Stock-Scam Crackdown: Too Little, Too Late?


Stock-Scam Crackdown: Too Little, Too Late?

The Securities and Exchange Commission is quick to claim credit for a decline in stock spam, but pump-and-dump schemes still thrive.

Let's give the Securities and Exchange Commission some credit. The SEC's moves to suspend trading of stocks that have been the targets of spam campaigns appear to have put a dent in the number of junk e-mails that tout worthless companies.

Spam complaints to the SEC have fallen sharply since the commission launched its anti-spam effort in March. An Internet security company credits the SEC with reducing stock spam by 30%.

But despite the progress, stock spam -- and pump-and-dump schemes in general -- continue to flourish.

Spam thriving despite crackdown. Stock swindles follow a simple recipe. Scammers promote the stocks they own through spam, message board postings, Web sites, print and television advertisements. The stock prices rise, and scam artists then sell their shares at pumped-up prices, while investors who buy the stocks at inflated prices are left holding the bag.

The unscrupulous focus on penny stocks (shares of companies with market values of less than $100 million that trade for less than $5) because their prices are easier to manipulate with misleading bluster and because they can acquire huge amounts of stock with a relatively small amount of money. Pump-and-dump schemes from spam campaigns alone cost investors billions of dollars a year, according to SEC estimates.


The SEC crackdown focuses on suspending stocks of companies that are targets of spam campaigns. The dragnet snags companies that do not provide accurate or adequate information in their SEC filings.

So far, the SEC has suspended 42 companies under its anti-spam initiative. In its latest penny-stock regulatory action, the SEC on October 4 suspended the stocks of Alliance Transcription Services, Prime Petroleum Group and T.W. Christian. (None of these companies returned calls seeking comment.)

The stocks are suspended from trading for ten business days, but that doesn't mean the shares automatically start trading again after the suspension ends. The idea behind stock suspensions is that brokers have to review the company's financials before shares are sold to investors.

But 38 of the 39 stocks previously suspended by the SEC under its anti-spam program continue to trade after the suspensions expired (the other, Vision Airships, appears to have disappeared). That shows there is no shortage of unscrupulous brokers willing to sell dubious shares to gullible investors.


Plus, stock-related missives still account for 20% of spam and are the second-most prevalent type of mass junk e-mail, according to Internet security firm Symantec. The SEC estimated in March that spammers send 100 million messages a week touting penny stocks. So a 30% decline means that now there are only 70 million stock spams sent every week. That's significant drop, but is it enough?

In fact, there was a huge wave of stock spam in August. Spammers sent out promotional e-mails touting the stock of Prime Time Group on August 9, according e-mail management company Postini. It was the most spam observed in a single day since Postini started tracking junk e-mail two years ago.

The stock of Prime Time Group, which is quoted on the OTC Bulletin Board under the symbol PRTH, soared 25% on August 9, to 11 cents. After Prime Time on August 10 denied involvement in the spam attack, the shares fell 36%, to 7 cents. The stock closed at 2 cents on October 10.

"The SEC did this big action in March and then we saw this massive attack around Prime Time in August, so I think it's hard to make a claim that it has dramatically reduced or made an impact on the spammers in this area," says Adam Swindler, a Postini spokesman.


Yet when it comes to fighting spam, the SEC is quick to toot its own horn. In its October 4 press release, the agency noted that Symantec, the world's biggest maker of security software, had found that stock spam decreased had 30% in the first half of 2007. The figure, which appeared on page 107 of the Symantec report, attributed the decline to the SEC's anti-spam efforts.

"Spammers follow the money," says Doug Bowers, director of anti-abuse engineering at Symantec. "So it's reasonable to assume that the SEC's actions are one of things that would be pushing those numbers down because we know for a fact that if spammers don't make money off what they are doing, they'll target their efforts elsewhere."

What more the SEC can do. Curbing pump-and-dump schemes, spam-related or otherwise, is a game of whack-a-mole. As the SEC fights spammers, stock hucksters have turned to slick mailers, newspaper and magazine ads and even commercials on CNBC to get their misleading claims out to would-be investors (see Beware of Penny Stock Hype).

"Scams and fraudsters don't stop," says Bruce Karpati, assistant regional director of the SEC's New York office, which is leading the anti-spam initiative. "We need to keep revamping our efforts."


Canadian regulators seem to have reined in the most egregious stock hype better than the SEC. The free-wheeling Vancouver Stock Exchange was long home to many penny stocks that were subject to pump-and-dump schemes.

But in the late 1990s, Canadian regulators began requiring executives and promoters of small-company stocks to register their promotional activities and submit to background checks. As a result, Canada eliminated most of its pump-and-dump problem. But many promoters of those toxic Canadian companies now target the U.S.

To its credit, the SEC has made some enforcement gains. On October 1, the SEC suspended trading in the shares of because, it said, the company had made misleading statements in its press releases and on its Web site. (Connect-A-Jet has run ads on CNBC touting its stock.)

"They moved very quickly with Connect-A-Jet, but it still took them two weeks," says Cromwell Coulson, chief executive of the Pink Sheets, a quotation service that lists thousands of penny stocks. Concerned about inadequate publicly available information about the company, Coulson slapped a skull-and-crossbones warning on the quote of Connect-A-Jet shares on the Pink Sheets' Web site before the SEC suspended the stock.

"It would be better if the SEC suspended a stock on suspicion of fraud rather than waiting to gain total knowledge of fraud," Coulson says. Amen.