Pump and Dump Scams

An Infoworld article: Microsoft sues alleged stock scammers discusses how lucrative spam email can be in the pump and dump of penny stocks.

"Pump-and-dump scams are gaining more attention from criminals and companies like Microsoft for one simple reason: They work. Researchers at Purdue and Oxford Universities recently examined the dynamics of pump-and-dump and found that spammers could realize 5 percent returns in a single day."

So Microsoft is filing lawsuits against these unknown criminals in order to subpoena the information it needs to identify and pursue them.

I have a better idea. Why doesn't Microsoft sell these stocks short and force the price down causing a loss for spammers. Microsoft has the financial resources to do so and might even make a profit if they manage buy it all back lower.

There are obviously some problems with this. If Microsoft were to do this with every 'pump and dump' spam stock then the spammers would have already sold the stock short. So they need to do this randomly and unpredictably.

I'm not sure where these penny stocks are trading that are being pumped like this because I recently read somewhere that one of the major exchanges (was it NYSE?) had delisted or stopped trading in stocks that were being pumped in spam emails...

[...goes off for a while with Google...]

From internetnews.com: SEC Cracking Down on Spam 'Pump and Dump'

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The SEC has suspended securities trading of 35 companies as part of a new crackdown on market manipulation via spam.

The SEC said in a statement that more than 100 million e-mails hyping small company stocks as "Ready to Explode," "Ride the Bull," and "Fast Money" were sent to addressees each week, which led to spikes in share price and trading volume.

The spam is a new-fangled version of a "pump and dump" scheme

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For example, on Friday, Dec. 15, 2006, shares in Apparel Manufacturing Associates, Inc. (APPM) closed at 6 cents, with a trading volume of 3,500 shares.

After a weekend spam campaign proclaiming, "Huge news expected out on APPM, get in before the wire, We're taking it all the way to $1.00," trading volume on Monday, Dec. 18 hit 484,568 shares with the price spiking to over 19 cents a share.

Two days later the price climbed to 45 cents per share. By Dec. 27, the price was back down to 10 cents a share with a trading volume of 65,350 shares.

The SEC'S action is the latest step in "Operation Spamalot," an effort by the SEC to shield investors from potentially fraudulent spam that pumps up small company stocks...

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Following the links I found the 35 companies that were suspended. Apparently the suspension only last 10 days. Now that would also be effective. i.e. As soon as a spam campaign starts then suspend the activity in trading in those stocks.

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Advanced Powerline Technologies Inc. (APWL), America Asia Petroleum Corp. (AAPM), Amerossi Int'l Group, Inc. (AMSN), Apparel Manufacturing Associates, Inc. (APPM), Asgard Holdings Inc. (AGHG), Biogenerics Ltd. (BIGN), China Gold Corp. (CGDC), CTR Investments & Consulting, Inc. (CIVX), DC Brands International, Inc. (DCBI), Equal Trading, Inc. (EQTD), Equitable Mining Corp. (EQBM), Espion International, Inc. (EPLJ), Goldmark Industries, Inc. (GDKI), GroFeed Inc. (GFDI), Healtheuniverse, Inc. (HLUN), Interlink Global Corp. (ILKG), Investigative Services Agencies, Inc. (IVAY), iPackets International, Inc. (IPKL), Koko Petroleum Inc. (KKPT), Leatt Corporation (LEAT), LOM Logistics, Inc. (LOMJ), Modern Energy Corp. (MODR), National Healthcare Logistics, Inc. (NHLG), Presidents Financial Corp. (PZFC), Red Truck Entertainment Inc. (RTRK), Relay Capital Corp. (RLYC), Rodedawg International Industries, Inc. (RWGI), Rouchon Industries, Inc. (RCHN), Software Effective Solutions Corp. (SFWJ), Solucorp Industries Ltd. (SLUP), Sports-stuff.com Inc. (SSUF), UBA Technology, Inc. (UBTG), Wataire Industries Inc. (WTAF), WayPoint Biomedical Holdings, Inc. (WYPH), and Wineco Productions Inc. (WNCP).

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And here are a further two stories from the sec.gov web site press release that demonstrate the movement in the spammed stocks:

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On Dec. 19, 2006, trading in Goldmark Industries, Inc. (GDKI), closed at $.17 on trading volume of 126,286 shares. On Dec. 20, 2006, the spam campaign started, with e-mail proclaiming "GDKI IS MAKING EVERYONE BANK!," and setting a 5-day price target of $2. By Dec. 28, 2006, spam emails boasted of the price spike that had already been achieved -- "$.28 (Up 152% in 2 days!!!)" -- and promised a 5-day price target of $1. That same day, GDKI closed at $.35 on a volume of more than 5 million shares. By January 9, 2007, the closing share price was back down to $.15.

