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Spam messages promoting bogus financial tips are on the rise. Financial spam rose from 10.8 per cent to 26 cent last month, according to mail filtering outfit ClearSwift. The increase is due largely to bogus stock tips, it says.
By implying that recipients of spam emails are in possession of privileged information - such as news of an acquisition before a general announcement - spammers seek to persuade the gullible into purchasing particular stocks. If a significant enough number of easily-led individuals invest in the touted stock, a spammer can ramp up the share price so that existing shareholders can sell their shares at a profit.
Alyn Hockey, ClearSwift's director of research, said: "It is hard to believe that spammers can influence stock market prices but they wouldn't be sending these emails unless there was something it for them."
Financial spam pegged out at second place in ClearSwift's March spam chart. Healthcare spam (57 per cent) was the most common form of unsolicited email. Pornographic emails comprised 8.2 per cent of the total, making this category the third most common nuisance in ClearSwift's spam chart.
1.1 What is this?
This is a page of information about stocks advertised by unsolicited commercial email (UCE) or spam. It explains how to recognise stock spams, why they are sent, and what you can do about them.
1.2 What is a stock spam?
A stock spam is an attempt to influence the price of stock in a publicly-traded (or soon-to-be publicly-traded) company, by sending information about the stock through electronic mail or news.
1.3 What do stock spams look like?
A typical spam (this is an imaginary example) might look something like:
Quote:
XYZ Industries (symbol: XYZI) has announced priority production of devices based on its proprietary XYZ-Plus technology. Analysts indicate that there is "almost limitless demand for this revolutionary technology". XYZ Industries is expected to trade in the $8 range by the end of the year.
XYZI is rated an immediate and "STRONG BUY".
1.4 How can a stock spam be distinguished from reliable information?
The simple answer is that reliable information about stocks doesn't appear, unrequested, in your mailbox.
Stock spams often typically reproduce press releases issued by the company, often adding a few optimistic claims about the future performance of the stock. The spammer often promises that "this stock will EXPLODE" or says that it is "rated an immediate STRONG BUY". The implication is always that the stock is a bargain and is about to increase dramatically in value in the next few days, guaranteeing quick profits for anyone who invests in it.
Real press releases often predict positive developments for the company, but they are usually not as exaggerated as those seen in stock spams.
1.5 Are stock spams sent by the company concerned?
It's hard to say, but it seems that in many cases the answer is 'no'.
It's easy to assume that a spam which appears to promote a company must have been sent by that company. However, other individuals or organizations also have an interest in promoting a stock. These include third-party speculators who hold shares in that stock, brokers and market makers who buy and sell the stock, and marketing firms who have been paid to advertise it.
Stock spam can lead to short-term increases in a company's share price, but these are usually followed by a sharp fall. This can be very damaging to the company. This is one reason why it's not usually in the interests of the company to send stock spam.
It seems likely that most current stock spam is sent by third-party speculators.
1.6 Why did I get sent here? Was .... ever listed on your page?
Lots of people who arrive at this section do so because they typed the name of a company into a search engine, and were directed here. This typically means that that company was once listed on the spam-advertised stocks page.Scam types
2.1 What are the main kinds of scams involving stock spamming?
There are two main recognised classes of scam that make use of electronic mail (among other things) to manipulate the price of a company's stock. These are known as "pump-and-dump" and "short-and-distort" schemes. Stock spams may also be the product of over-aggressive marketing by unscrupulous PR or marketing firms.
2.2 What's a "pump-and-dump" scheme?
In a classic "pump-and-dump" scheme, a fake company is set up by fraudsters who then promote the stock heavily, often through mail and news. Naive investors buy in, raising the share price. The fraudsters then sell their holdings, after which the company collapses.
The term "pump-and-dump" is now also applied to cases where a legitimate company is 'pumped' by third parties who have bought shares in it. Again, the goal of the people involved is to raise the company's share price temporarily so that they can make a profit on the shares they have purchased.
2.3 What's a "short-and-distort" scheme?
In a "short-and-distort" scheme, fraudsters manipulate the share price of a company by spreading negative information about it. They begin by 'shorting' the stock - that is, selling borrowed stock in the expectation that the price will subsequently fall, allowing the stock to be repurchased at the lower price. The difference between the price that the stock was sold at and the price at which it is repurchased determines the seller's profit.
