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Stock scams are back . . . in your inbox
The wonder of e-mail stock scams is how many investors still fall for them. Heres how to stay clear.
By Michael Brush
The e-mail is impossible to ignore.
It lands with a header screaming "Huge Investor Attention is turning to a thinly traded penny stock called Global Explorations (GXXL, news, msgs)."
Click on the e-mail and you'll find a research report projecting 3,000% revenue growth for this obscure company, which has a product that helps you download e-mail on your cell phone.
Breathlessly, the report boasts of many significant upcoming press releases regarding record-breaking revenue tied into (sic) successfully finalized contractual developments . . . which is why we are seeing gains of 400% or more for early investors.
Pay attention to the fine print
So wheres the catch?
Its right there at the very bottom of the e-mail -- in the small print. Like so many other e-mails of this sort flying around cyberspace, theres a disturbing disclaimer in this report, which purportedly comes from a shadowy outfit calling itself Financial.stickergalaxy.com.
According to the disclaimer, the author admits flat-out he is writing the report in return for $10,000 from someone who has a position in the stock. That person, of course, will benefit handsomely if the research report drives up the price of this thinly traded penny stock.
But surely, with that kind of disclosure right there in black and white, no one would buy this stock on the basis of this report, right? Wrong. In this case -- and many others like it -- investors, traders and gamblers fall for the pitch time and again.
Just look what happens next with Global Exploration, a small company based in Reston, Va., that operates websites aimed at Americans from South Asia. The breathless report in question is distributed on Feb. 5. A day later, the stock trades for as much as twice its typical price, on twice the average volume of the prior two weeks. Before noon on Feb. 6, investors have paid anywhere from 5 cents to 7 cents to snap up nearly 1.2 million shares of the company. Before the tout was sent out, the stock has typically traded for 3.4 cents to 4 cents per share. Sadly, for anyone who bought in that rally, the stock has fallen to about 3 cents per share this week -- a painful 50% loss.
Related news and commentary on MSN Money
Complaints are growing
As obvious as these ruses are to spot, this unfortunate scenario is hardly unique. While no one keeps official statistics on electronic stock newsletter scams, theyre more common ever since the stock market snapped back last year. Complaints to the SEC about investment-related spam increased 25% to 179,787 in 2003 from 144,320 in 2002. Only about 77,000 complaints were filed in 2001.
So far in 2004, the number of complaints is rising. So, too, is the number of people sending out spam, says John Reed Stark, the man in charge of investigating online stock scams at the Securities and Exchange Commission (SEC) for the past nine years. There certainly are a lot of these things going around. They are easier to do, and they are cheaper and cheaper to send out.
Ive noticed a sharp increase in my e-mail, too, over the past several months. Not surprisingly, this spike has coincided with a frenetic rise in volume in the more speculative corners of the stock market. Trading in stocks listed in the so-called pink sheets -- an exchange of sorts for tiny upstart companies -- jumped an awesome tenfold in February over February 2003, according to Pink Sheets, the company that manages these listings. Trading in OTC Bulletin Board shares was up almost threefold in the first two months of 2004.
It could happen to you
The scary thing is, these electronic newsletters are most likely legal, and they arent going away. And if you think you are immune because you are so smart, think again.
Pump and dump electronic newsletters regularly claim victims among educated professionals. The newsletters are like the Nigerian General scam -- those phony e-mails from a General looking to give you 10% of a fictitious $20 million hes trying to park as long as you pay $10,000 up front to help.
One recent dupe is the chief operating officer of a vibrant tech company thats growing at 70% per year. In short, hes no stranger to the world of high finance and low-life scam artists. But he admits he feels silly for buying two penny stocks pitched to him by a total stranger recently in an e-mail stock newsletter.
Both stocks promptly tanked.
Why did this otherwise smart businessman get snookered? My cousin bought one for 5 cents, and it went to $1.30, says the tech company manager. He made a lot of money. In the back of his mind, this victim figured he was going to get burned. But I did it anyway because there was a small chance it was going to be a home run. I did it with two stocks, and that was it.
His experience offers a valuable lesson about these scams. A big reason we fall for them is that they come to us in weak moments when we temporarily let our guards down, the SECs Stark says. Our tech managers defenses were knocked out by his cousins huge success, making our victim think he had an easy victory coming, too.
For the scam artists behind electronic newsletters, however, thats all it takes to make good profits by hyping stocks and selling them into rallies they create. Just like with any other sales pitch, there are a certain number of people who fall for it, says Jody Janson. Janson keeps a wary eye on stock newsletter scams, because he runs Investors Stock Daily, an above-board stock promotion service that makes heavy use of e-mail, too.
If they e-mail a million people, they are going to get 1% of the population to follow them, and that is all they need, Janson says. Investors Stock Daily typically is paid in cash for publicizing a stock, so Jansons not an unbiased source. But when he does accept stock as payment, he says, its usually with an agreement that he wont sell for at least several months.
Con artists playground
To be sure, there are plenty of quality companies in the pink sheets and on the OTC Bulletin Board. But this corner of the stock market also happens to be the playground for unscrupulous stock promoters looking to create a quick rally so they can unload shares for a fast profit.
Heres another recent example. On Feb. 4, an anonymous stock promoter sent me a report touting shares of InteliSys Aviation Systems of America (IYSA, news, msgs), a small company that makes software used in aviation. Within two days, the stock jumped 36% from 33 cents a share to 45 cents. Too bad for anyone who bought shares above 40 cents. The stock has been trading at 28 cents. So, the investors are now down nearly 38%.
The promoters most likely did alright, since they were paid 130,000 shares for the job, and we can assume they were selling into the rallies they sparked with their e-mail. They freely admit to keeping this option open, in the fine-print disclaimer in their stock tout. That disclosure may keep them within the law -- as long as prosecutors cant prove it was their intent to manipulate the market. Thats hard to do in court.
Companies are victims, too
Sometimes, the companies whose stocks are getting jerked around by these touts are part of the scheme, says Stark. But more often, they are resentful victims, too.
Our stock got bounced around quite a bit, and that is really irritating, says Atul Mehta, who handles public relations for Global Explorations. It creates a lot of headache for me because I am the one getting the calls from people asking: What are you doing there, what is going on? We were kind of flabbergasted, because people bought stock in our company, and then the next day, it was down.
Mehta says his company tried to track down the tout behind the e-mail but to no avail. A lot of these people are very into pump and dump, and that is not what we want to do because we are a real company. And we have a real product, Mehta says.
As with many stock promotion e-mail letters, Financial.stickergalaxy.com doesnt come up in a national search of the white pages, or at search engines such as Google. And they did not reply to return e-mails responding to their touts, so they could not be reached for comment.
Indeed, whenever you get an e-mail from someone touting a stock and it piques your interest, heres how to start judging its agenda:
- Can you find the Web site it purports to promote?
- If you do find the promoters, its crucial to look for some independent assessment of their track record. One good source: Hulberts Financial Digest, which ranks newsletters.
- Find out whether the newsletter received payment to "tout" or recommend the stock and, if so, what it received and from whom.
- Read carefully what the newsletter says about payments it receives.
- Independently investigate the company or investment opportunity.
- Don't invest in small, thinly traded companies unless you're prepared to lose every penny.
- Check with the SEC or your state securities regulator to see if the newsletter has ever been in trouble.
The best defense: use common sense, says the SECs Stark. Start by never making any investment decision solely based on e-mail spam, he says. Treat any tout that you receive like you would a slip of paper put under your windshield wiper in the parking lot.
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