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The Anatomy of Pump n' Dump Stock Spamming

Posted by Zonk on from the ugly-in-there dept.

giorgiofr writes "Laura Frieder and Jonathan Zittrain have analyzed pump n' dump spam activity in their paper 'Spam Works: Evidence from Stock Touts and Corresponding Market Activity'. Unbelievably, it appears that spammers are able to achieve a 5% gain on pumped stock before dumping it, along with a dramatic increase in transaction volume of the stock. From the synopsis: ' We suggest that the effectiveness of spammed stock touting calls into question prevailing models of securities regulation that rely principally on the proper labeling of information and disclosure of conflicts of interest to protect consumers, and we propose several regulatory and industry interventions. Based on a large sample of touted stocks listed on the Pink Sheets quotation system, we find that stocks experience a significantly positive return on days prior to heavy touting via spam. Volume of trading responds positively and significantly to heavy touting.'"

31 of 325 comments (clear)

  1. Invest in spam-filter companies ;) by Reverse+Gear · · Score: 5, Insightful

    I bet many or maybe even most of the people who start buying the stocks being spammed, buy them in the expectancy that the spamming will make the value of that stock rise.
    Thereby they reinforce this strange mafia way of making money and worst of all they make sure that loads of spam will keep on putting even more pressure on the internet.

    The only sensible conclusion I am able to draw from this is that it probably will pay of to invest in the spam-filter companies ;)

    1. Re:Invest in spam-filter companies ;) by Master+of+Transhuman · · Score: 4, Insightful

      Good point.

      There are two issues here. One is the number of idiots who buy the stock based on the spam. The other is the number of people who either: a) assess the stock on its merits and decide to buy; b) assess the SPAM on its merits, as you suggest, and decide to take advantage of it.

      I suppose one could consider spam stock touting another way of learning about what's available on the stock market. In that respect, it's like an "uninvited stock ticker". Some people are probably viewing it that way.

      It's like the 9/11 airline stock scam or the stock scam Le Chiffre uses in the James Bond film. There's always a way to make money on somebody else's stupidity or misfortune - especially if you engineer the stupidity and misfortune.

      --
      Richard Steven Hack - This sig is TOO GODDAMN SHORT TO DO ANYTHING USEFUL WITH! MORONS!
    2. Re:Invest in spam-filter companies ;) by Anonymous Coward · · Score: 1, Insightful

      If you're lying to prospective investors about the future prospects of a company you own a part of, isn't that fraud?

    3. Re:Invest in spam-filter companies ;) by nelsonal · · Score: 2, Insightful

      Regarding a, the stocks touted are tiny otc or barely listed NASDAQ or AMEX stuff that doesn't have much of an operating history or products (think Infinum labs/Phantom console which was the same scam on a much grander scale).

      --
      Degaussing scares the bad magnetism out of the monitor and fills it with good karma.
  2. "Follow the money"? by khasim · · Score: 5, Insightful

    Really, this should be the easiest to crack. Someone has to take the money. Or some company which then turns it over to some person. The SEC should be busting these left and right.

    1. Re:"Follow the money"? by Who235 · · Score: 2, Insightful

      By the time they are spamming you about it, the pumping has already pretty much happened.

      You're the dump part.

      I assure you, you can try to buy those stocks, but you won't make money.

    2. Re:"Follow the money"? by pla · · Score: 5, Insightful

      Really, this should be the easiest to crack. Someone has to take the money. Or some company which then turns it over to some person. The SEC should be busting these left and right.

      Except, you've missed the point on the very reason these scams do make money - Because people buy these stocks realizing them as pump-n-dump scams, hoping to trade out in time.

      Pretty easy, actually...

      1) Get stock spam
      2) See if the price has gone up in the past week. If so, forget it. If not, continue o step 3
      3) Buy a few thousand shares
      4) Watch the price carefully.
      5) The second it starts going up, sell sell sell! Don't try to time it for best profit, dump ASAP.
      6) Profit!


      So, by "following the money", they'd potentially catch honest traders as well as those running the scam.

    3. Re:"Follow the money"? by Babbster · · Score: 4, Insightful

      Here's one of [many] problems faced by investigators trying to unravel the mess: You can't know who the first person was to receive the spammed e-mail. If I (as someone who's not participating in the fraud) get one of these spams and decide to buy the stock, and I do so within minutes of the e-mail's propagation, I could end up making huge profits on the deal.

      Now, when the SEC goes over the records and sees that I have made a large amount of money on this now-"corrupted" issue, was I simply an investor who saw an opportunity based on what I perceived as - and, in fact, was once the spam was sent out - public information, or was I one of the scammers? You and I (since I just told you and we're assuming I'm being truthful) know that I picked up the stock only after the scam was initiated. The SEC, on the other hand, can't tell if I was simply lucky or if I timed my purchase based on foreknowledge that the scam was being initiated at that time on that day.