To make the scheme work, the scammers must ensure that the price will indeed fall after they've sold the stock. They do this by spreading negative information about the company, sometimes true, sometimes false.
Speculators could theoretically alternate "pump-and-dump" with "short-and-distort", going through repeated buy-sell cycles, using positive information to drive up the share price and negative information to drive it down. In practice, "short-and-distort" schemes seem to be rare. While stock spammers do indeed seem to work cyclically, they seem mostly content to let the natural corrections of the marketplace bring the stock down from its inflated high before buying again and restarting their "pump" operations.
2.4 What's "cowboy marketing"?
"cowboy marketing" is the term I use to describe a situation in which a company falls into the hands of an unscrupulous marketing firms that promises to promote their stock. Often unknown to the company, the marketers will use junk mail to try to boost the value of the company's stock. Because the marketing agency is often paid in stock options, this resembles a "pump-and-dump" or "short-and-distort" scheme, with the difference that the marketing firm is a third-party supposedly hired to act in the company's own interests.
In a number of cases that I've heard about, a company has approved an email marketing campaign because the marketer promised that it would send only to people who have 'opted-in' to receive stock announcements. Companies are often very surprised to learn that the marketer has lied to them, and that their so-called 'opt-in' list is just a standard bulkmailer's list of addresses scraped from Usenet and the Web.Advice for users
3.1 I'm getting stock spam; how can I get off their mailing list?
Unfortunately, you can't. Stock spammers are breaking the law, so they are careful not to include any information that could be used to identify them. The spammer conceals their identity by sending spam through hijacked PCs - 'zombies' - and any 'From:' address or contact information in the spam is usually false (stock spammers routinely put other people's addresses or domain names in their 'From:' lines). Even if you could somehow work out who was sending the spams, writing to them to ask them to stop mailing you is generally a bad idea. The spammer has no reason to remove your address from their list: so long as they keep spamming you, there's always a small chance that you'll invest in the stock they want you to buy. Moreover, when you mail them, you're confirming that your mail address is valid and that you read mail sent to it: they're more than likely to sell your address on to other spammers.
3.2 Will the spam ever stop by itself?
No. Once a spammer has found your address, you will keep getting spam at that address until the SEC takes the spammer away in handcuffs.
3.3 Is there anything I can do?
The best thing is to try to filter the spam. Unfortunately, this isn't easy. Stock spammers try particularly hard to avoid spam filters. Recently, many of them have taken to sending their messages as embedded images accompanied by random 'hashbuster' text in order to get past filtering.
If your mail program or your mail server lets you write rules that 'score' incoming messages, you might want to give higher scores to messages with embedded images. Because stock spammers make heavy use of 'botnets' - networks of hijacked home and office PCs on dialup or broadband connections - you might also want to be suspicious of messages that originate from dialup/broadband hosts. Some ISPs or mail forwarding services can flag messages that were sent directly from such hosts.
Stock spammers like forging other people's addresses in the 'From:' lines of their messages. This makes them a candidate for filtering using SPF. If you manage your own mail server, you might want to consider rejecting or flagging mail that explicitly fails an SPF test.
Some stock spammers still send their spams as plain text. You may be able to filter for those by using strings that appear commonly in stock spam but are rare in legitimate messages: 'OTCBB', 'Symbol:', 'Symb0l', 'St0ck' and 'set to explode' are all commonly found in stock spam and rare in 'real' messages.
3.4 Can I report stock spam anywhere?
You can always forward the stock spam you receive to the Securities and Exchange Commission. You'll get an auto-reply to say that your message has been received. They may act on the information that you provide, but you probably won't get any additional acknowledgements from them.
If you think that the company whose stock is being advertised might not be aware of it - check their website and Yahoo! first for press releases or statements - you can forward a sample of the spam to them. Only send one sample unless they ask for more, and be polite. In ninety-nine cases out of a hundred, the company isn't responsible for the spam and will be even more angry about it than you are. Stock spam hurts legitimate companies and honest businesspeople. Don't make things worse by insulting them for something they didn't do.
If the spam mentions a website and you have reason to believe that the site might belong to the spammer, you can try to work out who hosts the website and send a copy of the message to them. Again, be polite. The hosting company is more likely to take action against the spammer if you aren't rude to them.
