed to some grand scheme to try to defraud investors. Apparently, 50 knows that he was a bit too exuberant in his public proclamations, and he seems to have been schooled in the past few days. His most recent
tweets about H&H have been far more conservative, suggesting 50 may have lawyered up a bit.

Instead of promising investors and fans juicy returns, 50 tweeted:

"I own HNHI stock thoughts on it are my opinion. Talk to financial advisor about it,"

And,

"HNHI is the right investment for me it may or may not be right for u! Do ur homework."

Did you buy shares of H&H? If so, are you still holding them? Or if you sold your stock, did you make or lose money? Sound off about it here.

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Lynnette Khalfani-Cox, an award-winning financial news journalist and former Wall Street Journal reporter for CNBC, has been featured in the Washington Post, USA Today, and the New York Times, as well as magazines ranging from Essence and Redbook to Black Enterprise and Smart Money. Check out her New York Times best seller 'Zero Debt: The Ultimate Guide to Financial Freedom.'

 

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