I tried to get rich on stock spam

There really is a way to make money off those annoying, relentless e-mails about "hot stocks."

By Alex Koppelman

Read more: E-Mail, Spam, Politics, Stocks, News, Alex Koppelman

Feb. 1, 2007 | Like all of you, I get a lot of e-mail telling me I can get rich quick. I have a pretty robust spam filter, but plenty of those promises about penny stocks, Nigerian bank accounts and Russian start-ups still manage to slip through. More important, one brand of spam recently managed to sneak past my mental defenses as well and got me wondering whether there really was easy money to be made.

I can't read Cyrillic, and I'm not about to send a money order to Idioma Adams, chairman of the contract award committee of the National Petroleum Corp. of Nigeria. I do know, however, that the penny stocks touted in my in box, the ones that are "the hottest pick this year," "getting ready to explode" and "rock [my] portfolio," actually exist. And somebody has to be making money off the stock spam or it wouldn't keep clogging my e-mail account, or yours -- recent studies have estimated that almost nine out of 10 e-mails sent worldwide are spam, and some 15 percent of that spam is hyping penny stocks.

It's clearly a scam, some sort of pyramid scheme. But even pyramid schemes have winners as well as losers. And maybe, I thought, one of the winners could be me. So I decided to go for it. I invested $8,990 in penny stocks.

Well, I sort of invested $8,990. I couldn't get Salon to lend me $9,000, so my investment was virtual. In an unscientific study, I collected every penny-stock e-mail I received over a five-day period from Jan. 5 to Jan. 9, whether it landed in my in box or was blocked by my spam filter. All in all, there were 156 messages touting eight separate stocks. Setting as a benchmark the price of each stock at the earliest start of trading after receiving the first e-mail and imagining that I had purchased 1,000 shares of each, I then tracked the progress of the advertised stocks over the next week. I "sold" my shares at the market price at the closing bell on Tuesday afternoon, Jan. 16. You can skip to the bottom of the last page of this story if you want to see how I did.

Penny stocks are not the kind of blue chips a conservative broker might advise you to add to your investment portfolio. They're not listed on the NASDAQ or the New York Stock Exchange. A single share of Google trades for more than $500 on the NASDAQ, while the prices of the stocks I bought started at 8 cents and didn't exceed $2.75. But penny stocks, which are sometimes issued by start-up companies in search of capital to grow, sometimes issued by small companies that have stayed small and sometimes issued by major companies in financial distress, are listed on two established listing services, Pink Sheets and the Over the Counter Bulletin Board. They are, for the most part, completely legitimate companies -- you've probably heard of, or even do daily business with, plenty of them -- they're bought and sold by legitimate brokers, and the companies involved are real entities. For example, one of the companies in which I bought a stake, Harris Exploration, is incorporated in Nevada, has a board of directors, and puts out press releases announcing its activities, like a recent agreement to explore for gold in Ecuador. Listed by Pink Sheets under the symbol HXPN.PK, Harris Exploration sold for $1.50 a share on Jan. 8.

But regardless of the virtues or drawbacks of any given penny stock, low prices and infrequent trading make them vulnerable to manipulation by speculators -- and spammers. What the spammers are doing with their spam campaigns is usually a "pump and dump," as featured in the classic "Webistics" storyline from the second season of "The Sopranos." In a pump and dump -- which violates federal law -- the stock manipulator buys a stock, pumps up its price with a marketing campaign that may include faxes, e-mail spam, and even cold calls to investors, then sells the stock when the price has risen enough to guarantee a healthy profit.

E-mail spams are an especially effective way to pump and dump penny stocks, since it doesn't take a lot of buying to push the price up. In hopes of roping in a relatively small number of investors, spammers send out thousands of e-mails at a time. They sometimes use their own servers, and sometimes so-called zombie computers, or computers belonging to unwitting strangers that the spammers infect and use as remote-control servers. The e-mail addresses they target are either harvested from preexisting online lists or randomly generated by the spammer.

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