Don’t fall prey to penny-stock spam emails
They’re often part of what’s known as a ‘pump-and-dump’ operation
Perhaps nothing so well illustrates investors’ gullibility than their reactions to spam emails that hype penny stocks: Some actually invest in them.
Most of us, of course, insist that we’re not that gullible. We complain about how these spam emails are nuisances at best and try to program our spam filters to prevent them from ever showing up in our inboxes.
Apparently, however, at least some of us can’t resist trying to take advantage of the hundreds, if not thousands, of percentage gains that these emails promise. A number of academic studies have documented that touted stocks’ trading volumes rise significantly in the wake of a spam email campaign and then just as quickly fall back again in the days thereafter.
This is the hallmark of what’s known as a pump-and-dump operation: Unscrupulous operators, in the weeks before they send out their spam emails, quietly acquire a large number of shares of the companies they will soon promote. Then, when their emails lead unsuspecting investors to buy these stocks and thereby drive their prices higher, these operators dump their shares at a profit.
In contrast, investors who acted on the information in the spam emails will almost certainly lose money, buying high and then forced to sell low.
The stocks that are the focus of these campaigns are invariably thinly-traded penny stocks — those whose prices are below $1 per share and which don’t trade on a major exchange such as the New York Stock Exchange or the Nasdaq. Their obscurity makes them easy targets for unscrupu- lous operators since a relatively small number of buy orders from gullible investors can cause their prices to surge. This is why you don’t see a spam email pumpand-dump scheme involving the largest companies, such as Apple.
Regulators over the years have tried to curb some of the most egregious spam email campaigns, and ever-more-sophisticated spam filters catch many of the offending emails. But it’s unlikely their efforts will eliminate pumpand-dump schemes forever, according to Richard Price, a professor of accounting at the University of Oklahoma and one of the authors of a study of these email campaigns. “As long as there are underinformed investors,” he told me in an interview, “scammers will take advantage of them.”
He added that, even if email pump-and-dump schemes could be eliminated, ever-developing technology will continue to give unscrupulous operators new ways of delivering their messages. In recent years, for example, they have increasingly been turning to Twitter, message boards and other social media to generate interest in penny stocks. And before spam there were tip sheets, often one-page printouts touting individual stocks that were circulated around Wall Street.
I am constantly amazed by the behavior of investors who wouldn’t give the time of day to a used-car salesman who tried to claim that a car had only been driven to church on Sundays by a grandmother. Yet in the face of a spam email claiming that a penny stock is about to go up 10- or 50fold, the instinct of many of these same people is to start buying.
Mark Hulbert, founder of the Hulbert Financial Digest, has been tracking investment advisers’ performances for four decades.