Physics 3333 / CFB 3333 Stocks and Schemes

If you intend to invest, first be sure you know what you are doing! If you need some assistance, locate a reputable broker with one of the well-known brokerage firms. Talk to different brokers till you find someone that understands your needs and that you are comfortable with. Take a class in investing at the university. That's the right way. A stockbroker said, "Investigate before you invest." Good advice.

What we are going to talk about here is the wrong way to do it.

Hype-Loaded Spam e-mail

Suppose you got an e-mail like this one.

Wow! That looks like a hot stock! Get in quick and make some real money as XAID heads skyward. Really great opportunity, eh?

Nope. Look at the text in red. We made the red color. Does that look like really serious investment advice??? How about the spelling of "hot" in the first paragraph? They spelled it "h0t." That's a spammer's technique.

Prof. Cotton regularly gets "carpet-bombed" with stock promos like this one; sometimes several e-mails touting the same stock will show up in one week. He saves them for future study; the collection is getting large.

The above graphic was taken from on December 14, 2005. Notice that the hype-loaded e-mail is dated October 1, so two months elapsed between the e-mail and the stock price check. Look at the stock price as shown on the chart. Notice the peak at about October 1; there's a smaller peak in the middle of October. The big peak is at the same time as the e-mail. Notice that it got up to $1 before starting down. After that it's generally downhill; in early December the price was down to about $.10 (that's 10 cents). Depressing, isn't it? Down, down, down.....

So what's going on? This sure looks like a "pump and dump" operation.

  1. Someone buys a LOT of the stock. It's cheap.
  2. This person uses press releases, spam e-mail, junk faxes and any other means possible to spread the word that this stock is a hot one and is about to "break out" on a sharp upward move. The goal is to convince as many people as possible to buy the stock. This is the "pump" part of the deal.
  3. When the hoped-for buying surge starts, the operator sells the shares they got cheap and makes a tidy profit. This is the "dump" side of the thing.
  4. The company's fundamentals really don't justify the hype, which ends after the operator has dumped the shares. After that there is little demand for the stock, and, over time, those who bought it sell this loser at a loss just to get rid of it.
There is likely more to it than these basics, such as the dumped stock being unregistered shares.

More Hype

How about this e-mail?

Here's what the stock did.

Now, just for grins, look at the last paragraph of that spam. Notice the "inherent conflict of interest" that results from the promoters holding shares (likely a LOT of shares) of the stock. See "our intent to profit from the liquidation of these shares." That's the dump. When the suckers bite on the hype and bid the price up, the promoters will unload.

And now (may I have the envelope please), here's what was REALLY going on. Read the following complaint filed in December of 2005 by the Securities and Exchange Commission (this pdf was obtained from the SEC web site). What a scam! An offshore brokerage was selling unregistered shares into a "pump and dump" scheme. It turns out that you don't have to register shares sold out of the country. The promoters sold a load of shares to an offshore brokerage, who then sold them back into the U.S. at a LARGE profit.

A Real Whopper

Here's one for which we do not have the "pump" e-mail. Couldn't locate a copy of it. Anyway, read Litigation Release number 19465 from the Securities and Exchange Commission web site.

The charts don't go back far enough to show the activity, which occurred in December of 1999. In the release above, notice the references to reports containing false information and to required disclosures not made. For the full story, read the SEC's complaint filed in court.

The Latest Scoop

To get the latest scams, go to the SEC web site and click on Litigation Releases. You'll get a list with the latest ones first. For another good "pump and dump," see release number 19476. It's similar to the PacketPort gambit.

News Coverage

On October 27, 2005, the Dallas Morning News ran a story entitled "In for a penny... in for a pounding." In this piece staff reporter Will Deener described a study of spam-hyped stocks on This study found that most of the hyped stocks were real losers. In fact, this article was the inspiration for Prof. Cotton's own survey of the results of spam-hyped stocks.

A commentary from 2003 (030806) on The Motley Fool ( covers the same thing. Bill Mann collected the spam e-mails hyping penny stocks and built a phantom portfolio of these stocks (not risking any real cash). He would "buy" about $1,000 worth of the hyped stock. Over one year this portfolio lost 80%. Six of the companies failed and shut down. Only one (that's right - ONE) of the companies traded at a higher price after one year, and it gained 11%. That is no compensation for the other losers.


We printed out the e-mails and price charts for about 25 stocks that had been hyped via spam. The depressing conclusion is that you wouldn't want any of these stocks in your portfolio. Almost all were heading downward in price, finishing much lower than the price on the date that the spams came out.

If you wanted to conclude that these spam campaigns were part of "pump and dump" operations, you'd be on safe ground. The funny thing is that, in a large number of the cases we printed, the "pump" seemed not to work. The stock price continued to head downward without any upward bump. We actually have a hypothesis about why the "pump" failed. Recent (early 2006) penny stock spams are actually showing spammer tactics. Some examples:

Notice the butchery of words. This might be seen as an attempt to get the spams past aggressive spam filters. Maybe the spam filters are blocking enough of these spams to defeat the "pump" effort. We have some more evidence of this as of February, 2006. Some of the stock-hyping e-mails contain the hype message in an image file (GIF); this is an obvious attempt to get through spam filters. The filters can't read the text in an image file.

As you read the complaints, you see that unregistered shares were laundered, required disclosures were not made, phoney publicity (faxes, spam e-mails, press releases) were distributed, and there was no news about the company except for the blast of phoney publicity. How can you detect this? Our conclusion is that you can't reliably do it. It appears that the efforts at concealment succeed, at least in the short term.

Don't expect anyone out there to protect you from these scams. You must be aware of such things and steer clear. Don't EVER buy a stock based on hype in a spam e-mail. Why would you put your money into something hyped in a spam which showed obvious spammer tactics???

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