Creative Stock Scams

 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 [email protected], or call the SEC at 1-800-SEC-0330."

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Posted 06-21-2005 10:56 PM by Doug Casey
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