Zac Bissonnette has written extensively about how penny stocks, or stocks trading below $5, promote themselves through big name lab connections, big name celebrity connections, ads on CNBC and how sometimes, just sometimes, they have to settle with the SEC. As somebody who's made and nearly lost a small fortune playing penny stocks, I've decided to get people to stop whining about the ugly side of this niche and learn to profit from it!

And, I mean profit from it legally -- that being to buy these stocks when they're being hyped and to short sell them when the hype wears off. The old Manhattan two-step. While I prefer to short sell, these stocks are already priced so low, the risk-reward ratio favors buying them. That's right; I'll gladly buy into companies I know to be questionable because my time horizon is short and I know no matter how often Zac and other people write about this subject, there are new suckers all the time. The great fool theory and all that. Time and again, these suckers naively throw their hard-earned cash into these long shots without bothering to learn about the risks involved. Since you're reading this, you've already proven that you're not just another sucker and that's good -- congratulations!

So, go on, follow these stocks and learn to play the hype game -- BloggingStocks willing, I'll be writing many more articles to help demystify this greatly misunderstood niche. I think you'll find that while penny stocks are more volatile than stocks like Wal-Mart (NYSE: WMT), they are surprisingly liquid and the games they play are surprisingly similar to the games played by respectable Wall Street companies.

Timothy Sykes writes for the blog timothysykes.com, is a former hedge fund manager, the star of Wall Street Warriors and author of the book, An American Hedge Fund: How I Made $2 Million as a Stock Operator & Created a Hedge Fund.

Honest and ethical management is a sine qua non of a good stock, and investors should always be on the lookout for red flags that might raise questions about that.

So the fact that MPhase Technologies (OTC BB: XDSL) CEO Ronald Durando just settled charges with the SEC related to an alleged pump and dump scheme involving shares of a company called PacketPort might raise some questions for investors. According to the SEC's litigation release, Durando was ordered to disgorge $150,000 as part of the settlement.

What's even more disconcerting is that there appear to be points of similarity between Durando's conduct at PacketPort and the way the MPhase has been run. Back in February, I wrote about MPhase's PR campaign that consisted of posting videos on YouTube touting its stock. Mr. Durando and MPhase also have ties with Jonathan Lebed, a notorious penny stock promoter who settled charges of stock manipulation with the SEC at the tender age of 15. From an email that Mr. Lebed sent to subscribers to his newsletter:

My firm Lebed Biz LLC has been compensated by XDSL 400,000 restricted shares for a one-year investor relations contract. XDSL has agreed to register these shares in their next registration statement. We were previously compensated by XDSL a total of 450,000 restricted shares, $55,000 cash, and 175,000 warrants to purchase shares at $0.35 for past investor relations contracts which have since expired. We already sold all of the previously compensated restricted shares but still hold all of our warrants. Never invest into a stock we discuss unless you can afford to lose your entire investment. For our full disclaimer go to: www.lebed.biz/disclaimer.htm

To date, MPhase's primary product appears to the the press release. The company had sales of just $154 thousand in 2007.

Carmen Electra gained fame as a Playboy centerfold and scantily-clad star of Baywatch, but her latest business ventures may not be so innocent. Take a look at a few examples of her involvement with shady penny stock promotions:

• Back in June of 2006, MarketWatch's Chuck Jaffe wrote up a company Electra was involved with as his Stupid Investment of the Week. Jaffe received a phone call featuring the prerecorded voice of Carmen Electra, touting a company called Luvoo.com (OTC PK: LUVT). Shares of that company have since collapsed to 8 cents per share.

• Electra also signed on as a spokesman for a company called eFoodSafety.com (OTC BB: EFSF), and the company put out a press release hyping her involvement.

• The most interesting one: Payment Data Systems Inc. (OTC BB: PYDS) is a tiny microcap that announced its Carmen Electara prepaid Mastercard last year. Here's where it gets potentially shady. The company paid penny stock shill Jonathan Lebed $25,000 for a one-month investor relations contract that mainly consisted of sending out emails to his subscribers touting the stock with messages like "Combined with PYDS's new Carmen Electra debit cards and many more celebrities coming soon, it doesn't get much bigger than this!!!"

• For those of you who don't remember, Lebed made headlines in 2000 when he settled SEC charges of stock manipulation -- at the age of 15. Ever the self-promoter, Mr. Lebed posted a YouTube video of himself rubbing elbows with Ms. Electra.
  

I don't know the extent of Ms. Electra's involvement with these companies/stock promotions. But the fact is she has gotten herself involved with some pretty shady characters, and it's something her handlers may want to keep an eye on: Associating with the targets of SEC investigations can be a career-killer.