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VeriSign, SEC Trying New Ways to Beat Penny Stock Pushers

August 16, 2008 08:52 AM
by Anne Szustek
Internet infrastructure company VeriSign’s new software monitors stock trading for market behavior that parallels those of “pump and dump stocks,” a common spammer tool of trade.

Closing in on E-Mail Stock Hucksters

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VeriSign’s new VIP Fraud Protection Module is stepping in to help fight the battle against spam e-mails that promote low-cap stocks. An online company press release writes that the software can “spot pump-and-dump activity by tracking and weighing multiple factors including stock risk, user behaviors, how trading compares to typical fraudulent trades, and the network effect that occurs when many users are making similar trades.”

The Securities and Exchange Commission estimates that pumping and dumping, also known as “hype and dump manipulation,” has cost investors billions of dollars, Kiplinger’s reported in October. There are no precise figures as to how much markets have lost at the hands of pump-and-dump schemes, however. Analyst Geoff Turner of consultancy Forrester Research told the BBC, “People are somewhat shy on reporting losses because it erodes investor confidence.”

The SEC has launched its own decisive campaign against stock spamming. As of October 2007, the commission had suspended 42 companies suspected of plying their penny stocks by unwanted e-mail. An October 4 SEC press release cited a Symantec study crediting the governmental body with a 30 percent decrease in e-mail stock spam during the first half of 2007.

But considering an earlier SEC estimate that spammers send 100 million pump-and-dump messages each week, this “means that now there are only 70 million stock spams sent,” Kiplinger’s quips.

SEC head of Internet enforcement John Stark told the BBC that the commission is unable to give an opinion on a commercially released product such as VeriSign’s, although the SEC partners with many agencies. The BBC quoted his indirect warning to pumpers and dumpers: “This is basic lying, cheating and stealing and the message to anyone engaging in these shenanigans is they are going to get caught.”

Old-fashioned telemarketing and junk mail scams are still used by stock fraudsters. According to Kiplinger’s, some, such as Connect-A-Jet.com, are even using “commercials on CNBC to get their misleading claims out to would-be investors.”

But e-mail spam is now the pump-and-dump marketing method of choice.

Background: Pump-and-dump schemes and penny stocks

Pump-and-dump stock scams occur when conmen persuade investors to buy up massive quantities of penny stocks based on fraudulent claims about its projected performance, driving up the stocks’ prices so that the perpetrators can sell their own shares at a profit.
The definition of penny stocks varies. Some consider them to be any stock traded off of the major markets. Others call penny stocks securities of companies whose market valuation is below $100 million and have shares trading for less than $5. But investors are of the consensus that they are high-risk and speculative because of their relative lack of disclosure and small capitalization. This makes them a prime target for investment tricksters looking to make a quick buck.
“Often the promoters will claim to have ‘inside’ information about an impending development or to use an ‘infallible’ combination of economic and stock market data to pick stocks,” the Securities and Exchange Commission writes in a note alerting about such schemes.

The SEC points out that the pumpers may actually “be company insiders or paid promoters who stand to gain by selling their shares after the stock price is ‘pumped’ up by the buying frenzy they create.”
One recent pump-and-dump ring generated millions of dollars in illegal earnings. By April 2007 Jeremy Jaynes, Sam Currin, Howell and Vernice Woltz, Bryan Kos and David Hagen had all been indicted for their roles in driving up the stocks of GTX Global, Concorde America Inc. and Absolute Health and Fitness Inc. GTX Global’s stock alone exceeded $31 million in sales.

Carol S. Remond reported for Dow Jones in April 2008, “Court documents show that Jaynes, a convicted Internet spammer who has been under house arrest while he appealed his conviction, pleaded to one count of securities fraud in November 2006 and has been cooperating with the government since then.”

The SEC filed civil cases against other promoters and parties connected with the same stocks in U.S. District Court in South Florida in 2004.
On April 28, U.S. District Court Judge Marcia S. Krieger sentenced Edward “Eddie” Davidson to 21 months in federal prison for tax evasion and forging e-mail headers—many of which were attempts to defraud investors. On July 24, days after escaping from prison, Davidson murdered his wife Amy Hill and their three-year-old daughter before killing himself.

Related Topics: Spammers in prison

Penny-stock trader Edward “Eddie" Davidson
Edward “Eddie” Davidson was sentenced to 21 months in federal prison for tax evasion and forging e-mail headers on April 28. According to U.S. attorney Troy Eid of the circuit court District of Colorado, Davidson ran his spamming operation, Power Promoters, through a network of “sub-spammers,” sending messages to thousands under the name of 19 companies. Many of the messages were attempts to defraud investors on the stock market and to spark market manipulation.

The bodies of Davidson, his wife and young daughter were discovered July 24. Police say the convicted spammer shot his family and then himself. Authorities had been looking for Davidson since July 20, when his wife, Amy Hill, helped him escape from a minimum security prison in Florence, Col.
Robert Soloway
Robert Soloway was sentenced to nearly four years in jail July 22 for sending millions of unsolicited e-mails. He was convicted under the CAN-SPAM Act. Soloway pled guilty in March to single counts of e-mail fraud, mail fraud and tax evasion. His sentence of 47 months is less than half of what prosecutors wanted for the spammer, who sent more than 90 million unwanted e-mails in just three months, according to court records.

Reference: Investing guide

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