Stock Spammers: Invest a penny – milk a million

By now it seems that all of us know what spam is. It gets to us via various communication methods on a daily and sometimes hourly basis. We have been spammed through our snail mail boxes filled with offers we don’t need, mobile phone text messages targeted at commercial advertising, unsolicited land phone line marketing, and of course, email messages. Spammers get to us in forums and blogs, above and under the ground, at work and at home. Spam is everywhere and it takes a lot of nerve and effort to stay spam-free. In other words, spam is all that information pushed on us that we are not ready for or not willing to hear. Even though it presents more like just an annoying fly buzzing around, not all spam is just an innocent marketing strategy. Lost productivity, fraud, slow resource performance and time waste are just a few spam driven outcomes.

As a very viable way to get to the end consumer and a quite easy operation to perform, spam was called to duty to a much more competitive and professional environment such as the stock market. Stock spam, which is primarily targeted at a well known ‘pump and dump’ scenario, has become a very common stock crime facilitator.

Why stock and why spam?

Without getting too much into details, stock is an ownership in the company represented by its shares. Some larger companies are registered with stock exchanges and trade their shares publicly. Meanwhile, some smaller companies choose to trade their shares privately over the counter or through market makers who trade them on the Pink Sheets or the OTC Bulletin Board via an electronic quotation system of the securities not listed with NASDAQ. Shares that are not traded publicly are often called penny stocks; they are priced under $5 dollars.

Penny stock is more risky and less liquid as it is owned by less people and it’s not traded in a large volume every single day. Any abrupt change in demand/supply can cause a lot of instability of the stock price which can soar up or crash down. Due to such qualities penny stock is more prone to manipulation and was chosen to become a target of the stock spam.

Stock spam is an unsolicited information presented via e-mail or news with an intent to influence the price of a given publicly traded stock. A typical stock spam sent via e-mail will look close to this:

…or as simple as this one:

Source: http://www.cybertopcops.com/stock-market-spam-misc-examples.php

The illegitimate stock touting campaigns have been out for some time already. They evolved from simple e-mail messages to a much more professional looking ads. While an average person learned to ignore simple text advertising, professionally made videos and TV promotions still catch the eye. This is what Jitender Sarda, a security researcher of Symantec, said: “Penny stock spammers have also used legitimate video commercials (TV and online media commercials) and clippings of professional news reports or programs. Often there are conversations between the host and the guest star “professional analyst”, discussing the company’s strategies and financial prospects. The online video streaming is about 30 seconds long with very crisp and clear sound and the video quality is very impressive. The video looks like a legitimate TV or online media commercial used by the company for advertisement.”

Stock spam goes hand in hand with the evolving security filters that we use to stay spam free. After text spam filters learned to sort junk from legitimate content, stock spammers started using image spam to penetrate text filters. After spam filters upgraded and became smarter, stock spammers did not loose time either. Now they attach PDF files to fool around most filters and end users with the professionally looking stock reports. Another evolved technique of getting through spam filters is to attach MP3 files to a stock spam e-mail. As per MessageLabs, an e-mail security provider, the more sophisticated method of sneaking into e-mail inboxes appeared around October 17, 2007 when approximately 10,000 messages were sent out every hour. To pass through the security filers, such e-mail had semi-random subject lines matched to the title of the MP3 file containing a 20-60 second address pumping penny shares of a company called Exit Only Inc. Even though the company denied any involvement in this stock spam attack, nothing could be done to stop it.

The Securities and Exchange Commission does go hard on the stock spam by suspending trading in the securities of the companies which were the subjects of such attacks. Roughly around two months ago the SEC did suspend three companies that haven’t provided all the required information to their investors such as its assets, business operations as well as current financial condition, and were the subjects of stock spam via e-mail and promotional videos on YouTube.

Since the SEC started paying a close attention to penny stocks and pump-and-dump scenarios, the number of stock spam complaints significantly decreased:

Source: www.1440wallstreet.com/index.php/comments/sec_stamps_out_stock_spam

This is what the assistant regional director of the SEC’s enforcement division in NY, Bruce Karpati, said about some of the securities suspensions: "These trading suspensions are a continuation of the anti-spam initiative announced by the commission last month. The commission will take action where there are questions concerning the accuracy of a public company's public statements, especially where the company has been touted through spam email."

What do people fall for and how they lose their money?

With a small amount of initial investment into a stock, often referred to as “penny stock’, the profits predicted do seduce some people to part with their money.

“Pump-and-dump schemes”

The traditional ‘pump-and-dump’ tactic is enforced by a fake company set up by fraudsters to intensively promote its stock. When investors unknowingly buy in, the share price goes up. Shortly after that happens, the fraudsters sell their stock and the company collapses thus leaving the shareholders with nothing and the fraudsters with plenty of dough. With the evolved technology and fraud methods, this term is now used to depict the stock spam where third parties, who own the shares of a certain company, ‘pump’ through Internet and media the shares to ‘dump’ them later at a higher price.

