Rampant E-Mail Stock Fraud

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Rampant E-Mail Stock Fraud

For as long as equities markets have existed, there have been “stock scams.” Or put more generally, ever since there have been rules, there have been people willing to break them.

But now, the problem is bigger than ever. In the age of the Internet, stock scams have become both easier to mount and harder to stop. The age of anonymous e-mail means that naïve or greedy people, hoping to make a quick profit, will find themselves the target of clever manipulations in which the price of a stock is briefly pushed up, then suddenly crashes.

E-mail is a perfect medium for setting up such an operation. Because sending e-mail is essentially free and instantaneous, the perpetrator can easily and quickly target millions of people at the same time. Even if only a tiny fraction of them respond, it can still push the price of a thinly traded stock up, doubling or tripling it in a short time, especially when that stock’s price is very low to begin with.

And, because e-mail does not recognize borders, international stock scams can emanate from anywhere and affect people across the globe. Their international nature also makes them difficult to track and prosecute. In addition, stock scammers, fraudulently posing as a legitimate investment or banking firm, may be touting the stock of a company whose management is completely unaware of the scheme.

For example, the Australian news source John Fairfax Holdings Limited1 reports that last year the Australian banking and financial firm Westpac had its logo stolen for the purpose of sending out millions of e-mails touting worthless stocks of small companies.

What makes is so hard to stop such manipulations, say officials at the Securities and Exchange Commission, is that they work. One of the stocks, Cardia Technologies, went from 3 cents a share to 6.1 cents a share. Although the company’s typical shareholder may not have seen much profit, for someone selling millions of shares, that 100 percent increase in price is significant. And, as soon as the scammers sell, the stock’s price collapses.

NASD, which oversees and regulates trading in equities, corporate bonds, securities futures, and options, provides information on stock fraud to corporations and investors. It has researched the problem of investment-related spam and says that the most common kind of abuse involves “touting a stock.” Touting is defined as peddling it in an aggressive or persistent way.

The most effective touts, of course, masquerade as unbiased news about the stocks; but in most cases, they are blatant attempts to drive up the price of a stock that the touter already holds...

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