Rampant E-Mail Stock FraudFor as long as equities markets have existed, there have been “stock scams.” Or put more generally, ever since there have been rules, there have been people willing to break them.
But now, the problem is bigger than ever. In the age of the Internet, stock scams have become both easier to mount and harder to stop. The age of anonymous e-mail means that naive or greedy people, hoping to make a quick profit, will find themselves the target of clever manipulations in which the price of a stock is briefly pushed up, then suddenly crashes.
E-mail is a perfect medium for setting up such an operation. Because sending e-mail is essentially free and instantaneous, the perpetrator can easily and quickly target millions of people at the same time. Even if only a tiny fraction of them respond, it can still push the price of a thinly traded stock up, doubling or tripling it in a short time, especially when that stock’s price is very low to begin with.
And, because e-mail does not recognize borders, international stock scams can emanate from anywhere and affect people across the globe. Their international nature also makes them difficult to track and prosecute. In addition, stock scammers,fraudulently posing as a legitimate investment or banking firm, may be touting the stock of a company whose management is completely unaware of the scheme.
For example, the Australian news source John Fairfax Holdings Limited1 reports that last year the Australian banking and financial firm Westpac had its logo stolen for the purpose of sending out millions of e-mails touting worthless stocks of small companies.
What makes is so hard to stop such manipulations, say officials at the Securities and Exchange Commission, is that they work. One of the stocks, Cardia Technologies, went from 3 cents a share to 6.1 cents a share.
Although the company’s typical shareholder may not have seen much profit, for someone selling millions of shares, that 100 percent increase in price is significant. And, as soon as the scammers sell, the stock’s price collapses.
NASD, which oversees and regulates trading in equities, corporate bonds, securities futures, and options, provides information on stock fraud to corporations and investors. It has researched the problem of investment-related spam and says that the most common kind of abuse involves “touting a stock.” Touting is defined as peddling it in an aggressive or persistent way.
The most effective touts, of course, masquerade as unbiased news about the stocks; but in most cases, they are blatant attempts to drive up the price of a stock that the touter already holds. As a result of the quick profits to be made, some hedge funds have even begun to piggyback on these scams in an effort to beat the market. But it’s a dangerous game to play.
The most frequently touted stocks are those that are rarely traded. Because they’re not traded routinely, any change in volume will result in a change in price, because that’s the way stock markets behave. If you buy 1,000 ? or even 10,000 ? shares of a heavily traded stock like Microsoft, it’s not likely to influence the price.
But, if you do the same with a stock that’s rarely traded and sells for a few cents a share, a change in volume can double the price. If you then sell those shares, the stock will take a nosedive. Stocks that are manipulated in this way are not ordinarily traded on the major stock markets, but are instead listed on the OTC Bulletin Board and Pink Sheet stock lists. Those lists do not require companies to maintain a minimum of assets or revenues like the major stock exchanges do.
Another type of “stock-related spam” involves an offer to sell you a stock prior to a company’s initial public offering. Many people will remember the great IPO boom of the 1990s, when those who were lucky enough to buy a stock before the offering became instant millionaires on the day the company went public.“IPO scam e-mails” will offer you the same kind of opportunity with a forthcoming IPO, which often never materializes.
When you buy privately sold pre-IPO shares, there is no guarantee that the company in question will ever go public, and there’s no guarantee that you’ll be able to sell your shares if it does, since privately purchased shares typically come with restrictions.
And, while these e-mail scams predominate, this scheme isn’t just limited to one medium. In July, three people in Florida were charged with conspiracy and securities fraud for using “automated voice mail messages” to tout stocks and drive up the prices.
The calls, masquerading as wrong numbers, purported to pass along insider information on a hot stock to a friend. In reality, thousands of people received the same message. The market values of the six thinly traded stocks involved in the scam rose by a combined $179 million in less than a month, according to the Associated Press.2
In order to spot and avoid such stock-related scams, remember the following six guidelines:If it looks too good to be true, it is. A stranger is not going to offer you the deal of a lifetime unless he stands to gain from your loss.
Legitimate stockbrokers and financial management companies do not blindly solicit through e-mail.Legitimate financial analysts do not announce “target prices” for stocks except through established channels, such as formal analysts’ reports for listed stocks. These firms almost never issue predictions of exponential price increases.
Legitimate analysts never claim to have inside information ? that’s illegal. They also don’t predict unannounced mergers and acquisitions as a way of touting a stock.Any message that claims that you must act immediately is not likely to be legitimate. If the same message guarantees that you won’t lose money, delete it immediately.
Unless it’s part of a subscription to a legitimate “investment newsletter service” with a known track record, it’s best to assume that any e-mail you receive offering a great opportunity to invest in a stock is fraudulent spam.