A spam campaign in Healtheuniverse, Inc. (HLUN) stock began on Sept. 4, 2006, with emails incorporating a Healtheuniverse press release proclaiming that HLUN was "focused on being the first to commercialize stem cell applications in the $15 billion worldwide plastic surgery and cosmetic surgery market." On Sept. 7, 2006, HLUN closed at $.12 per share on trading volume of 3,000 shares. The spam campaign accelerated, and HLUN shares spiked to $.22 per share on Sept. 11, 2006, with over 2.2 million shares trading hands. By Sept. 22, 2006, the closing price had dropped back down to $.11.

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Here's what I worry about, DT. If the small companies are involved with the campaign, then this doesn't apply. What if some nutcase wanted to screw over a small, struggling, but legitimate company. They simply send out pump and dump SPAM on it, and the SEC swoops in and suspends the stock. It might be argued that this will have no long-term consequences for the company, but is that for certain? And what about short-term effects? Again, I'm referring to legitimate companies that may be be in the process of trading stock for something, as many companies do.

It just seems like there are knuckleheads out there doing bad things, and as always, the innocent are targeted, too, in the solution. This is based on the assumption that just because a company is struggling and is a penny stock it doesn't mean they are disreputable. I think any company that pays someone to send out the SPAMs is highly disreputable. Just my two cents. Trust me, having a public e-mail address related to trading, I get probably every one of these ever generated, and I hate them, I just don't like a 'hang everyone, you'll get the guilty for sure' approach.

You're right, the hang everyone... approach is not the greatest.

While the spammers are profiting from this (and according to the news it's the most profitable use of spam mail) they will continue to do it and penny stocks will acquire a more and more dubious reputation as they are pumped and dumped to the point that no-one will touch them. This too will cause harm for those legitimate small companies.

You need to de-incentivise the spammers and the only way to do that is to take away their profits. How does one achieve that?
Legal action directly against them is probably the best way but it is notoriously difficult to find them and then prosecuting them is difficult as well. If they are not in the USA then co-ordinating with foreign governments and police forces can take so long that the perpetrator has disappeared by the time you track them down.

Perhaps technology and broker involvement could be used. If someone tries to buy one of these stocks after a series of spams have been sent out then a message pops up warning them about the 'pump and dump' fraud and if that's why they're buying the stock they should steer clear. Likewise, brokers receive daily advisories and are required to warn their clients if they try to buy one of the stocks on the 'pump list'.

CFTC.GOV ADVISORY

Investors Should Beware of Phony Futures and Options Websites

Investors Worldwide Should be Wary of Fraudulent Websites Claiming U.S. Federal Oversight

The U.S. Commodity Futures Trading Commission, the federal agency that regulates the futures and options markets in the United States, warns consumers to exercise caution when dealing with internet websites claiming to be the U.S. federal regulator of futures and options trading, or to be a federally regulated entity.

The scams all appear to operate in a similar fashion. A fraudulent website claiming to be a registered commodity broker solicits potential customers to invest in futures or options. The website also directs the potential customer to another fraudulent website claiming to be the federal agency responsible for the oversight of the U.S. commodity markets. Once the customer agrees to invest, the broker directs the customer to open an account with a fictitious exchange, which falsely claims to be regulated by the United States government. The fictitious exchange then directs the customer to wire funds to a bank account for trading. Customers are led to believe that they have opened online trading accounts with the exchange when, in fact, their funds have been misappropriated.

The websites are slick and professional looking, and the scams are particularly convincing because they appear to offer investors the assurances of industry and U.S. federal government oversight. The websites even go so far as to allow potential investors to search regulator databases for registration status and to file complaints.

The CFTC warns investors to do independent research before sending funds to a commodity firm. The following websites are the official websites for the CFTC, the National Futures Association (the self-regulatory organization for the U.S. commodity industry) and the International Organization of Securities Commissions.

Commodity Futures Trading Commission: http://www.cftc.gov/cftc/cftchome.htm.

CFTC Contact Info:
section at http://www.cftc.gov/cftc/cftccontacts.htm.

NFA – The federal commodities laws require that virtually every commodity firm doing business with the U.S. public must be a member of the National Futures Association (“NFA”). You’ll find information on how the NFA registers and governs its member firms on the NFA’s Nfa Website: http://www.nfa.futures.org

International Regulators - You'll find a list of international regulators on the website of the International Organization of Securities Commissions (IOSCO) at http://www.iosco.org.

& Stocks: http://www.sec.gov