The Tycoon Report

Beware of These Stock Scams

Wednesday, February 28, 2007 | Wayne Mulligan

I’m going to take a break from my typical tech stock commentary this week and talk a bit about a topic that really makes my blood boil…

STOCK SCAMS!

With every technological innovation comes a commensurate innovation in how stock promoters defraud unsuspecting investors.  It’s their job figure out new schemes to inflate the price of a stock and make a handsome profit at your expense – this is where the term “pump and dump” comes from.

First, these promoters “pump” up the price of the stock through various means and then “dump” the shares they own onto the market as unsuspecting investors bid the price up.

These pump and dump tactics have been going on since the beginning of the market and only get more profitable and sophisticated with time.

First it was the scams of the old days where a guy would literally walk down to Wall Street, act and talk like he was some big investor (or worked for one) and “accidentally” drop a piece of paper from his pocket that contained the names of stocks he was supposedly buying.

Then came the advent of the telephone and all the “boiler room” brokerages that employed hundreds of sales people to hype up a stock.

And now we’re in the digital age.  We hear stories about teenagers using the internet and e-mail to perform sophisticated pump and dump operations.

That’s mainly why I’m bringing this up now – in the age of technology and innovation, the stock promoters are getting even smarter.

Now that everyone uses a computer, one would think the vast majority of people are more informed and don’t make silly mistakes like falling for a stock pitch via e-mail.  But that’s not the truth at all.

Just last year, a 19-year-old used a computer virus to forcibly sell a stock to another trader at a hyper-inflated price.

I consider myself to be a fairly savvy guy when it comes to technology and e-mail filtering technologies, but every single day, I get at least 10 new pieces of stock promotional e-mail in my mailbox.

So what I want to do is talk about a couple of the big scams we see going around now and then give you some tips in case you can’t easily see if you’re being scammed or not.

Trojan Horse

Just like in the ancient Greek story, computer “Trojan Horses” get into your system because you basically let them in.

This is usually because you think they’re either:

a)    Coming from a friend
b)    Contain something you want

Let me briefly address both and show you some quick ways to avoid getting scammed…

If one of your friends sends you a short, impersonal e-mail telling you to “check this out”, and it requires that you download a file, then you should simply give that person a call and see if they really sent the e-mail or not.

It’s that simple – just look for telltale signs, like if the message is very short and if the file ends with the extension, “.exe”.  That’s usually a dead giveaway.

The other thing many of these Trojan Horses are doing now is disguising themselves as “trading programs”.  

They’ll tout how the system is a free version of a popular product like InvesTools or just that it will make you “millions” if you use it.

These are both very common scams and if you’re on the lookout for them, then there’s a very good chance you’ll never fall victim to this type of malicious attack.

Promotional E-mails

This one is the oldest and by far the most common – a letter from someone who purports to be an “insider” at a particular company or industry, and they have a “hot tip” for you.

Let me give you a tip right now…don’t take tips!  They never work!

But these e-mails always happen to get through SPAM filters and seem so convincing at times.  They provide testimonials from other traders who have made insane profits by following these recommendations.

Do you want to know a secret?

It’s all a lie!

Why on earth would someone from out of the blue drop a recommendation in your e-mail box?  

It might sound silly, but you won’t believe how many people fall for these scams.

I don’t care how “official” the letter looks or how convincing the pitch is, if it’s from someone that you’ve never done business with before, then it’s a scam, period!

The other thing to look out for is the stock symbol itself – punch it into Yahoo! Finance.  I’d bet you good money the company trades on the pink sheets.

If you don’t know, the pink sheets are publicly traded companies that don’t meet the minimum listing requirements of major exchanges.  Which means the companies on them are loosely regulated, thinly traded and, more likely than not, are controlled by corrupt stock promoters.

Now, I know plenty of people who have done well trading penny stocks – but those are so few and far between that it’s not worth the risk, especially when you consider the source of an e-mail recommendation.

Just to be clear, I’m not talking about the types of recommendations you would receive from a company like Tycoon Publishing.  I’m talking about the types that come unsolicited, contain actual stock trading ideas directly in the e-mail and are usually stocks that trade on the pink sheets.

Protection Checklist

Below is a checklist straight from the SEC.gov website.  Follow these guidelines, and you’ll dramatically reduce your chances of getting scammed!

• Be Skeptical - When you see an offer on the Internet, consider it a scam until you can prove it's legitimate through your own independent research.

• Consider the Source - Remember that the people touting a stock may be company insiders or paid promoters who stand to profit at your expense.

• Independently Verify Claims - Don't rely solely on claims by companies or promoters about new product developments, lucrative contracts, or the company's financial health.

• Beware of High Pressure Pitches - Watch out for promoters who pressure you to buy before you have an opportunity to fully research an offer.

• Research the Company - Always ask for – and carefully read – the company's prospectus and current financial statements.

• Confirm Registration - Check the SEC's EDGAR database or your state securities regulator to make sure the company is properly registered or legally exempt from registration.

So keep your guard up, my friend – nobody is going to look out for you, so you should always be prepared to look out for yourself!




Wayne Mulligan
Contributing Editor
The Tycoon Report