Stock tip junk fax/e-mail

The fax machine at the office where I work gets several junk faxes per week encouraging people to buy some stock or another. My question is, who pays for and presumably benefits from these advertisements?

Is it the company whose stock is being advertised? Or is it just some scammer who has bought a bunch of cheap shares and wants to sell them at a profit by generating artificial demand?

Finally, not counting the fact that unsolicited junk faxes are illegal, is the advertisement almost certainly illegal? Is it that hard to trace them back to the originator? We get so many of them that it would seem people would be going to jail right and left…

First, report the junk faxes to the authorities (see for info). All faxes are required to have an accurate return phone number, and the sender is liable for some hefty fines.

Also, report the information to the SEC. They’ll also investigate and go after the senders.

It’s not usually the company sending the faxes. Most likely, it’s some shady investors working on a “pump and dump” scheme. (I’ll bet the prices of the stocks being touted are usually less than $5; these are known in the stock brokerage trade as “penny stocks” and they are not recommended except for experienced investors.*) What they do is buy a lot of shares of some worthless company, then talk up the stock in order to drive up the price. Then they sell and the stock returns to its normal level – which is below what those they solicit pay for it. This works because cheap stocks are very volitile because only a small number of shares are traded.

So the pump and dumper buys 10000 shares of Amalgamated Crapola at $2, then sends out the glowing reports. Others buy in and the price goes to $4. The dumper sells his stock at $4 (maybe even to some of the people taken in by the scam); then the price drops to $1. Scammer gets a big profit; everyone else gets burned.

*SEC rules prohibit a broker from suggesting a penny stock to clients unless they have a track record of buying them. Further, if you decide yourself to buy one, there is all sorts of extra paperwork warning you that you’re going out on a very big limb and brokers are supposed to actively discourage investors from getting involved.

These spam faxes usually are sent by small stock brokerages that specialize in “penny” stocks. The brokerage pays for the ads, though the cost is minimal. The ads are created on a PC and blast faxed to the mailing list. The only cost to the brokerage is the time to put together the ad and long distance charges. The brokerage benefits through commissions on any sales the ads generate.

While unsolicited junk faxes are illegal, I would hazard a guess that someone in your office signed up for the mailing list either knowingly or unknowingly.

If it is a brokerage involved, the SEC would be on their ass so fast it would make their ears catch fire.

It is against regulations for any brokerage to recommend any penny stock except to “experienced” investors (i.e., those with a history of penny stock investing). To blast fax it to anyone is a serious violation unless the list were limited to experienced investors who are existing clients of that brokerage (and the brokerage would have to have records to back them up).

With what you describe, the brokerage would be fined much more than they’d make in commissions, and could be shut down by the SEC. Even if the list was limited to those few to whom the brokerage can legitimately recommend penny stocks, the SEC would take a very dim view of this practice.

I doubt it’d be a brokerage. But you should definitely send the information to the SEC.

This is definitely not from a brokerage - there is absolutely no contact info. I.e. no number to call to buy the stock. (There is a “no more faxes” number, but those never work, and may even increase the number of faxes.)

All of these faxes try to look like they’re newsletters from stock analysts, but there is never any contact info for anybody at all. The small print at the bottom of the fax says it all:

(emphasis mine)

So basically, they are admitting the scam. Would that in any way protect them from legal action?

One final question (only peripherally connected) - how are OTC stocks traded? Can one find prices on the internet? Dont’ worry, I don’t intend on buying anything…

What used to be called OTC stocks are traded on NASDAQ.

However, very cheap stocks that are very risky are not traded on any exchange. They’re listed on “pink sheets,” that go to brokers. If you want to sell these things, the broker has to find a buyer for the stock, which is much more difficult since no one makes a market in them and keeps shares on hand for trading.

I’m not sure of the mechanism, but perhaps the pink sheets give them information on where to trade shares; otherwise, the brokers have to call other brokerages to see who might have shares available.

In the pump and dump scheme, the scammers are the ones who will sell their stock to you.

Then this must not be a traditional pump and dump scheme since the fax gives no way of identifying or contacting the scammers.

Unless you mean that since they are selling at the same time that the chumps are buying, then indirectly the chumps are buying their shares. But they are not selling them to the chumps directly.

Interesting … the supposed name of the newsletter, “Stock Buyers Alert”, doesn’t show up at all under google.

We get them here at work both from a brokerage and from the “stock alert” type companies. My boss (the owner) does have a history of buying penny stocks, so that accounts for the brokerage. I figured the brokerage sold his info on a mailing list and that’s what accounted for the “alerts”.