      In other words, if a scammer changes the timing of their purchase to occur after the spam has gone out, large profits could still be realized thanks to the naive and the opportunistic who subsequently receive the e-mail.

      Of course, even the purchases made before the scam could be masked to a large extent by giving tips to a few people one knows will keep their mouths shut (if not to the SEC then at least to other "investors" before the scam) and having them buy the issue.

      In short, it's a problem that's not easily solved.

    4. Re:"Follow the money"? by Anonymous Coward · · Score: 2, Insightful

      That is where the data mining comes in.
      When you have bought penny stock 20 times in a year, and every time it turned out that many other persons wanted to buy it shortly after you and it was mentioned in a stock spam run, chances become more and more that you are behind the spams instead of getting your info from the spams.
      So while it will be difficult to prove from a single case, bringing together lots of data will bring the proof.

    5. Re:"Follow the money"? by Who235 · · Score: 3, Insightful

      Is it ethically OK? Well I think you and I know the answer to that - it depends.

      If you have money to play around with, I think a better idea would be to determine how the spammers select stocks that look like good pump and dump opportunities and buy into a few of them before they get selected in the hopes that they will someday be pumped. There has to be some relatively simple algorithm they use which accounts for price, trade volume, etc. . .

      That way, you wouldn't really be a part of the plan, but you could profit from it passively with little or no possible criminal liability. It could just be a part of your normal investment system.

      Does a spam email that is obviously a pump and dump scam expose you to any liability as a co-conspirator, say, if you follow up on it? How do people know you weren't following what you thought was a legitimate tip? And how about the companies involved? What happens to them when they see a huge stock price increase that blows away in a month? What kind of havoc does that wreak on the employees of that company?

      Anyway, I think the best idea is to ultimately leave the whole thing alone. Let Spam Assasin do its job and don't get too curious about the shit that ends up in you Junk folder. You can't cheat an honest man as they say, so the best defense is probably to use your instincts and steer clear.

    6. Re:"Follow the money"? by garyrich · · Score: 5, Insightful

      Mutual fund managers are almost never empowered to trade the "pinks". Plus why would they bother risking their $$$$$ jobs for a 5% profit? Part of the reason they can't/don't is that you just can't put large amounts of $ to work in these stocks. Even if they truly loved some penny stock and thought it would be the next microsoft - you can't invest even as little $10M in a company with $50M market without totally distorting the market - easier to just do a buy out the company of you like it that much.

      In theory you could write a few lines of java/lisp/perl into your favorite automated trading platform and seek out the patterns of the spammers taking their position before they start pumping. That is, if they traded on some "real" exchange you could. In the "pinks sheets" there are no market makers, frequently no level 2 quotes, etc. Not enough data to easily find the patterns. As others have pointed out, this is also what makes it hard to prosecute the pumpers, they data trail is just too thin.

      --
      -- your Web browser is Ronald Reagan
    7. Re:"Follow the money"? by plover · · Score: 2, Insightful

      So while it will be difficult to prove from a single case, bringing together lots of data will bring the proof.

      Unfortunately, bringing together lots of data will create a correlation, perhaps a strong correlation. But they will not provide the actual proof. Unless they find harder evidence (payment to a spammer, letters to a co-conspirator, a confession from another involved person) there's nothing to convict them on. Good luck, however highly improbable, is not prima facie evidence of a crime. I don't think a judge would let the case come to trial without more evidence.

      This is like investigating any other theft. Investigators could certainly use the correlations to locate these extremely "lucky" investors for further investigation. They would then watch them carefully in their future dealings. But all that presupposes that we have enough investigators to chase down every stock scam and follow every lead. Perhaps the public visibility of these schemes will lead to increased enforcement.

      --
      John
    8. Re:"Follow the money"? by John+Hasler · · Score: 2, Insightful

      What about the people who never saw the spam but purchased the stock for their own reasons? You are assumming that all activity in the stock is related to the scam. This is not true. Many people buy and sell these stocks every day.

      --
      Warning: this article may contain humor, sarcasm, parody, and perhaps even irony. Read at your own risk.
  3. Why there is spam, how to get rid of spam by Rosco+P.+Coltrane · · Score: 2, Insightful

    Regardless of the type of spam, there is spam because spammers make money out of it. To be a successful spammer, you need:

    - A half-convincing scheme
    - Half-witted people gullible enough to be conned

    To get rid of spam, get rid of the half-witted people. It shouldn't be that hard to educate computer users and explain to them that nobody will ever contact them to help them better their lives, just like nobody pop out of the blue and make their lives better in real-life. It's so simple even idiots can grasp the concept, and I fail to understand why nobody ever launched an educational campaign to explain this.

