How to Avoid Pump and Dump Stock Schemes

Pump and Dump, a form of investment fraud, occurs frequently everyday. In fact, I received an interesting e-mail in my inbox, which pointed out Pure Biofuels Corp. (PBOF.OB) as a hot stock pick.

Here’s a copy of the e-mail:


Stock Radar Presents
Get Ready!! PBOF continues!

Don’t you dare take your eyes off this one Tue,20 morning.
Extended Day Target: 2.025 USD (35%)

Breaking News Headline:
Entry into a Material Definitive Agreement, Change in Directors or Principal O

When this St0ck moves… WATCH OUT! CATCH THE NEW LEADER!

Wikipedia explains how the pump and dump process works:

A company’s web site may feature a glowing press release about its financial health or some new product or innovation. Newsletters that purport to offer unbiased recommendations may suddenly tout the company as the latest “hot” stock. Messages in chat rooms and bulletin board postings—or, more often, spam—may urge readers to buy the stock quickly.

Unwitting investors purchase the stock in droves, creating high demand and pumping up the price. When the persons behind the scheme sell their shares (at what will soon become the peak) and stop promoting the stock, the price plummets, and other investors lose their money. (Source: Wikipedia)

Pump and dump schemes are successful scams for one reason: greed. Greedy investors are more susceptible to pump and dump stock schemes because they want riches without working hard for them. The scammers know this; this is just another spamming technique to lure away dollars from the greedy and needy.

How to Beat Stock Scams

The easiest way to diagnose any scam is to see it before you read it. In other words, look for certain “spammy” characteristics before you open any e-mail message or message board post.

Here are 5 warning signs of a pump and dump investment scam:

1. Unrecognizable “From” Fields – The scam e-mail I received had two different reply fields, “further law” & “starts”. Scammers use different techniques such as buying e-mail databases and attacking IP addresses to prey on your e-mail information. It’s a safe bet to scrutinize every e-mail message you receive. Look for “red flags” in the e-mail body that suggest suspicious activity.

2. Bold, Unkept Promises – How on earth is the recommended stock supposed to gain 35% in 1 day? There is no support, analysis, or evidence that would warrant large stock gains over the course of 1 trading day. As 02/20/2007, PBOF stock is actually down 5 cents to $1.45 per share. Pump and dump victims would have lost 4% of their investment within 9 hours. Losing money in the stock market within hours is a scary feeling.

3. No Names, No Links, No Trust – Successful pump and dumps always omit valuable contact information from the attacking e-mail/post. That way, the original sender is completely anonymous to the e-mail recipients, who may act on the false investment advice. If your broker gave you terrible investment advice, you’d pick up the phone and give him or her a piece of your mind. But when the advice comes without any contact information, i.e., name, phone number, or web address, who do you call for help?

4. Excessive Exclamation Points – Typical e-mail spam lacks this characteristic, but pump and dump stock scammers seem to have an obsession with exclamation points. Perhaps they believe adding excessive punctuation will excite more investors than a normal spam message would.

5. If It Looks Like Spam, It Probably Is – Use your common sense when you read anything online, especially investment information. “Get Rich Quick Claims” and “Hot, Secret Stock Tips” are and always will be scams because you never get something for nothing. Brilliant investors make lots of money because they put time and effort into their investments. If you want something for nothing, try playing the lottery.