Creative
Stock Scams - What We Now Know
Casey
Research
|
|
.
Stock scams have been around since,
well, probably about five minutes after the invention of stocks. Over the
years, their variety has been limited only by the collective ingenuity
of the scammers.
The classic scam of our time is the
pump-and-dump, recently popularized on TV in The Sopranos, and in films
such as Boiler Room. In the pump-and-dump, a semi-legit “brokerage office”
quietly buys up a block of stock in a company that is selling cheap and
hasn’t moved for a while. Then a team of “agents” cold calls prospective
buyers from one of the lists of investors that are readily available, and
touts the stock as being just about to make an explosive move (based on
“insider information” of course). The buyer is badgered mercilessly, while
being told that he or she needs to get in on the action immediately, or
miss out. When enough suckers have bought, driving up the price, the scammers
sell out and close down their office, leaving their victims holding the
bag when the stock’s value plunges back to its real worth.
The Internet has made a variation
of the pump-and-dump even easier. Most stocks now have a “message board,”
on which those who follow the company can post news, opinions, and general
information. Scammers looking to make a quick profit have been known to
use these boards to post messages touting the company’s prospects, often
posing as a corporate officer or other insider. Some may post to the board
under a number of different aliases, each more enthusiastic than the last.
Again the idea is to engineer a rapid rise in share price, so that the
scammer can then cash out. (It happens the other way, too. Scam artists
can sell a stock short, then post negative “news” on a board, hoping to
drive down the price.)
.
 |
Another fraud involves
a creative use of coin tossing. The con man, alleging an infallible “system”
for predicting market direction, sends out a large number of letters lauding
his scheme. This used to be done by regular mail, on fancy “company” stationery,
but email has simplified matters and allows someone to reach millions simultaneously,
rather than thousands. The messager claims the ability to accurately forecast
the direction of a particular stock index and, to prove it, he gives away
his current prediction for free. |
What the recipient doesn’t know is that
the scammer has sent out a huge number of alerts, divided equally between
positive and negative. Those who got wrong predictions never hear from
the guy again. Those who got correct predictions get a second one. Again,
they’re divided equally between plus and minus. And so on. By the sixth
or seventh iteration, a small group has gotten predictions that were correct
every time. The scammer, having “proven” his accuracy, then offers his
next prediction, for a price. If he can convince, say, 500 people to pony
up 500 bucks each for a “sure thing,” then he can pocket a cool quarter
million. Better yet, he can work that group down and make even more off
those who succeed. The interesting thing about this particular con is that
some of the victims actually make money.
| One of the latest and
cleverest of these is the “wrong number” scam.
According to the SEC, which has filed
a complaint in the matter, one example of this was run the last two days
of August, 2004. Whittemore Management, a Dallas-based telemarketer, was
hired to exploit a vulnerability in voice mail systems. Known as “voice
mail spam” (or “vice mail”), it is a relatively new phenomenon. Spammers
use the same system that allows customers to check their voice mail to
broadcast their messages. Recipients don’t get an actual phone call; the
message is simply dropped in their box, to be retrieved the next time they
check it. |
|
.
Whittemore’s
mass-mailing employed a sexy-voiced young woman who, seemingly having dialed
a wrong number, said something like: “Hi, it’s Debbie. Since you missed
out on the last one, I just wanted to tell you that that broker guy I’m
dating is getting ready to do another one of those promotions. You remember
what happened last time. Anyway, this one is a company that does some sort
of free long distance and it’s called Yap International, Y – P – I – L,
and if you want to get in on it before it takes off you need to do it tomorrow.
It’s at sixty something cents right now and it’s going to, I don’t know,
six bucks or something outrageous. You don’t want to miss this. Talk to
you again soon. ’Bye sweetie.”
Yap, a Vancouver-based
VoIP company listed on the pink sheets, traded at $.68 on volume of 7,400
the day before the messages went out. Three days later, the price spiked
at $1.00 on volume of over 300,000. (The company, which itself has not
been accused of any wrongdoing, later changed its name to Nomad International.
As of June 14, you could pick up shares for four cents each.) Criminal
investigations are ongoing.
No doubt this
is not the last word in stock scams. Future advances in technology will
surely spawn schemes yet undreamed of. But for now investors would be wise,
as always, to be wary. The old saw—if it sounds too good to be true, it
probably is—is as applicable as ever.
And if you
do think you have been contacted by a scammer, the SEC wants to hear from
you. It asks investors “who receive these kinds of calls to let them know
the company being touted, the exact date and time the call was received,
the number called, and the number from which the call was made, if available.
E-mail the information to Enforcement@sec.gov, or call the SEC at 1-800-SEC-0330.”
.
 |
The
above originally appeared in the June 21, 2005 weekly edition of What We
Now Know distributed by Casey Research, and is used here with permission
from Casey Research, LLC. WWNK is a weekly free e-letter and the only Casey
Research publication that does not specialize in investment topics, What
We Now Know is a refreshing mix of topics—from U.S. and world politics
to the economy, health, science, technology and general interest stories.
What We Now Know has a current readership of over 100,000. Always informative
and entertaining, it presents news from an angle that you will hardly find
anywhere else. Check
us out it’s Free! |
.
.
.
. |
