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The success of stock spam

Marketplace Staff Dec 29, 2006

KAI RYSSDAL: 2006 will be remembered as a banner year on Wall Street. The Dow hit record highs, but with the good comes the bad. We heard about it all year, it’s called back dating. That’s when stock grant dates are changed to give workers more chance of profit when they sell their shares. But back dating is only the latest in a long history of stock scams. Marketplace’s Amy Scott has the story of an old one with a new twist.

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AMY SCOTT: I got an e-mail the other day. It was your typical spam, touting the stock of a mining company called Shallbetter Industries. The message read, in all caps, investors watch out. SBNS is moving. I looked into the company. It doesn’t seem to actually do any mining or bring in any revenue. Still, in the few days after that message, the stock climbed more than 30 percent. At first glance this looks like your typical pump and dump scheme. Did you see the movie “Boiler Room?”

ACTOR:
This stock is blowing up right now. The whole firm’s going nuts. Hold on, let me open up the door to my office.

Like the old-fashioned cold call, spam creates a buzz about a stock. People start buying it, the price goes up and then quickly falls again as the spammers unload. But Laura Frieder has another theory. She teaches finance at Purdue University. In a recent study, Frieder and a colleague found that spammed stocks not only went up on the day the spam was sent, but also the day before.

LAURA FRIEDER:
It could be the case that it’s an individual that happened to buy shares in the stock. The stock goes up a little bit. They’re like, ah, now’s a good time to sell. And in order to sell they need to create some sort of market to whom they can sell their stock and they do this by spamming.

They have to create a market, because most stocks touted by spam aren’t heavily traded. Now you may be wondering who falls for this? Technical writer Leonard Richardson tracks stock spam as a sort of hobby.

LEONARD RICHARDSON:
I think it’s the same kind of people who keep falling for the, I’ve got this money and I need to get it out of Africa scams. And it’s – it’s kind of the same principle. People think that they’ve stumbled onto some secret that they can exploit for money.

ANGUS MCINTYRE:
In one word, suckers.

Angus McIntyre is a system administrator, which means he manages his company’s e-mail. McIntyre says in the last year the amount of stock spam he sees has probably tripled. One Internet security firm estimates stock-related spam accounts for 15 percent of all junk e-mail, compared to less than 1 percent two years ago. McIntyre says spammers are finding creative ways to slip through e-mail filters. A common tactic is to send the message as an image, rather than searchable text.

MCINTYRE:
They have the money. They have the time. It’s their job. And so they’re constantly thinking up new techniques to use.

Which brings us to the question of who the spammers are? And that’s very hard to find out. Much of the e-mail is likely sent by what are known as zombie servers. Those are PCs taken over by spam-sending software unbeknownst to the owners. Purdue’s Laura Frieder says she’d like to think the companies themselves aren’t involved. After all, a stock advertised by spam usually falls by at least 5 percent within a few days. Shallbetter Industries, that mining company, didn’t return calls. In New York, I’m Amy Scott for Marketplace Money.

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