1.1 What is this?

This is a page of information about stocks advertised by unsolicited commercial email (UCE) or spam. It explains how to recognise stock spams, why they are sent, and what you can do about them.

1.2 What is a stock spam?

A stock spam is an attempt to influence the price of stock in a publicly-traded (or soon-to-be publicly-traded) company, by sending information about the stock through electronic mail or news.

1.3 What do stock spams look like?

A typical spam (this is an imaginary example) might look something like:

XYZ Industries (symbol: XYZI) has announced priority production of devices based on its proprietary XYZ-Plus technology. Analysts indicate that there is "almost limitless demand for this revolutionary technology". XYZ Industries is expected to trade in the $8 range by the end of the year.

XYZI is rated an immediate and "STRONG BUY".

1.4 How can a stock spam be distinguished from reliable information?

The simple answer is that reliable information about stocks doesn't appear, unrequested, in your mailbox.

Stock spams often typically reproduce press releases issued by the company, often adding a few optimistic claims about the future performance of the stock. The spammer often promises that "this stock will EXPLODE" or says that it is "rated an immediate STRONG BUY". The implication is always that the stock is a bargain and is about to increase dramatically in value in the next few days, guaranteeing quick profits for anyone who invests in it.

Real press releases often predict positive developments for the company, but they are usually not as exaggerated as those seen in stock spams.

1.5 Are stock spams sent by the company concerned?

It's hard to say, but it seems that in most cases the answer is 'no'.

It's easy to assume that a spam which appears to promote a company must have been sent by that company. However, other individuals or organizations also have an interest in promoting a stock. These include third-party speculators who hold shares in that stock, brokers and market makers who buy and sell the stock, and marketing firms who have been paid to advertise it.

Stock spam can lead to short-term increases in a company's share price, but these are usually followed by a sharp fall. This can be very damaging to the company. This is one reason why it's not usually in the interests of the company to send stock spam.

In contrast, dishonest speculators can often gain by talking up the price of a stock. A study by Laura Frieder and Jonathan Zittrain has shown that this kind of stock manipulation can be highly profitable.

It seems likely that most current stock spam is sent by third-party speculators.

1.6 Why did I get sent here? Was .... ever listed on your page?

Lots of people who arrive at this section do so because they typed the name of a company into a search engine, and were directed here. This typically means that that company was once listed on the spam-advertised stocks page.

Scam types
2.1 What are the main kinds of scams involving stock spamming?

There are two main recognised classes of scam that make use of electronic mail (among other things) to manipulate the price of a company's stock. These are known as "pump-and-dump" and "short-and-distort" schemes. Stock spams may also be the product of over-aggressive marketing by unscrupulous PR or marketing firms.

2.2 What's a "pump-and-dump" scheme?

In a classic "pump-and-dump" scheme, a fake company is set up by fraudsters who then promote the stock heavily, often through mail and news. Naive investors buy in, raising the share price. The fraudsters then sell their holdings, after which the company collapses.

The term "pump-and-dump" is now also applied to cases where a legitimate company is 'pumped' by third parties who have bought shares in it. Again, the goal of the people involved is to raise the company's share price temporarily so that they can make a profit on the shares they have purchased.

2.3 What's a "short-and-distort" scheme?

In a "short-and-distort" scheme, fraudsters manipulate the share price of a company by spreading negative information about it. They begin by 'shorting' the stock - that is, selling borrowed stock in the expectation that the price will subsequently fall, allowing the stock to be repurchased at the lower price. The difference between the price that the stock was sold at and the price at which it is repurchased determines the seller's profit.

To make the scheme work, the scammers must ensure that the price will indeed fall after they've sold the stock. They do this by spreading negative information about the company, sometimes true, sometimes false.

Speculators could theoretically alternate "pump-and-dump" with "short-and-distort", going through repeated buy-sell cycles, using positive information to drive up the share price and negative information to drive it down. In practice, "short-and-distort" schemes seem to be rare. While stock spammers do indeed seem to work cyclically, they seem mostly content to let the natural corrections of the marketplace bring the stock down from its inflated high before buying again and restarting their "pump" operations.

2.4 What's "cowboy marketing"?

"cowboy marketing" is the term I use to describe a situation in which a company falls into the hands of an unscrupulous marketing firms that promises to promote their stock. Often unknown to the company, the marketers will use junk mail to try to boost the value of the company's stock. Because the marketing agency is often paid in stock options, this resembles a "pump-and-dump" or "short-and-distort" scheme, with the difference that the marketing firm is a third-party supposedly hired to act in the company's own interests.

