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Ever wonder where they come from, or for that matter why you are being given this great advice for free? Welcome to the world of penny stock manipulation.
Yesterday the SEC settled a classic case against four Georgetown University law students and one mother who had been charged with violating securities law in conjunction with a scheme to profit from investor gullibility.
That wouldn't be you, would it? Of course not.
The thing is, I suspect that we all have a button that, if pushed just right, leaves us vulnerable to such cons. It might not be greed. It might be ambition, or the desire to help our children, or the need to be loved. A good con artist can spot that vulnerability a mile away.
The law students were engaging in a very old ploy updated to Internet speed. See this story in the Washington Post for the details, but the gist of the story is that they set up a newsletter service called FastTrades (I hope that doesn't sound familiar to you), then proceeded to sign up as many people as they could for their free service. The originator of the scheme enlisted three other law students (didn't any of them know better?) to patrol the chat rooms and message boards of investing sites and talk about what great stocks FastTrades had recommended to them in hopes of pumping up the subscriber list and building up enough credibility to ensure that they would take the bait. At one point they had 9,000 subscribers to their free e-mail newsletter.
The students would find a cheap stock that was very thinly traded, write up a great "story" for the company, and recommend it to their subscribers. Ooops, I forgot one step. First, they bought a bunch of shares, then they recommended it. Subscribers who bit started buying up shares, which quickly drove up the price since there weren't that many shares to begin with, which made the stock look like it was actually going somewhere. I would imagine that a second e-mail would go out about the time the stock was hitting its high, pointing out what a great pick this was. When they thought the time was right, the students sold their shares. Essentially they sold it to their own subscribers, who were left holding the bag as the stock quickly sank back to its previous level.
Now, these guys weren't all bad. When one of their mothers complained that she lost money because the stock had run up from $1.50 to $5.00 before she could buy it, her son explained that to make money, you had to buy before the recommendations came out. After that he always sent her advance notification. What a considerate son. She's a city council person, and, now that the details have come out, it's not going to do her career a lot of good.
It's not going to do those budding lawyers' careers much good either.
Other than the law student aspect, which is not going to do the legal profession's reputation any good, there's not much new in this story. In fact, our own Tom and David Gardner first hit the national news by exposing penny stock manipulation on the Prodigy message boards. See Buy Zeigletics for the full, hysterical story. Recently we put together a special on all kinds of Securities Fraud -- but you don't need to worry about that, right?
Internet message boards aren't the only places where you can find fraud. Monday we will look into books and movies that can give you some insight into the callous world of securities fraud.
Fool on and prosper!