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Scammers Dust Off The Old "Pump & Dump"

October 26, 2006

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With the Dow at 12,000 and real estate values sinking faster than the Titanic, many investors are taking another look at the stock market. And scammers have dusted off an old chestnut to take advantage of unsophisticated investors.

As long as there have been stocks, there have been stock touters -- those who seek to drive up the price of shares that they happen to own in hopes of selling at a huge profit.

Also called the "pump and dump," this scheme leaves many small investors holding the bag when the scammers sell and the share prices plunge.

Using spam emails, these scammers are sending out millions of messages each day breathlessly extolling the virtue of some obscure company. In nearly every case the company itself is clueless that it is part of a scam. It's chosen because its stock is selling for pennies a share, making it easy for the scammer to acquire a huge number of shares with a minimal investment.

Does the scam work? Apparently it does.

Texhoma Energy was touted in a recent spam email, resulting in a significant increase in the stock's value. According to the Chicago Tribune, 53,000 shares of Texhoma stock were traded on October 16. The next day the volume jumped to more than one million.

Two day later it jumped to more than five million, as the spam emails began to hit inboxes and prompt victims to place orders.

The scammers, of course, sell at the stock's high point and other investors soon join them as the price begins to fall. Pretty soon the stock is back to selling at a nickel a share and those who jumped on the bandwagon have lost significant amounts of money.

The best way to avoid this scam> Don't take investment advice from an anonymous email.

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