“Short-and-distort”

On the contrary, in a “short-and-distort” scheme stock spammers spread negative information about a given company and “short” its stock by selling it quickly. Stock spammers hope that the price of the stock will fall drastically and they will repurchase the stock at a cheaper price. In the stock spammers’ world this tactic is less utilized. Spammers usually do not overwork themselves and let the natural adjustments of the marketplace take the stock down from its overblown price before buying again.

Spam as a market strategy or “Oh, my God what did we do?”

With their best intentions some companies hire marketing agencies to promote their stock. Little do they know that often those marketing firms become stock spammers and make the company a victim of a stock spam by sending out unsolicited junk mail. Because such marketing companies are usually paid in stock options, they become stock spammers who are directly interested in the stock price hike. In the most cases, companies are usually very surprised to know that the marketing firm used such a cheap tactic as an e-mail spam to send stock announcements.

Who are the spammers and how much they ‘earn’?

It is easy to imagine that a spam advertising some company’s stock is sent out by the company or with its consent. The new trend of some marketing companies offering a new type of service that is targeted at pumping up share prices did not go unnoticed by analysts. But only a company that is aiming for a very short-term success would agree for this kind of tactics, because this type of promotion can lead to only temporary increases in a company’s share price which is usually followed by a drastic drop that is extremely damaging to the company.

On the other hand, private third party speculators who own interest in the stock, brokers and market makers whose job is to buy and sell shares as well as marketing companies which are paid to advertise can be direct collectors of the rewards produced by stock spam.

A research conducted by Professor L. Frieder of Perdue Univ., USA and Professor J. Zittrain of Oxford Univ., UK showed that spammers who buy low-priced stock before the spam e-mails are sent out can get 4.9% to 6% of return upon the sale of such stock. In other words, on average a stock spam victim can part with $52.50 for every $1000 he/she invested. And such figures are not just hypothetical, the researchers also said: “Our analysis shows that spam works. Among its millions of recipients are not only those who read it, but who also act upon it.”
Here is a real charted example of a stock spam and its effect on the shares of a company whose stock was heavily promoted via spam e-mails:

Source: http://www.qwoter.com/why_spam.php

In case you wondered, stock spam is illegal!

In spite of the fact that stock spam is for the most part just an innocent e-mail message with an almost impossible-to-find originator, stock spam is illegal. It harms the free market and grind down consumer faith. In case you are wondering if stock spam can be a solution for own company’s low priced stock, the best advice is – don’t do it! As it was mentioned earlier, stock spam is very damaging to the company’s reputation; it makes a company look dishonest and fraudulent. And it surely did catch the eye of the authorities. The Securities and Exchange Commission has an investigative team who monitors stock spam and aids prosecution.

Last September an international gang of 4 men pleaded guilty on charges of manipulating the stock market via spam and faced 5 to 10 year in prison. According the US Department of Justice the men sent out fraudulent news stories to tout the shares of 15 small companies. After the spam campaign, the gang netted $20 million upon the sale of the pumped shares; a part of this amount was shared with some companies which agreed to have their share prices manipulated, supposedly, without knowing that such manipulation of information was illegal.

The damage of stock spam is not only done upon private investors. Some companies know it for real what it is like to be a target of such unauthorized “pump-and-dump” campaigns. New Jersey based video conferencing and data service company received a hard-to-count amount of e-mail messages and phone calls from outraged people who were eager to know why their e-mail boxes were spammed with ads for their “soon to explode” shares. "We have no clue who is dong this, and we have tried to figure it out," said the company's chief operating officer. "We just hit a dead end at every turn." And this company is not alone.

What is NOT a good stock offer?

First of all, a good stock offer is NOT the one that comes unrequested to your e-mail inbox. Second, if it sounds too good to be true, it is NOT a legitimate offer. Third, just think, if someone found a good stock for investment, would he/she share it with the rest of the world or keep it to him/herself? You can also always check SpamStockTracker.com or www.qwoter.com/spam to see if the offered stock is spammed and to get discouraged from investment by observing the facts that you will loose anyway.

Is it possible to stay stock spam free?

If you are getting stock spam, there is nothing you can do. Once you go on the stock spammers’ list, they would not leave you alone. Stock spammers are breaking the law so they would do anything to stay anonymous and will not give you an “unsubscribe” option. Such spam e-mails are usually sent via hijacked PCs “zombies” and even if you e-mail back to them, you will just confirm that your e-mail address is valid. And then you just wait for more spam!
The best way is to filter your incoming e-mails or not to open them as some can even contain Trojans. If staying away from stock spammers is just not enough for you, you can send the received stock spam to the Securities and Exchange Commission and it will be up to them to act on it or not. If after reading all the above you still think you might consider looking into buying a spammed stock, buy it before the price is touted and sell it before it collapses. And who knows when it is gonna happen?