Don't Be Scammed by Penny Stock Spam

(from the November 2007 edition of PMD)

By Susan Haigney

We've all been infected by it at some time or another. Spam. It's that unwanted, unsolicited e-mail that pops up in your inbox. Mostly, these e-mails are just a nuisance, but some spam is actually costing investors money. Scammers are using spam to target investors with promises of penny stocks about to hit pay dirt.

Penny stocks are defined by the US Securities and Exchange Commission (SEC) as "low-priced (below $5), speculative securities of very small companies that generally traded on the Over the Counter Bulletin Board, in the Pink Sheets, or on securities exchanges." These stocks are candidates for promoter spam because they are cheap and the average person can afford them.

MotleyFool.com reports that of the estimated 730 million spam e-mails that go out each week, approximately 15% are promoting penny stocks. That's about 100 million per week, all in the hopes you’ll bite and invest.

Spammers Win, Investors Lose

The scam is simple. Spammers send millions of e-mails touting a stock whose price will soon rise. Naive investors take the bait, start investing, and raise the price of the stock. The spammers cash out when the stock is high. They know when the e-mails will stop and, therefore, when the hype will end. The duped investor is left with a deflated stock and money lost.

Spammers have continually become sneakier by using computer viruses and even sending text messages to cell phones (at an average cost to the consumer of 10 cents per message). And these same promoters are taking out print ads in major newspapers as well.

Stock spam is illegal on two fronts: It violates both the Securities Act of 1933, which bars paid promoters from pushing stocks without disclosing their compensation, and the 2003 CAN-SPAM act that states e-mail receivers be able to request to be removed from the distribution list.

In March 2007, the SEC initiated the "Operation Spamalot" investigation of stock spam e-mails and suspended shares of 35 penny stock companies as a result. The SEC estimates that individuals taken in by the spam lost tens of millions of dollars. The SEC plans, with the help of Canadian regulators, to continuing targeting the promoters that send stock spam.

Trading Safely

While penny stocks are riskier than they're worth, there is a draw to purchasing them. But if you really want to play the game, be prepared and be careful. Kiplinger's recommends that investors who wish to trade penny stocks stick with companies that have filed audited financial reports with the SEC and have a market value of $50 million or above. Also, investors should only invest what money they can afford to lose.