A lot of stock spammers also advertise using junk faxes. The laws on junk faxes are a bit fiercer than the laws on spam, so if you're getting junk faxes there are things you can do. The FCC page about unwanted faxes is a good source of information. The FCC also offers a form for reporting junk faxes (Form 1088). If you want more information on the subject, the independent junkfax.org seems to have a good collection of information and resources.Advice for investors
4.1 I'm an investor: should I buy stocks advertised by spam?
John Reed Stark of the Securities and Exchange Commission has said it simply and clearly: Never invest based on spam.
The stocks that you see advertised by spammers aren't any better than any other stocks of the same kind and may be worse. If a spammer had found a genuinely good investment, he wouldn't share the information with a million strangers; he'd keep it to himself. The stocks you see have been chosen not because they're good buys, but because they're easy for the spammer to manipulate. Spammers pick stocks that trade at very low prices so that even a small gain can lead to profits for the spammer. These are often not the best stocks to invest in.
Recent studies suggest that stock spam can boost the price of a stock. The gain is always small (which is why stock spammers have to keep sending spam) and is only temporary. SpamStockTracker, a website that tracks spammed stock performance, shows that in the long run you will almost always lose money buying spammed stocks.
It's not worth buying spammed stocks as a long-term investment. Small-cap stocks are a risky investment anyway, and spammed stocks are riskier still. The 'rollercoaster' effect that spam causes - a brief price rise after each wave of spam, followed by a sharp drop - can hurt legitimate companies and even cause them to collapse. Moreover, while most of the stocks advertised by spam are legitimate, there's reason to believe that some may be classic 'pump-and-dump' schemes based on fake front companies putting out press releases full of fraudulent information. Pick one of these and you really will get burned.
4.2 What if I buy and sell quickly?
Stock spam can produce a small, short-term boost in a stock's price. In theory, you might try to do the same thing as the spammer: buy the stock and then sell as soon as it rises enough to make a small profit.
The studies referred to earlier suggest that this strategy is likely to lose you money. According to one study, traders who buy in response to stock spam can expect to lose 5-10% of their investment on the days following the spam run.
The main problem is that you don't know where you are in the cycle created by the spammer. You might have got one of the spammer's last spams, sent just before he prepares to cash out. Because the spammer probably has a relatively large holding, the price is likely to fall sharply as soon as he sells his shares, causing your holding to lose value.
Trying to make money by second-guessing the spammer (and the effects of his spam on the market) is a poor trading strategy because you don't have enough information to make good judgments, making it likely that you'll lose money.
4.3 What if I short the stock?
"Shorting" or short-selling stocks amounts to betting that the price of the stock will fall. Given that studies show that spam runs are typically followed by a fall in the stock price, this might at first seem like a valid strategy.
There are two problems with this. The first is that most stock spam promotes smallcap or 'penny' stocks, and it appears that few if any brokerages will allow shorting of stocks of this kind.
A more serious objection is that the same problems mentioned earlier affect this strategy as well. Shorting is generally viewed as a risky strategy in itself. The risk is increased by the fact that you can't predict how long a spammer will continue to pump a stock, or what effect the spam will have on its price. A spammer who fails to boost the price enough to make it worthwhile to sell may decide to hang onto his holding and try again later, so the expected fall in price may never materialize.
4.4 Are there any reliable sources of stock information on the net?
You should treat anything you read on the Internet with suspicion, particularly in cases where that information is provided by people who might have a financial interest in a particular stock. Be particularly suspicious of 'tips' posted by people in newsgroups and bulletin boards.
Portals such as Yahoo and Google often offer stock information, including official documents filed by the company, and graphs of the stock's performance to date. Large organizations (portals, news services etc) with a solid reputation and no particular reason to promote one stock rather than another are a safer guide than 'some guy you met in a chatroom'.Advice for companies
5.1 My company's stock has been spammed: what do I do?
The first thing to do is to make it clear to investors that you aren't responsible for the spam. A good way to do that is to post a press release through whatever channels you use normally. Keep it short and clear: state that you didn't send or authorize the spam, state that there are 'no undisclosed material facts in regard to the company', and remind investors that the only reliable sources for information about the company are your company's website and recognized industry PR channels such as MarketWire.
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