    Once too few people respond to spam, then spamming isn't profitable anymore and spams disappear. The only true solution to the spam problem is a basic lesson in electronic social relationship.

    --
    "A door is what a dog is perpetually on the wrong side of" - Ogden Nash
    1. Re:Why there is spam, how to get rid of spam by Joebert · · Score: 5, Insightful

      The problem with that, is that there's millions of middle-low class citizens in the world that are fully aware they will never have the things of thier dreams without taking a chance now & then.

      Spam like that is successfull for the same reasons lotterys are successfull.
      Not because people don't know, but because they're prone to greed.

      --
      Wanna fight ? Bend over, stick your head up your ass, and fight for air.
  4. Re:beware... by alienmole · · Score: 4, Insightful
    The information in that spam probably can't be considered public

    I don't see why not - if it's been sent directly to millions of people's inboxes, how much more public can it be? All you'd have to do to cover yourself is document when you received the email, so you can prove that you only bought after the email went out.

    You can't be guilty of insider trading if you have no connection to the company and no source of real inside information. This spam is never based on real inside info.

  5. People who buy stocks based on spam by Kanasta · · Score: 2, Insightful

    deserve to lose their money. They won't forget that lesson again.
    Give it a few years, it'll go the way of nigerian spams.

  6. Re:Ride the pump'n'dumps, make big $$$ by ericrost · · Score: 2, Insightful

    And at the amounts where you'd make any money over commissions/fees the stocks will be too thinly traded and you'll lose your ass by driving the price up as you buy and down as you sell. This (I'm sure) is why the spammers choose nothing stocks. There's ABSOLUTELY nothing that anyone can do in the market to make money with them. Remember, you have a finite amount of shares, and a finite demand. If you're trying to pull too many shares off the market, the price goes north.

    --
    My Babylon
  7. Why is it unbelievable? by writermike · · Score: 2, Insightful

    Unbelievably, it appears that spammers are able to achieve a 5% gain on pumped stock before dumping it, along with a dramatic increase in transaction volume of the stock. Can someone explain this to me? Why would this be unbelievable? If spam is so wide-spread as we believe, then it's certainly going to hit those gambling-types who see the ad and think they can beat the odds and make a small bit of money getting in on the action. I find that quite believable.
    --
    If Nalgene water bottles are outlawed, only outlaws will have Nalgene water bottles.
  8. Re:God forgive me, but.... by oliderid · · Score: 3, Insightful

    Spammers bought stocks days/weeks before they sent their spam. The spammer will sell you these stocks. You will help them to "leave" the market.Even if you manage to make any profits (and I seriously doubt you could...Because you will be the "top"), it will be thinner than these 5.00% of return. Their pump & dump lifecycle is extremely short. You have to be the source to enjoy any profit.

    There are plenty of other ways to make better e-investment.
    My name is Kikon Vizirmarabu. I'm an ex-minister of the Nigerian government. I've got US$1.572.000.053 (ONE FIVE HU...ERR...LOTS) and I need a trusted US partner for a special operation. If you are interested please leave me your email.

  9. Re:The great thing about these schemes... by mysqlrocks · · Score: 4, Insightful
    Except that you CANT short pink sheet stocks or OTC stocks.
    Sure you can:
    http://www.investopedia.com/ask/answers/06/otcpink sheetshortselling.asp
    --
    Bradley Holt
  10. Re:Caveat emptor by GigsVT · · Score: 3, Insightful

    The company itself is an innocent bystander.

    The spammer buys in, driving the price up. They then sell against some of the early suckers, who are left holding the bag. By this time the price has probably started falling already. Then the suckers eventually wise up and start selling, against the very thin market, which can depress the price even further.

    It's entirely possible for a stock to wind up a lot lower than it started out after one of these schemes hits it.

    --
    I've had enough abrasive sigs. Kittens are cute and fuzzy.
  11. Re:God forgive me, but.... by mazphil57 · · Score: 2, Insightful

    starts polling finance.yahoo.com You can't trade profitably using delayed quotes (15-20 minutes delay), like at finance.yahoo.com. In some markets, you cannot even afford a two second delay. That's why there are expensive real time quote services.
  12. Perhaps Tax Evasion is the way to get them... by CaptainDefragged · · Score: 3, Insightful

    Perhaps the way to get these people is through IRS. It would seem a highly likely proposition that the people running these P&D schemes would not be paying tax. They would more than likely keep detailed records with a nice transactions trail from their brokers and banks as well. Should be a slam dunk if IRS gets in on the game.

