The federal government made headlines on Thursday by cracking down on dozens of penny stocks whose prices had been manipulated by mass e-mailers.
But while the Securities and Exchange Commission made a splash by unveiling "Operation Spamalot", it is unlikely to end spam. In the face of increased enforcement, warnings and federal laws, spam is not only continuing, but flourishing. And there's no reason to think the SEC will be able to do anything to stop it.
The SEC's anti-spam team identified 35 stocks that had seen their shares rise after spam campaigns, according to Linda Chatman Thomsen, director of the SEC's Enforcement Division. Stock spam is simply a high-tech version of the classic pump and dump scheme: Promoters send millions of e-mail messages at a time promoting "can't miss" stock tips. Enough recipients inexplicably buy in, the price soars and then the spammers sell off their shares at the top of bubble.
The SEC's move to suspend trading on the 35 stocks is overdue, according to security experts. "People in the technology industry have been impatient to see some action from the SEC," says Patrick Peterson, vice president of technology at e-mail security company Ironport.
Stock spam has been around as long as the e-mail and the Web, but it has gotten much worse in the last few years. Stock spam messages rose 120 percent in the last six months, according to data from Postini, a messaging security company. In total, stock-related messages make up about 20 percent of all spam landing in in-boxes. The SEC estimates that 100 million stock spam messages are sent each week.
Don't expect it to diminish anytime soon. Technology has increased spammers' ability to send junk e-mail, and they are taking advantage of it. Spammers used to send all their messages from one computer, making them easily blocked by spam filters. Today, spammers increasingly send their messages through linked networks of computers that they control, called botnets. The extra bandwidth allows them to send out billions of messages and embed the promotional text in bigger image files.
The so-called image spam looks identical to normal spam but sneaks by many anti-spam programs, which just looks at text, not pictures or photos. "There's not just more spam being sent but for people that aren't properly protected, there are more messages getting through," says Postini executive vice president Daniel Druker.
There's another reason spam won't go away: It works. A 2006 study by Purdue University assistant professor of finance Laura Frieder and Law professor Jonathan Zittrain from Oxford University's Internet Institute concluded that stock spam moves markets. The researchers found that the average investor who buys a stock when it's heavily touted, and sells after the spam promotion ends, loses about 5.5 percent of their investment. But the spammer who buys before the spam onslaught and sells during the campaign makes a 5.79 percent return.
The National Association of Securities Dealers, a securities industry self-regulatory group, frequently posts alerts warning investors to look out for certain types of spam messages, to little avail.
"It's like you're seeing a dollar bill in a dark alley and getting hit over the head when you go in to get it," says Cromwell Coulson chief executive of Pink Sheets, which provides financial services and electronic quotes for over the counter stocks.
That doesn't mean Coulson ignores the men carrying the sticks. Coulson says as soon as his company can verify a spam complaint, Pink Sheets blocks trading on the stock on its site. The 35 stocks suspended by the SEC today won't be back on Pink Sheets once the 10-day suspension is over. "These things will get the skull and cross-bones," he says.
Coulson wants the SEC to take further action. In April, Pink Sheets proposed a new SEC rule mandating that stock promoters disclose their identities, funding and financial relationships with other companies. "There is nothing wrong with promotion — but if you are doing promotion and then dumping, that's a big problem," says Coulson.
It is also lucrative. According to the SEC, on Dec. 15, shares in Apparel Manufacturing Associates closed at 6 cents. After a four-day spam campaign, the price spiked to over 45 cents a share. By Dec. 27, it fell back down to 10 cents.
Similarly, shares of Goldmark Industries, trading at 17 cents on Dec. 19, rose to 35 cents a week later because of spam. By Jan. 9, the shares were down to 15 cents. "Thus far in this investigation we estimate that investor losses on these 35 stocks alone are in the tens of millions of dollars," said Mark Schonfeld director of the SEC's northeast regional office.
But evidence of the SEC's limited reach is in your in-box. Spam messages pushing shares of small companies NutriOne, Las Vegas Central Reservations and Cambridge Resources spread over the Internet on Thursday with messages advising recipients to "watch it like a hawk" and "500 percent profit guaranteed."