In a number of cases that I've heard about, a company has approved an email marketing campaign because the marketer promised that it would send only to people who have 'opted-in' to receive stock announcements. Companies are often very surprised to learn that the marketer has lied to them, and that their so-called 'opt-in' list is just a standard bulkmailer's list of addresses scraped from Usenet and the Web.

Advice for users
3.1 I'm getting stock spam; how can I get off their mailing list?

Unfortunately, you can't. Stock spammers are breaking the law, so they are careful not to include any information that could be used to identify them. The spammer conceals their identity by sending spam through hijacked PCs - 'zombies' - and any 'From:' address or contact information in the spam is usually false (stock spammers routinely put other people's addresses or domain names in their 'From:' lines). Even if you could somehow work out who was sending the spams, writing to them to ask them to stop mailing you is generally a bad idea. The spammer has no reason to remove your address from their list: so long as they keep spamming you, there's always a small chance that you'll invest in the stock they want you to buy. Moreover, when you mail them, you're confirming that your mail address is valid and that you read mail sent to it: they're more than likely to sell your address on to other spammers.

3.2 Will the spam ever stop by itself?

No. Once a spammer has found your address, you will keep getting spam at that address until the SEC takes the spammer away in handcuffs.

3.3 Is there anything I can do?

The best thing is to try to filter the spam. Unfortunately, this isn't easy. Stock spammers try particularly hard to avoid spam filters. Recently, many of them have taken to sending their messages as embedded images accompanied by random 'hashbuster' text in order to get past filtering.

If your mail program or your mail server lets you write rules that 'score' incoming messages, you might want to give higher scores to messages with embedded images. Because stock spammers make heavy use of 'botnets' - networks of hijacked home and office PCs on dialup or broadband connections - you might also want to be suspicious of messages that originate from dialup/broadband hosts. Some ISPs or mail forwarding services can flag messages that were sent directly from such hosts.

Stock spammers like forging other people's addresses in the 'From:' lines of their messages. This makes them a candidate for filtering using SPF. If you manage your own mail server, you might want to consider rejecting or flagging mail that explicitly fails an SPF test.

Some stock spammers still send their spams as plain text. You may be able to filter for those by using strings that appear commonly in stock spam but are rare in legitimate messages: 'OTCBB', 'Symbol:', 'Symb0l', 'St0ck' and 'set to explode' are all commonly found in stock spam and rare in 'real' messages.

3.4 Can I report stock spam anywhere?

You can always forward the stock spam you receive to the Securities and Exchange Commission. You'll get an auto-reply to say that your message has been received. They may act on the information that you provide, but you probably won't get any additional acknowledgements from them.

If you think that the company whose stock is being advertised might not be aware of it - check their website and Yahoo! first for press releases or statements - you can forward a sample of the spam to them. Only send one sample unless they ask for more, and be polite. In ninety-nine cases out of a hundred, the company isn't responsible for the spam and will be even more angry about it than you are. Stock spam hurts legitimate companies and honest businesspeople. Don't make things worse by insulting them for something they didn't do.

If the spam mentions a website and you have reason to believe that the site might belong to the spammer, you can try to work out who hosts the website and send a copy of the message to them. Again, be polite. The hosting company is more likely to take action against the spammer if you aren't rude to them.

Please don't forward your stock spam to me. Why?

Advice for investors
4.1 I'm an investor: should I buy stocks advertised by spam?

I wouldn't recommend it. The stocks that you see advertised by spammers aren't intrinsically any better than any other stocks of the same kind. If a spammer had found a genuinely good investment, he wouldn't share the information with a million strangers; he'd keep it to himself. The stocks you see have been chosen not because they're good buys, but because they're easy for the spammer to manipulate. Spammers pick stocks that trade at very low prices, so that even a small gain can lead to profits for the spammer. These are often not the best stocks to invest in.

One recent study suggests that stock spam can boost the price of a stock. The gain is always small (which is why stock spammers have to keep sending spam) and is only temporary. SpamStockTracker, a website that tracks spammed stock performance, shows that in the long run you will almost always lose money buying spammed stocks.

It's certainly not worth buying spammed stocks as a long-term investment. Small-cap stocks are a risky investment anyway, and spammed stocks are riskier still. The 'rollercoaster' effect that spam causes - a brief price rise after each wave of spam, followed by a sharp drop - can hurt legitimate companies and even cause them to collapse. Moreover, while most of the stocks advertised by spam are legitimate, there's reason to believe that some may be classic 'pump-and-dump' schemes based on fake front companies putting out press releases full of fraudulent information. Pick one of these and you really will get burned.

