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Don't Be a Pump-and-Dump Chump

Nearly every day when I check out the junk folder in my e-mail inbox, I find at least one unsolicited e-mail trying to convince me that RIGHT NOW is the time buy some cheap penny stock. These kinds of solicitations, almost without exception, are connected to schemes known as pump-and-dump scams, where fraudsters will buy up a bunch of low-priced microcap stock (the prices usually vary from a fraction of a penny to a few cents per share), blast out millions of spam e-mails touting it as a hot buy, and then dump their shares as soon as the share price ticks up from all the suckers buying into the scam.

The resulting flood of shares dumped back into the market causes the price of the pumped stock to plummet, and very quickly investors not in on the game lose everything they invested.

At least two different recent studies have shown the effectiveness of stock spam in both convincing people to purchase shares of the touted company and in boosting the price of the stock. But what about the effect on people left holding the bag from these scams?

Enter Joshua Cyr, curator of Spamstocktracker.com. On May 5, 2005, Cyr set out to determine just how much money he could lose by trusting stock picks advertised via spam. Cyr began tracking the price of each stock after receiving a spam tip, and found that if he had bought 1,000 shares in each of the several dozen companies, he would have lost about $46,000 over the past 15 months.

While researching this subject I came across another blogger who is doing some fairly real-time tracking of stock spam effectiveness, with graphics that track the appearance of stock spam alongside the stock's daily market performance and links to any related spam e-mails.

Stock spam has been estimated to make up about 15 percent of all junk e-mail, though I'm sure that number fluctuates quite a bit. The Securities and Exchange Commission occasionally brings cases against stock spam scammers, but the agency probably doesn't have anywhere near the resources it would need to make a real dent in this problem. What's more, the spammers don't have to worry about setting up Web sites and keeping them reachable; as long as they have a ticker symbol to pimp, they're in business.

By Brian Krebs  |  September 5, 2006; 10:37 AM ET
Categories:  Fraud  
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Comments

So you're saying that when we get one of these spam scams, we should short the stock?

Posted by: Ryan | September 5, 2006 12:11 PM | Report abuse

Ryan, If you get scammed on the long side of a pump & dump, the most you can lose is what you bought. As for shorting... If you short early on the pump and have to buy to cover (because you borrowed from someone who wisely wants to sell on the rising price), you could be forced to buy at the worst time, making you the scammer's new best friend. I wouldn't play with matches when someone is spreading gasoline.

Posted by: OhioMC | September 5, 2006 1:03 PM | Report abuse

Anyone stupid enough to buy a stock on the recommendation of an unsolicited email deserves whatever loss they sustain.

Posted by: eb | September 5, 2006 1:38 PM | Report abuse

There is a minimum stock price for shorting - you can't short a stock trading in the pennies range; it would cause extreme havoc for companies on the edge and receiving bad news coverage. Think United Air Lines when it was trading at $3. It plummeted about 50% in one day. Imagine how much worse it would have been if people could have jumped in and ridden that ... it would have dropped tons more.

I don't recall what the minimum is, but last I checked, it was around $3-5.

Posted by: Gordon | September 5, 2006 2:02 PM | Report abuse

What exactly is the illegal angle to all this?

Posted by: bkp | September 5, 2006 3:52 PM | Report abuse

Just get anti-spam service, and all your problems give up!!
http://www.abartiateam.com/proteccionantivirusantispam.html

Posted by: Abartia | September 5, 2006 5:05 PM | Report abuse

@bkp: It's a type of fraud and is illegal under U.S. securities laws. The Mafia was into it back in the 1990s.

Posted by: tdb | September 5, 2006 7:41 PM | Report abuse

"Anyone stupid enough to buy a stock on the recommendation of an unsolicited email deserves whatever loss they sustain."

Usually I'm sympathetic to stupid people, but in this case I have to agree. The only people who could possibly act on this kind of tip are greedy *and* they're idiots.

Posted by: h3 | September 6, 2006 3:36 PM | Report abuse

There's another good article about this at http://www.spamnation.info/blog/archives/2006/08/how_to_lose_on_spammed_stocks.html
He has links to a couple of other studies on this, plus a lot of information based on his own analysis of stock spam. There's lots of good information at http://www.spamnation.info/stocks/FAQ.html
I have no connection with that site other than that I came across it while researching some stock spam I had been getting.

And FWIW I see a lot more than one or two of these a day. At the moment at least 50% of my spam to a large number of different and unrelated accounts is stock spam. Apparently from at least two different spammers based on the differences in style and the addresses getting them.

Posted by: k2 | September 7, 2006 5:03 AM | Report abuse

Well, this resolves a question I've been asking since the early 90's: do enough people actually bite to make spam schemes worthwhile? Apparently the answer is, yes. Thanks for the explanation of how this one works.

Posted by: chamisal | September 7, 2006 8:53 AM | Report abuse

Given some of this spam stuff comes in with Subjects like "Your password has been updated" and literary passages from books at the end of the email, I am astounded at the way some people are fooled into this type of scam!

Posted by: Steve H | September 7, 2006 1:01 PM | Report abuse

The comments to this entry are closed.

 
 
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