It would seem to be a simple matter to avoid these kinds of swindles. But, according to a report in The Arkansas Democrat-Gazette,3 e-mails touting stocks represent up to 15 percent of all spam today, up from just 1 percent in 2005.
To highlight the perils of following the advice contained in these messages, consider what happened when the chief technology officer at Savvy Software, a Web content firm, created a dummy portfolio out of 86 spam stocks to see what would happen to an investor if he bought all of them. In just two months, 63 of them lost value ? 29 were trading at less than a quarter of the price he paid, and 10 of them went out of business altogether.
One reason for the sudden rise in the so-called “pump and dump” scam is that the spammer does not have to interact with the victim. He sends the anonymous e-mail, and the recipient either buys the stock or doesn’t.
That’s the entire interaction. Because it’s possible to send millions of e-mails at the click of a button, it doesn’t matter that 99 percent of the recipients will ignore them. If just 1 percent of them buy the stock, the price could go up.
This dependence on a simple, one-way message will even fool spam filters, which often check for links to an on-line form or other contact information that would help identify it as spam. In addition, according to the New York Post,4 the major “stock spammers” use hacked computers to conceal or disguise the originating IP address. This anonymity covers the tracks of the sender. Most other Internet scammers are caught because they either ask for credit card information from a victim, or require the victim to go to a
Web site that is then traceable. These elements are missing in the “pump-and-dump” scam.In most other cases, the SEC’s Office of Internet Enforcement has nothing to track. The entire scam is over before the slow-moving bureaucracy can get an investigation going. In one case earlier this year, a company called Ever-Glory, which makes apparel in China, happened to change its stock ticker symbol when it acquired a public company. That symbol came to the attention of spammers, who began touting the stock worldwide.
In just one week, without the company having any idea what caused it, the stock went from less than 50 cents per share to $2.75 a share. At the same time, the daily volume went from virtually nothing to 300,000 shares. Within another few days, volume dropped to under 7,000 shares per day, and the price was collapsing through $1.85 and heading south. No one will ever know how much the spammers made, but it was all over before anyone even knew it had begun.
In light of this trend, we offer the following four forecasts:
First, expect this investment-related e-mail trend to continue growing for another year or two. E-mail schemes touting stocks will follow a curve similar to that observed in other online scams. For example, in 2004, spammers began widespread use of the practice known as “phishing,” in which they pretended to be banks and credit card companies in an attempt to trick people into revealing personal financial information. For a time, it worked. But in less than 2 years, it became well known and fell out of favor. The same will happen to other online scam techniques as they come under increased public and governmental scrutiny. Phishing died out when the general public became aware of the threat, and now stock scams have largely replaced phishing. Expect waves of publicity to bring stock scams to a level of awareness that will make them less and less attractive as time goes on. Spammers will continue pursuing this route only as long as they’re making money at it.
Second, don’t expect regulators to be of much help in this area. Even if the SEC can learn who the spammers are, enforcement is often thwarted by the fact that the spammers are beyond their reach in a foreign country and essentially untouchable. So, the best defense is for individual users to be very suspicious of any e-mail that’s not from someone they already know. Since there are plenty of legitimate brokers andstock exchanges to deal with, no one should risk his capital on ideas from people who send unsolicited advice.
Third, if these stock scams continue, expect Congress to put in place regulations that prohibit “institutional investors” that manage retirement funds from investing in the kind of fly-by-night stocks typically used for these scams. That at least would reduce the chances that the truly unsophisticated worker would unwittingly suffer from this scam.
Fourth, in the next 10 years or so, such scams will become much more difficult to pull off, as the Internet infrastructure is revamped to provide better spam-filtering and tracking of e-mail origins. As the Trends editors have previously reported, Internet technology was never intended for the kind of sophisticated business uses to which it’s now being applied. But, in the coming decade, new protocols will come online that will be much more robust in detecting and eliminating spam and tracking fraud.
References List : 1. The Age, August 16, 2005, Here’s a Stock Tip You Shouldn’t Bank On,” by Christopher Webb. ⓒ Copyright 2005 by John Fairfax Holdings Limited. All rights reserved. 2. Associated Press, July 27, 2006, “Three Florida Residents Charged in ‘Wrong Number’ Voicemail Stock Scheme,” by Marcy Gordon. ⓒ Copyright 2006 by The Associated Press. All rights reserved. 3. The Arkansas Democrat-Gazette, February 16, 2006, “Stock Spam Latest Scam to Hit Web,” by Brian Baskin. ⓒ Copyright 2006 by Arkansas Democrat-Gazette, Inc. All rights reserved. 4. The New York Post, August 16, 2004, “Pink-Sheets Strumpet,” by Christopher Byron. ⓒ Copyright 2004 by The New York Post. All rights reserved.
