Stock Spam: A Classic Scam

WHITE PAPER
Stock Spam: A Classic Scam Ever since there have been stocks and shares there have been so called "pump 'n' dump" scams. This white paper looks at how Internet fraudsters utilize the Internet and email to perpetrate these classic scams. Martin Lee, Senior Software Engineer, Research & Response Team, MessageLabs
Introduction "Buy a bunch of garbage stock, tell your idiot subscribers about Ever since there have been stocks and shares to sell, there have how great the stock is, and like sheep they will run out andbeen so-called A "pump 'n' dump" scam. They were partly to buy it. Dump the shares you bought a few hours ago to allblame for the infamous South Sea Bubble of 1720 and the Wall these suckers." Street Crash of 1929. But today, thanks to the Internet, they've In August 2000, another student stumbled on the powerful effect got a new lease of life and represent a type of spam that can that a fake press release can have on a company's share price. damage the unwary. When faced with a trading loss after betting on a share price A pump 'n' dump scam is extremely simple. Somebody buys dropping, the student distributed a fake press release purporting shares at a cheap price and promotes them to anyone who will to come from the company. It caused the company's stock price listen as "the next big thing". As others buy the shares, driving up to plummet by 62%, losing $2.5 billion in market capitalization. demand, the share price increases. When the original buyer feels This had the intended effect of turning his $97,000 trading loss that interest has reached its peak, they sell their shares for a into a $241,000 pro? t. Unfortunately for him, his pro? ts were quick pro? t. Eventually everyone realizes that the shares they've con? scated and he received not just a $100,000 ? ne but also a bought are not worth the hype. As demand recedes, the share 44-month prison sentence. price de? ates, sometimes dramatically, leaving anyone who Nevertheless, the potential pro? t in such stock manipulations bought at any time (other than the very beginning) out of pocket caught the attention of more sophisticated criminals adept at - sometimes to the tune of thousands of dollars or more. exploiting the anonymity of the Internet. For example, Glenn Historically, stocks were hyped in the streets, bars and coffee Conley and James Sherat subverted the identity of a major houses of ? nancial districts. Now, the Internet provides fraudsters Internet company as the source of their fake stock tips. They with a whole new medium, facilitating the rapid communication promoted 60 stocks over three months, netting them $1 million with lots of recipients that are vital to scammers' ability to co- pro? t. However, they attracted the attention of the company ordinate the hyping of valueless stock. Moreover, the Internet whose identity they had hijacked - and the company set about allows a degree of anonymity, allowing the fraudster to go tracking the pair down. Before long, the culprits were identi? ed, undetected and launch more pump 'n' dump scams over and put behind bars and their pro? ts seized. over again. Organized crime raises the stakesFrom opportunist to criminal The less talented fraudsters involved in stock spam have had The ? rst Internet fraudsters involved in promoting these stock their operations shut down. The spam gangs still perpetuating spam scams were relatively unsophisticated. One of the ? rst this type of fraud have become incredibly sophisticated. Over investigated cases involved a law student who set up a fake the past two years, they've consistently been at the forefront of share tip website in 1999. He netted $345 000 pro? t for himself spam innovation. Their emails are always sent from networks of and his friends within a few months by promoting shares he'd virus-infected machines, leaving no trace as to who actually sent already bought to subscribers to his website. His investment the message. To avoid detection by text-analyzing spam ? lters, philosophy was cynical but straightforward: their messages are encoded as images. They've also written software to run on virus-infected computers that ensures every
1 SEC Complaint - CV-1:00CV00423 (D.C.D.C) (EGS), March 2000. http://www.sec.gov/divisions/enforce/extra/coltcomp.htm2 Washington Monthly, "Tilting at windmills - news and observations on current political and social issues", May 2000. http://? ndarticle... [download for more]