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."

Published February 1, 2007 1:40PM (EST)

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.

According to Joe Stewart, a senior security researcher with SecureWorks, spammers have become so sophisticated that they're able to target those e-mail recipients most likely to respond. Stewart reverse-engineered some of the bugs that exploit security flaws in computers and allow spammers to create "zombie" computers. By doing that, Stewart was able to see the commands sent by the spammers to the zombies. He also found some databases the spammers had left behind -- databases, he says, of subscriber information for things like investor information lists from legitimate brokerages. "These were pretty likely stolen," explained Stewart, "and you could clearly see their customer information."

And there's no question that the people sending the e-mails are getting better at it. Anti-spam companies and programmers keep trying to beat back the onslaught, but the spammers evolve to defeat each new anti-spam technique. Anti-spam forces had, for instance, mastered the art of seeking out, and blocking, e-mails with certain giveaway lines of text, so spammers simply switched to sending spam as part of image files. That's why most of the stock spam in your in box these days consists of graphics files with embedded text.

Most observers believe that the companies targeted in penny stock spam are innocent bystanders, blindsided by spammers who choose a stock at random and then run their pump-and-dump scams. The companies affected certainly want investors to think so.

Of the eight companies in which I invested, four put out press releases disavowing the spam campaigns. Another, Quantex Capital Corp. (QCPC.PK), put out no press release, but I spoke with its president, L. Evan Baergen, who denied that his company had any involvement in the spam. (None of the other companies, except two that had no working phone numbers and so were not contacted, responded to requests for comment.)

Baergen, who said he first heard about the spam campaign affecting his company's stock from a friend who forwarded him one of the e-mails, professed to be disheartened by it. "To be honest, there's not much I can do and not much I can say about it," Baergen lamented. "Unfortunately, it makes us look bad, as we're legitimately putting out news releases and that kind of thing. But there's nothing I can really do about it, as I don't know who's putting it out there."

Cromwell Coulson, the CEO of Pink Sheets, isn't sure that all the targeted companies are as innocent as they claim to be. "Every company we've ever met has denied being involved," Coulson said, "but somehow they seem to know how to make [the spam] go away."

As Coulson put it, without singling out any firm, "most of the companies that spam involves are companies with speculative or at best developing operations, and that's at best. They're lucky to have a fax machine or a phone."

In fact, when I, as a virtual stockholder, attempted to learn more about the companies in which I'd invested, I found hard information elusive. Without casting aspersions on or making accusations about any of these firms -- which, for all I know are legitimate companies selling real products -- what I could glean didn't make me think any of them was likely to be the next Google.

I found a string of phone numbers that never had a message machine or a live person on the other end. I found Web sites that had ceased to exist in their advertised form, Web sites with front pages where every single offered link was unclickable, and Web sites with press releases announcing news that had nothing to do with the company.

I was able to dig up history on a few of the companies. Physician's Adult Daycare (PHYA.PK), a company that specializes in providing outpatient day care for the elderly, has previously been two other companies. Until 1999, it was Unique Fashions Inc. After that, it was -- until July 2006 -- a company called Rhino Enterprises, an incubator for start-up companies that had an interest in the franchisor of a sub shop called Great Outdoors and a sports memorabilia company. Another of my stocks, Medical Institutional Services Corp. (MISJ.PK), which claims to have developed a distribution system to allow physicians to dispense medicine without making their patient go through a pharmacist, was until this past October Go Call Inc., an e-commerce company that processed online gaming transactions.

Then there's Harris Exploration, the aforementioned mining company, which is run by a group of people who may be as experienced in finance as they are in geology. Joseph Meuse, a director of the company who is also listed in Nevada incorporation documents as its president, secretary and treasurer, is involved in several other companies as well. He is a managing member at Belmont Partners LLC, an investment bank specializing in reverse mergers. These are mergers that can allow new companies to go public without having to make an initial public offering, because they merge with existing public companies. He is also a representative of PacWest Transfer LLC, a stock transfer agent; such agents are sometimes asked by companies to keep track of ownership of stock and to provide stock certificates. PacWest Transfer is Harris Exploration's stock transfer agent.

