A few weekends ago, I received an unsolicited pump-and-dump e-mail urging me to buy a U.S. penny stock. The e-mail said that a big deal was pending for the company. The share price was just 29 cents, and the stock would "rocket through the roof" on Monday. I wondered who might buy and then quickly sell a few shares on Monday, figuring that this supposedly inside information could move the price.
Pumping and dumping is one of the oldest and simplest cons in the book. In pre-Internet days, it was relatively easy for the cops to find the perps. The police tracked down the phone numbers and addresses of shady dealers, then raided their boiler rooms.
Now regulators are overwhelmed by the con. The sheer volume of pump-and-dump spam, the fact that it can be sent from anywhere on Earth, and the scam artists' ever-more-ingenious software mean that the authorities will never stop it, and they'll never catch more than a fraction of the spammers.
How much of the stuff is out there? According to Commtouch, an international e-mail security firm, says that total e-mail traffic worldwide averaged about 160 billion messages a day in 2006, and about 140 billion of those messages were spam. Yet another estimate says about 15% of spam touts stock scams.
One beauty of these pump-and-dump schemes for the scammer is that there is no contact with the investors—the victims don't have to send money to buy anything, or to claim bogus lottery winnings, or whatever. Finding thinly traded penny stocks to manipulate is also a snap. There are thousands on the U.S.-based OTC Bulletin Board—a share price quote service for companies that don't meet the requirements of major stock exchanges—or on so-called Pink Sheets (named after old paper-based services) that quote prices for companies that may not even file financial statements.
It's also easy to foil a lot of spam-filtering software. Misspelling suspect words and jumbling phrases defeats dictionary filters. Those filters are also useless against JPEG or GIF files that are pictures of text. And if you look closely at repeated e-mails touting the same stock, the words may be jiggled or appear in different sizes. In effect, spam programs create bespoke appeals for you to lose money. How thoughtful.
To feel safer, some spammers operate in freewheeling jurisdictions beyond the reach of U.S. regulators. The risk is that they may be in a country where securities regulation is often handled personally by disgruntled investors. One day in Moscow in 2005, the mother of 35-year-old Vardan Kushnir, renowned as Russia's "spam king," found her son on his bathroom floor with his skull bashed in.
Actually sending millions of e-mails a day is a snap—you use other people's computers. So-called botnet-herding viruses and worms infect computers and then link them. The largest controlled bot found so far by the U.S. Department of Homeland Security was sending e-mails from 226,525 computers.
New viruses have their own anti-virus software that prevents other scammers from hijacking the computer. Regulators take note: Criminal infectors are now competing for the use of your machine. You are now three steps behind.
Four, actually. In January, the U.S. Securities and Exchange Commission (SEC) filed a complaint against Aleksey Kamardin, a 21-year-old Florida college student who they say made $82,960 (U.S.) in six weeks by manipulating 17 stocks. It was allegedly a next-generation scheme: After he bought shares in target companies, he hacked into victims' online investment accounts, sold their stocks and bought more shares in the targets. That drove up share prices, and Kamardin then sold his stock. He wasn't arrested, however—he apparently fled to Russia.
In March, the SEC announced Operation Spamalot, which suspended trading for 10 days in 35 Pink Sheet companies that had been touted in pump-and-dump schemes. As for the scammers, the commission would only say that its investigation was continuing.
So, a word on each aspect of the new pump-and-dump equation. I never buy stocks touted in e-mails—even though the one promoted in the e-mail I received went up 5 cents, or 17%, that Monday. I use a Mac with the OS X operating system, which so far has prevented my computer from relaying spam. Mr. Pump-and-Dumpster? These are salad days and you can probably make out like a bandit. And Mr. Regulator? You can keep shutting down trade in suspect stocks, but you likely won't nab the perps until some other life.