4.2 What if I buy and sell quickly?

As mentioned above, one study suggests that stock spam can produce a small, short-term boost in a stock's price. In theory, you might try to do the same thing as the spammer: buy the stock and then sell as soon as it rises to make a small profit.

This looks like a risky strategy. For one thing it means that, like the spammer, you're counting on the stupidity of other investors, people who are ready to buy a stock just because someone they don't know sent them a message about it. Stupid people aren't in short supply but if they make a habit of buying spammed stocks they're going to run out of money quite quickly. The day that happens, the small rise you're counting on isn't going to materialise and you'll be left holding a lot of worthless paper.

More seriously, you don't know where you are in the cycle. The study shows a small rise on the first day and a fall on the second. You have no real way of knowing whether it's the first day or the second. You might have got one of the spammer's last spams, sent just before he prepares to cash out. Because the spammer probably has a relatively large holding, the price is likely to fall as soon as they sell their shares. The spammer's scam works (sometimes) because they have information that you don't. If your strategy for getting rich is to try to second-guess a spammer, you're essentially gambling with your money and might do better at the racetrack or the casino.

4.3 Are there any reliable sources of stock information on the net?

You should treat anything you read on the Internet with suspicion, particularly in cases where that information is provided by people who might have a financial interest in a particular stock. Be particularly suspicious of 'tips' posted by people in newsgroups and bulletin boards.

Portals such as Yahoo and Google often offer stock information, including official documents filed by the company, and graphs of the stock's performance to date. Large organizations (portals, news services etc) with a solid reputation and no particular reason to promote one stock rather than another are a safer guide than 'some guy you met in a chatroom'.

Advice for companies
5.1 My company's stock has been spammed: what do I do?

The first thing to do is to make it clear to investors that you aren't responsible for the spam. A good way to do that is to post a press release through whatever channels you use normally. Keep it short and clear: state that you didn't send or authorize the spam, state that there are 'no undisclosed material facts in regard to the company', and remind investors that the only reliable sources for information about the company are your company's website and recognized industry PR channels such as MarketWire.

You should also put a note on the home page and contact page of your website to let Internet users know that you didn't send the spam. Include a link to the press release. This may reduce the number of messages you get from users who have received spam.

You should also contact the Securities and Exchange Commission to report the spam campaign and request their assistance.

If you are able to identify the senders, a good law firm may be able to assist you in taking action against the spammers.

5.2 How can I find out who is sending the spam?

Unfortunately, this is very difficult to do. Typically, stock spammers go to great lengths to conceal their identities. In other kinds of spam the spammer has to provide some point of contact - an email address, a website, a phone number - in order to make money. The stock spammer doesn't. He just needs to get their message with your company's name on it seen by as many people as possible. The actual email message contains no information that can be traced back to the spammer.

The SEC has investigators who monitor stock spam. They have access to information that may not be available to you, including information about activity at market makers and monitoring of Internet communications. Their investigations sometimes eventually lead to prosecutions, but they work on their own timetable and it's unclear whether they'll be willing to share what they know with you.

5.3 Should I promote my company via spam?

No. Spam is extremely bad for your business. It is a 100% certainty that sending spam will do you more harm than good. Promoting your stock via spam is generally illegal; promoting your products or services makes your company look dishonest and probably fraudulent, and will damage your reputation forever.

5.4 How can I prevent spammers from sending spam advertising my stock?

The short answer is that you can't. The worst aspect of stock spam is that any company, even the most honest, can be a victim.

One thing you can and should do is to be very careful when you choose a marketing firm or agency to represent you. I've heard of a number of cases of marketing firms sending spam without the knowledge or approval of the company they were supposedly representing (and then leaving the company to clean up the resultant mess). In many of these cases, lawsuits followed. I've also heard it suggested that some companies providing financial backing for small startup companies may 'recommend' a marketing firm which then sends spam, giving the backers a quick return on their investment (if the spamming campaign succeeds) at the expense of the long-term success of the startup company.

When you sign a contract with a marketing firm, make it a condition that they should only send email or faxes to recipients who have asked to receive them. Any sending of unsolicited messages should constitute a breach of their contract with you and expose them to legal penalties.

Some marketers will tell you that they send only to subscribers who have 'opted-in' to receive mail. Ask them how their opt-in process works and what records they keep to prove that the recipients really requested their mail. The preferred method is known as 'confirmed opt-in' or 'closed-loop opt-in': Spamhaus has a good explanation of how this should work.

Incidentally, spammers sometimes refer to 'confirmed opt-in' as 'double opt-in' to try to suggest that it is somehow onerous and troublesome. Be suspicious of any marketing firm that talks about 'double opt-in'.

I guess that PERT is part of this group. What do You think?