Meuse has been involved with mining companies before. StockPatrol.com, an Internet watchdog, has previously reported his tangential relationship, as the former director of one of the involved companies, with what appeared to be a group of mining companies of questionable value that were heavily promoted at the time of StockPatrol's report.

Whatever these companies may be, their stocks probably sold like hotcakes the day after their stocks were first spammed. A study conducted by Daniel Peng, a doctoral student in computer science at Harvard, found that trading volumes in spammed stocks increased as much as 10-fold in the days immediately following spam campaigns.

The spammers, meanwhile, are selling. The price of spammed stocks, according to Laura Frieder, an assistant professor of management at Purdue University, peaks within hours of the start of trading on the first trading day after the first e-mail is sent. The spammers can start selling almost immediately and realize a profit, because they have a head start. Having bought their stock prior to that initial e-mail, they've already driven the price of the stock up considerably before the first spam blast. Whoever sent me the spam for each of my eight companies probably sold their stock the day I bought it.

Can anybody else make money off these stocks? Joshua Cyr runs the Web site Spam Stock Tracker, on which he keeps track of the share prices of stocks for which he receives spam. Over a three-month period, said Cyr, "the stocks, almost every one of them, eventually plummeted ... The[y] might have seen a bit of an improvement in the short term ... but for the most part, you were guaranteed to lose money."

Frieder, who conducted her own study of penny stock spam, concurs with Cyr about the long-term prospects for spammed stocks. But she found a downward trend in the short term as well. Frieder tracked results for 48 hours after the initial touting and found that "returns are significantly negative." During that two-day period, the spammed stocks underperform penny stocks that haven't been spammed.

For somebody who isn't in on the scheme prior to the spam blast, the window of profitability is very narrow. If you jump on the stock the minute it is touted and sell it within hours, you might make a profit. But remember -- as in Vegas, when it comes to stock spam, the house always wins. Can you really be sure that the e-mail in your in box is the first e-mail sent out, and not the millionth? If it's not the first, you're going to lose.

Penny stock spam is a pyramid scheme, after all, and for it to work there must be more losers than winners. According to the experts, some of those losers are exactly who you think they are. They're suckers.

"It's a bit of human nature to be always yearning for that opportunity that's probably too good to be true," Cyr said. "I think a lot of people, they probably know it's too good to be true, but they're willing to put a few dollars toward it, just to try it out and see what's going to happen."

"Nobody forces somebody to buy a spam stock," Coulson noted. "You send out 5 million [e-mails], you find three dumb people. Anybody who buys a spam stock is just really dumb." Or, he added, "they're hoping for a greater fool." Those are the special class of suckers, like me, who know something is a pyramid scheme and still think they can beat it.

Speaking of dumb people, I did pretty well with the stocks I picked, at least compared with what Frieder and Cyr had led me to expect. I was lucky enough to see one of my stocks, Healtheuniverse (HLUN.PK) hold steady at 8 cents, and three increase in value. Aerofoam Metals Inc. (AFML.PK) went from 12 cents to 30 cents, Apparel Manufacturing Associates Inc. (APPM.PK) went from 15 cents to 28 cents, and Harris Exploration went from $1.50 to $1.62.

None of those were enough to keep the losses in my other stocks, like Medical Institutional Services Corp. (MISJ.PK), which lost 58 percent of its value, plummeting from $1.94 to 82 cents, from dragging down my entire portfolio. By the end of the experiment, I had lost a virtual $2,250, which amounted to 25 percent of a portfolio that had begun the week at $8,990.

Remember, though, that I waited a week to sell those stocks. Next time, I'll know better. I should've bought and sold them within hours of receiving the first e-mail. That e-mail I just received about West Excelsior Enterprises looks promising.

By Alex Koppelman

Alex Koppelman is a staff writer for Salon.

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