Kiplinger Today


The Truth Behind Penny Stock Spam

Promoters of penny stocks typically pitch these high-risk investments as if they were valuable real estate, like oceanfront property. With little money down, you can make a quick-and-easy profit. But in reality, penny stocks are more like swampland. And now, thanks to spam, the muck is spreading at an alarming rate, and efforts to stop it have so far been as effective as ordering the tide not to come in.

You probably trashed an e-mail message last December touting Goldmark Industries. A spam campaign predicted that investors would earn spectacular returns. One e-mail, which forecast the stock would gain 1,077%, said, "Watch GDKI [Goldmark's symbol] soar on Wednesday, Dec. 20!"

Maybe you didn't bite, but many others did. On December 19, the day before the spam campaign began, Goldmark closed at 17 cents a share. Nine days later, when the spam barrage ended, the stock closed at 35 cents. Those who held the stock before the e-mail campaign doubled their money. Investors who bought at the top lost their shirts. The stock closed at 6 cents in mid April.

If you think we're talking about chump change, think again. The Securities and Exchange Commission says spam campaigns promoting Goldmark and 34 other stocks that the agency recently suspended from trading for ten days robbed investors of tens of millions of dollars. And those 35 are just a few acres of the swamp. The SEC estimates that 100 million stock-spam messages are sent daily. Postini, an e-mail-security company, says the volume of spam that hypes stocks has grown 120% in the past six months, and that about one-fifth of all spam is stock-related. (On April 13, the SEC suspended trading on three more penny stocks that it suspected were being manipulated through spam campaigns.)


Spam attacks

Spammers never let facts get in the way. Take an e-mail about Goldmark sent last October, before the campaign cited by the SEC. The note claimed that Goldmark, which says it produces and distributes hip-hop music, films and TV shows, had struck a deal with rap impresario Sean "Diddy" Combs. A Combs representative says the claim was fiction. None of the firms whose stocks were suspended, including Goldmark, acknowledge involvement in the spam campaigns.

People behind those campaigns have a big edge over those who buy on the hype: They know when the spam will end. A well-executed spam attack can produce triple-digit gains in a matter of days. Because of a December spam campaign, for example, the stock of Apparel Manufacturing Associates rose from 6 cents to 45 cents in just five days. It was among the stocks later suspended by the SEC.

Almost all stock spam is illegal. That's because these e-mails violate the Securities Act of 1933, which, among other things, bars paid promoters from touting stocks without disclosing the details of their compensation. Spam that doesn't allow you to opt out of the e-mail list (and most stock spam does not) also violates the 2003 CAN-SPAM Act, as well as state anti-spam laws.

You may have noticed that your spam blocker is letting more stock touts through. That's because spammers have become more sophisticated. The e-mails you open look ordinary, but many messages are in the form of digital images that spam filters can't read. And spammers avoid detection by using computer viruses to infect vast networks of computers, which then disseminate millions of e-mails.

Stock spam would wither without a healthy supply of junk-company shares, of which there is no shortage in the U.S. Most of these low-priced, thinly traded stocks are found on the Pink Sheets and the OTC Bulletin Board. NASD, the self-regulatory body of the brokerage industry, runs the OTCBB, and stocks quoted by this service must register with the SEC. That cuts down -- but doesn't eliminate -- the number of stocks that can be manipulated. The Pink Sheets, a private company, permits stocks that don't file with the SEC to be listed on its service.

NASD won't venture a guess at the number of OTCBB stocks involved in penny-stock spam. Cromwell Coulson, chief executive of the Pink Sheets, estimates that 10% of the more than 4,800 stocks that trade on his service are easy marks for spammers because the companies provide little or no financial information. The Pink Sheets has stopped quoting prices for the 35 stocks the SEC suspended as well as shares of more than 300 companies about which the company has received spam-related complaints from investors.


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