FBI creates money-losing hedge fund ... to prove penny stock fraud exists?

Thanks to the blog of the brilliant Floyd Norris over at the New York Times for this fascinating tidbit.

The FBI set up a fake hedge fund to invest in crappy penny stocks with the intent of losing a ton of money. It also cut a deal with a shady stock promoter to receive a kickback for buying the shares -- a pretty clear case of market manipulation.

The investment declined in value from $91,580 to $12,800 -- and the promised kickback never came. Great work guys! As Norris writes, "taxpayer dollars at work."

I'm all for cracking down on stock fraud, but you really have to wonder about this -- did the FBI really need to blow nearly $80 thousand of our money to prove that microcap fraud is alive and well? And if the promoters involved are like a lot of other promoters I've read about, the money probably went right up his nose or offshore somewhere -- and no matter what any order to "disgorge ill-gotten gains" says, that money is probably gone.

But still: Another good reason to avoid heavily promoted penny stocks. If the FBI invests in them for the sole purpose of losing money, that's probably a bad sign.

Maybe that was the reason all those state pension funds bought subprime debt. If not, it should have been.