    --
    Don't tailgate - the end is near!
  13. Jim Cramer rules by heroine · · Score: 2, Insightful

    Everyone loves Jim Cramer because he's a celebrity, be he's the biggest stock pumper of all.

  14. They got them sold.... by Kjella · · Score: 2, Insightful

    ...on a lottery with no winners, it's as simple as that. How do you know that there are actual winners in a lottery? If it wasn't for regulation, you'd have a paid actor up there saying he won $10mio while they actually just pocketed the money. People think the game is to find the right stock, which is sort of true but stocks aren't equal like two lottery tickets. Spamvertized stocks are like buying last week's lottery tickets, but people don't see that they're set up to be losers. They only know that you could get rich on the stock market, and they're putting money on the stock market and so they could get rich. And if it doesn't turn out well, then it was the wrong stock to put money on. Better check the inbox for more lottery offers.

    --
    Live today, because you never know what tomorrow brings
  15. Re:The great thing about these schemes... by mysqlrocks · · Score: 2, Insightful
    If you read your own link you will see the point the parent to your post was making.

    Actually, I think the parent (now grandparent) was pretty clear in his/her point:

    Except that you CANT short pink sheet stocks or OTC stocks.

    This is a common misconception, so I thought I'd correct the point. You are absolutely right that it is INPRACTICAL to short pinks or OTC stocks, but, INPRACTICAL is different than CANT, IMHO. I'm not sure if you're reading the same post as me.

    --
    Bradley Holt
  16. The #1 post will be... by PhreakOfTime · · Score: 2, Insightful

    From all the know-it-alls who think that they can 'short' one of these stocks to be on the 'other-side' of the gamble.

    People please consider that the posters on Slashdot are NOT very good at trading. Such a lack of knowledge is quite frankly bothersome in a community where so many people analyze everything to the bitter end. Yet, when money is involved everyone thinks they have the secret to making it work right.

    Tell me, exactly what brokerage do you use that allows you to short OTC, and .PK(pink sheet) stocks? For the rest of the real world, OTC and PK are legally impossible to short trade legit. One of the exceptions is if you short sell a stock that actually WAS listed and then became de-listed by the exchange it is on. The world of money and finance is as complicated and incomprehensible to most techies, as computers are to most non-techies.

    Everyone likes to joke at the person who used the CD player for a cup holder, or cant figure something that comes so easily to you. Then when those people are gone, you make fun of their ignorance. Guess what, any comment about short selling one of these stocks makes YOU the person who gets made fun of when the backs turn. And deservingly so, if you knew how rediculous the comment of 'short-selling' spam stocks was, you would laugh your ass off too. Maybe as much as you did when you first heard the 'CD tray for a cup-holder' joke.

    Having fun yet?

  17. Key points - not a good way to make money by Animats · · Score: 2, Insightful

    That paper has been out for a while. I cited it a few weeks ago.

    Key points:

    • The response rate on large scale stock spams, in terms of actual stock transactions, is around 18 in 1,000,000.
    • This isn't a big-money operation. The biggest spam they studied resulted in around $36,000 in transactions. The spammer made maybe 5% of that, and other investors lost about 5% of that.

    With those numbers, it's going to turn out that this is some kid in his parent's basement. It's not a market manipulation problem. It's the buildings full of servers that have to be installed to process all the spam that cost.

  18. Re:Caveat emptor by benzapp · · Score: 2, Insightful

    You're forgetting who this DOES hurt: the companies that are small and are trying to raise capital.

    These pump and dump scams are a major reason why the uber-corporations stay in power, it is VERY VERY difficult to get money if you start a small corporation. All it takes is to be targeted by one pump-and-dump con artists, and your company is ruined.

    This does ruin people's lives, and does affect our society and civilization negatively.

    --
    I don't read or respond to AC posts
  19. Re:One way to stop it... by glenstar · · Score: 3, Insightful

    That's all well and good and I mostly agree. But... I was the CEO of a public (Pink Sheets) company where I would get calls DAILY from people (and their lawyers) complaining about spam 'pump and dump' faxes and emails being sent to them. I can honestly say that I never knew anything about these spammings. Essentially what can happen is that one or more major shareholders decide to drop a few bucks to increase the value of their holdings. The company never knows but their name is tarnished. I learned the hard way that proving innocence (ie... not knowing nor endorsing) about a pump and dump scheme is almost impossible. Basically, don't assume that a spam email or fax is being sent from the company directly. While there are most definitely scam artists out there (especially on OTC and Pink Sheets!), there are also a lot of very honest businesses who are at the mercy of their less than honest shareholders.