The Anatomy of Pump n' Dump Stock Spamming

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.'"

Comments

Invest in spam-filter companies ;)

[Reverse Gear]

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 ;)

Re:Invest in spam-filter companies ;)

[Master of Transhuman]

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.

"Follow the money"?

[khasim]

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.

Re:"Follow the money"?

[pla]

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.

Re:"Follow the money"?

[Babbster]

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.

Re:"Follow the money"?

[Who235]

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.

Re:"Follow the money"?

[garyrich]

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.

Re:beware...

[alienmole]

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.

Re:Why there is spam, how to get rid of spam

[Joebert]

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.

Re:God forgive me, but....

[oliderid]

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.
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Re:The great thing about these schemes...

[mysqlrocks]

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

Sure you can:
http://www.investopedia.com/ask/answers/06/otcpink sheetshortselling.asp

Re:Caveat emptor

[GigsVT]

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.

Perhaps Tax Evasion is the way to get them...

[CaptainDefragged]

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.

Re:One way to stop it...

[glenstar]

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.