"Learning" From Timothy Sykes

It's easy for investors to be lured by the possibility of returns emulating those claimed by Mr. Sykes. Before you part with your money, here are some suggestions for doing due diligence that will inform your decision.
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Timothy Sykes is offering you an opportunity to make big bucks. According to his website, he turned $12,415 into more than $3.7 million by trading penny stocks. He represents the following "verified" returns:

2014 (year to date): 90 percent
2013: 66 percent
2012: 38 percent
2011: 54 percent
2010: 57 percent

Mr. Sykes sells a trading system and claims to have more than 3,000 "students" in more than 70 countries. According to him, more than two dozen of these students earn six figures annually. He states that he has created "two millionaires from scratch."

You have to "apply" to work with him, by completing an application on his website.

If you subscribe to one of his four newsletters, you will receive "daily watchlists, daily video watchlists, video lessons and you'll get all his trade alerts in real-time via IM, text message, email and chatroom."

As best as I can determine, Mr. Sykes' trading strategy involves short-selling penny "pump and dump" stocks. He is nothing if not prolific. His course involves hundreds of video lessons and DVDs.

It's easy for investors to be lured by the possibility of returns emulating those claimed by Mr. Sykes. Before you part with your money, here are some suggestions for doing due diligence that will inform your decision:

Is the Promoter SEC Registered?

The "earnings claims disclosure" posted by Mr. Sykes notes that he is not an investment adviser registered with the Securities and Exchange Commission and does not provide personalized investment advice.

Treazure Johnson believes that relying on investment advice from investment advisers who are not registered with the SEC is problematic. She was formerly a senior assistant chief litigation counsel for the SEC's Division of Enforcement. She is now a partner at McKenna Long & Aldridge. Ms. Johnson notes that SEC registration provides investors with many protections, including oversight by regulatory authorities, rules governing advertising (including webcasts and social media) and a requirement that those registered have passed required examinations.

Registered investment advisers can't post testimonials. They have severe limitations on referring to past, specific recommendations that were profitable. They cannot represent that any graph, chart, formula or other device can be used to determine which stocks to buy or sell, without disclosing the limitations on the use of these techniques. Non-registered promoters like Mr. Sykes do not have these constraints.

The earnings disclaimer on Mr. Sykes' website does not necessarily mean he is not required to register with the SEC. Ms. Johnson stated that whether promoters of trading systems must register as investment advisers is a "fine line" involving many factors and room for interpretation.

The SEC could take the position that Mr. Sykes' activities bring him within the ambit of an "investment adviser," making him subject to the provisions of the Investment Advisers Act of 1940. According to a release issued by the SEC in an unrelated case involving an Internet stock picker, "Those who are in the business of offering investment advice on the Internet may take on the same duties and responsibilities as other investment advisers."

This is a fact-based inquiry. I am not suggesting Mr. Sykes is, or is not, on the right side of this "fine line."

Consult With Trusted Professionals

From her vantage point and experience, Ms. Johnson, while not an investment adviser, does not believe a trading strategy that involves shorting pump-and-dump stocks is advisable.

Thomas Sporkin spent 20 years with the SEC's Enforcement Division and is now a partner at BuckleySandler. He is "leery" of anyone who claims he or she can consistently time the markets, especially in micro-cap stocks. Mr. Sporkin is also not a registered investment adviser.

Edward O'Neal certainly qualifies as trusted professional. Mr. O'Neal has a doctorate in finance and was an assistant professor of finance at the Babcock Graduate School of Management at Wake Forest University, where he taught investments and portfolio management, applied security analysis and corporate finance to MBA students. He spent one year as a visiting economic scholar at the SEC, where he advised the chief economist on investment management regulation and policy issues. He is now a principal at Securities Litigation and Consulting Group and has testified as an expert witness in more than 250 cases. He has been retained by the SEC and by state securities regulators.

I asked Mr. O'Neal what due diligence he would have to do to verify the claims made by Mr. Sykes. Mr. O'Neal told me that, if retained to do a professional investigation, he would need to review the following documents, among others:

1) Brokerage account records of all of Mr. Sykes' trading records over the time period. This includes not only the trades he publishes for his followers but all other trades. This is to verify that the records Mr. Sykes publishes are not just a subset of the overall trading he does (i.e., the subset with the largest profits).

2) For each trade, a trade confirmation. An analysis of these confirmations would determine whether the trades were in fact made and executed, rather than just being a list of trades that the strategy suggests should have been made.

3) All commissions, markups and markdowns that occurred on the trades. This is important because profits are negatively affected by trade costs. Mr. Sykes' returns should be calculated net of costs.

As a practical matter, Mr. O'Neal does not believe any due diligence is necessary because he would "never" recommend a trading strategy that touts potential large returns; one concentrated on trading penny stocks; or one based on short-term, in-and-out trading. According to Mr. O'Neal, "Any one of those three would make me run. Imagine if someone told me their strategy was all three?"

Mr. O'Neal is also not currently registered as an investment adviser.

Sean Kelly has additional concerns. He is the founder of Kelly & Associates, a registered investment adviser and an expert witness who has testified in many securities arbitration matters. He questions whether the returns claimed by Mr. Sykes are scalable. The type of stock being shorted is typically thinly traded. The prices could be easily affected if a group of Mr. Sykes' followers attempted to replicate his trades. Mr. Kelly places little weight on the claim that two of Sykes' "students" became millionaires. With thousands of students, Kelly would expect to see data showing that hundreds of them are successful. He notes this adage: "Even a stopped clock is right twice in a day."

Evaluate the Promoter's Response to Being Questioned

I asked Mr. Sykes to provide me with brokerage statements and related documents validating his claims. I also asked for data showing the returns earned by his students. He declined.

Dan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth advisor with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His latest book, The Smartest Sales Book You'll Ever Read, has just been published.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.

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