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Adventures in Spam: Stock Pumping Scams

August 13th, 2007

One form of spam that has been on the rise over the past two weeks is stock spam, which is most commonly used to promote a type of scam known as stock pumping. This is a technique in which spammers attempt to manipulate the price of a company’s stock, usually in the upward direction, in order to make a quick profit. The most common tactic used to accomplish this is known as the “pump-and-dump” scheme. With this method, a spammer chooses a stock that is relatively unknown, has a low price per share, and has low trading volume. Most such stocks are traditionally called “penny stocks” because they usually trade for less than one dollar per share and are listed only on the over-the-counter bulletin board (OTCBB) or Pink Sheets exchanges. With this type of stock, the spammer can usually raise the share price relatively easily by disseminating lots of positive (and sometimes fraudulent) information about the chosen company and lure naive investors into quickly buying shares, thus temporarily driving up the price. The spammer, having bought fairly large blocks of shares in advance, then quickly sells the stock by “dumping” it back onto the market before most investors realize that the information being disseminated is exaggerated or inaccurate.


Another tactic that is sometimes used by stock spammers is called the “short and distort” method. This is essentially the reverse of the more popular pump-and-dump; instead of hyping up a stock, negative information is sent out in an attempt to drive the share price downward. Rather than buying shares, the spammer short sells them- that is, the shares are borrowed from a broker and immediately sold for whatever they are worth at the current price. In a short sale transaction such as this, the investor hopes that the stock price declines because if it does, the shares can be bought back at a lower price than what they were originally sold for, leaving the difference as profit. However, there is also significant risk involved in this proposition because if the price of the stock actually goes up, the investor can lose money when the shares are eventually bought back in order to settle the short position. For this reason, plus the fact that the possibility of short selling is usually not offered for penny stocks, the short and distort method is not as popular with veteran spammers. However, it is sometimes still used by unscrupulous investors who have inside knowledge of the companies involved and want to manipulate the markets for quick profits.

Trying to block this type of spam is notoriously difficult because these kinds of spammers are particularly persistent in their attempts to bypass standard filtering technology. We can see a good example of this in a classic plaintext stock spam mail that I received a few days ago:

H+u*g+e N*e-w’s To I-mpact C.Y*T’V

Chi na Yo,uTV C+o_r+p*.

Sy,mbol: C_Y*T*V

We h_a-v-e alr eady s-e*e_n C_YTV’s marke*t impa*ct b.efore clim,bin’g to o v-e’r $ 2.00 w i+t_h n+e-w.s..

Pr*ess Releas-e:
C*hina YouTV,’s CnBo,o W’e_b S.i,t+e R’anks N_o-.+1 on M’icr_osoft L_i+v_e Searc’h Eng_ine

CnBo+o Traff_ic I-ncrease*s 4*9.% O v_e*r T*w o Mont+hs

R,e*a*d t-h+e news , t_hink a.bout t-h-e im.pact, and
j-u m’p on t,h i’s firs t th_ing To,morro-w mo rn_ing! $,0.42 is a g’i f*t at t’h+i-s p.r_ice…..

Do y_o+u’r hom,-ework a+n-d wat-ch t_h.i-s tr.ade Mo+nday m-orning.

D,e-n er*sten Individualger.,uch er,gat’terte Gr, enouille im Hospi_z d e’r Cha rite.

T_h-i,s g*e t s T*opDesk c.omplete ly o+u t of t,h e w+a.y w h-i*l+e y,o+u conce+nt+rate on y*o u+r w,ork, y+e+t giv es y+o-u insta_nt acc.ess f.o+r n avigat.ion at a_n_y t*i_m e_.

In*side Tou_ret te Syndro’.me 1.

H*i+s w+allet w.a’s g,o,n e*.
A-n+d n.o+w., k,e’e+n be-fore m_e*, y_o_u_.

To the untrained eye, this may simply look like a bunch of gibberish, and many people may not even realize what it is. But if we look at the text more closely, we can see that there are actually normal words in here, but they have been divided up by several different kinds of symbols like asterisks, underscores, plus signs, periods, and apostrophes. Meanwhile, the spammer has managed to slip in that all-important ticker symbol several times, and in one instance, we can even make out the name of the company, which in this case is China YouTV. The figure of $0.42 indicates the approximate price of the stock at the time that the email was sent. Interestingly, in this case, the spam seems to have had somewhat of a positive effect. Just before I started receiving all of the spam that was pumping CYTV, it was trading around the $0.40-$0.42 range. According to the Reuters stock quote, the price started climbing at about the same time as the spam campaign commenced and got as high as 50 cents at one point. At the time of this writing, it has now settled back down to 45 cents, which is still about three cents higher than the day before the spam.

As I began to research this phenomenon in more detail, I found out that this is actually a pretty typical pattern for stock spam cases. In two recent studies, one by Rainer B√∂hme and Thorsten Holz, and another by Laura Frieder and Jonathan Zittrain, it was found after some rather rigorous statistical analysis that spamming and “touting” of individual stocks can have a significant positive effect on both the trading volume and share prices of the affected stocks for one to two days after the touting begins. In most cases, however, the price of the stock quickly dropped back down again after the initial surge, probably due to the effect of the spammers selling off their shares. So while it is technically possible for regular investors to profit from stock spam, it is very difficult to time it right for any profits without some kind of advance knowledge of when the spam campaign will occur. Therefore, it is generally not recommended for people to invest in stocks based on their spam mails.

Meanwhile, for more details on exactly how stock spamming schemes work and what people might be able to do about them, you can read this rather extensive stock spam FAQ from SpamNation.com and also see the latest list of stocks that have been advertised by spam.

Related Articles from the Adventures in Spam Series:

Appeal to Greed
The Hidden URL
The Sandwich Technique
Bogus Lottery Winnings

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