SEC Cracking Down on Spam ‘Pump and Dump’

The SEC has suspended securities trading of 35 companies as part of a new crackdown on market manipulation via spam.

The SEC said in a statement that more than 100 million e-mails hyping small company stocks as “Ready to Explode,” “Ride the Bull,” and “Fast Money” were sent to addressees each week, which led to spikes in share price and trading volume.

The spam is a new-fangled version of a “pump and dump” scheme; greedy investors hype the stocks to get people to buy them. The flurry of activity inflates the stock prices and the investors who initiate the scam sell their shares at a profit.

Investors who fall prey to the scheme suffer big losses when the stock prices inevitably tank.

“When spam clogs our mailboxes, it’s annoying. When it rips off investors, it’s illegal and destructive,” said SEC Chairman Christopher Cox. “Today’s trading suspensions, and actions that will follow, should send a clear message to spammers: the SEC will hold you accountable.”

SEC cited some of the spam campaigns designed to dupe would-be investors.

For example, on Friday, Dec. 15, 2006, shares in Apparel Manufacturing Associates, Inc. (APPM) closed at 6 cents, with a trading volume of 3,500 shares.

After a weekend spam campaign proclaiming, “Huge news expected out on APPM, get in before the wire, We’re taking it all the way to $1.00,” trading volume on Monday, Dec. 18 hit 484,568 shares with the price spiking to over 19 cents a share.

Two days later the price climbed to 45 cents per share. By Dec. 27, the price was back down to 10 cents a share with a trading volume of 65,350 shares.

The SEC’S action is the latest step in “Operation Spamalot,” an effort by the SEC to shield investors from potentially fraudulent spam that pumps up small company stocks.

Small company stocks are not traded on the NYSE or NASDAQ, but are listed via “pink sheets.”

This electronic quotation service allows brokers to post stock quotes about stocks with virtually no regulation because the shares traded as pink sheet stocks are not subject to the reporting requirements of the Securities Exchange Act of 1934.

This means brokers posting quotations for the purchase and sale of the securities are not required to conduct due diligence regarding the issuers. Without a regulatory body to oversee the trading, unwitting investors can be victimized by scams.

This is why the SEC has stepped in.

“While the Commission cautions investors not to make investment decisions based on anonymous emails they receive, we are also committed to tracking down those who prey on investors with false or misleading information,” said Linda Chatman Thomsen, Director of the SEC’s Enforcement Division, in a statement.

The SEC, which lists the 35 companies whose trading was suspended here, explains its procedures for suspending trading on its Web site.

The latest move by the SEC comes amid an atmosphere of tension at the regulatory body, which is being pressured to penalize companies whose executives backdate stock options.

The SEC has said it is having a tough time deciding how much to fine companies and faces the task of quantifying the harm backdating causes innocent investors.

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