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Stock spammers pull 'pump, dump'

December 16, 2006 12:50 am

By BILL FREEHLING
By BILL FREEHLING

Early Tuesday morning, the e-mails start arriving in inboxes.

The messages tout Chef Selections Inc., which trades under the symbol CFSC.PK. It was selling for 10 cents a share, but the e-mails say it's about to hit $1. The recommendation is "strong buy."

According to Yahoo! Finance, Chef Selections was founded in 1998, is headquartered in Las Vegas, and sells gourmet food products and specialty items through direct sales.

On Monday, very few shares of the company's stock changed hands. But when the U.S. markets opened Tuesday, the volume spiked and the price began to rise. It peaked that morning at 15 cents, a 50 percent increase.

By the end of the day, nearly 400,000 shares had been traded. It closed at 9 cents a share, a penny less than where it started and far from the e-mails' predicted price.

That has all the markings of a "pump-and-dump" penny-stock scheme that experts say are on the rise. Chef Selections Inc. is on the list of spam-advertised stocks collected by the Web site Spamna tion.info.

The scam typically involves spammers buying cheap stocks with low trading volume offered on over-the-counter markets. These markets involve thousands of companies that don't meet the listing requirements of the Nasdaq or other exchanges. Little information is available about many of these penny stocks.

Spammers send messages pumping some of these stocks to thousands or even millions of people. An uptick in volume occurs, sending the stock higher. The spammers dump it, and the price crashes back down.

The Webmaster of Spamna tion.info, who asked to remain anonymous, said in an e-mail that stock spam "has increased enormously" this year. The site tracked 316 stocks that were spammed this year; in 2000 the site tracked seven such stocks.

Leonard Richardson, who runs a Web site called the "Stock Spam Effectiveness Monitor," said stock spam now represents about 15 percent of the total spam he collects. It was 3 percent in 2004. Richardson said the companies themselves are not typically behind the spam, as it's not good for their long-term health.

A phone call placed to Chef Selections was answered by Glen Tanner, who said he's the company's chief operating officer. He said the company has been publicly traded for a couple of years, and was unaware of the spam.

The U.S. Securities and Exchange Commission investigates fraudulent scams and can seek civil claims against those responsible. Whether by phone, direct mail or e-mail, SEC spokesman John Heine said, "pump-and-dump" scams have "been around for a long, long time."

E-mail allows spammers to reach people quickly and cheaply. Perhaps partly as a result, the scam can be profitable, according to a report published in July called "Spam Works: Evidence from Stock Touts and Corresponding Market Activity."

Spammers who buy the stock the day before touting it and sell as trading volume increases make about 6 percent on average, according to the report. The person who buys the stock on the day it's touted and sells two days later loses about 5.5 percent.

A June report titled "The Effect of Stock Spam on Financial Markets" notes that there are three categories of people involved: the spammers, the naive recipients who believe they have a hot tip and the "smart" recipients who try to benefit off the suckers.

Mark Ramsey, a certified financial planner and investment representative for Edward Jones in Fredericksburg, advises people to delete the e-mails immediately. "Common sense tells you to stay away from these types of investments," Ramsey said.

Instead of hitting the delete key, some people are intrigued, said Bern Mahon, president of Union Investment Services and a Fredericksburg financial adviser. He says he sometimes gets calls from clients about spam-touted stocks. He tells them to consider the source. "Would you take legal or medical advice over the fax machine?" he asks.

If people are determined to try their hand at these issues, Mahon has another piece of advice--give the money to charity instead.

"At least you would feel good about it," he said.

To reach BILL FREEHLING:540/374-5424
Email: bfreehling@freelancestar.com





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