Many people fall for stock spam

Many investors apparently trust spam e-mail -- at least those messages that say a fortune is to be made in a speculative stock. All too often, credulous people buy the shares, only to see them plummet in value.

That is the conclusion of a new study, "Spam Works: Evidence From Stock Touts and Corresponding Market Activity," by Laura L. Frieder, an assistant professor of finance at Purdue, and Jonathan L. Zittrain, professor of Internet governance and regulation at Oxford. The study has been circulating for several weeks in academic circles; a copy is at papers.ssrn.com/sol3/papers.cfm? abstract-id=920553.

The professors found the stocks promoted in these messages are almost always found in the off-market, over-the-counter trading arena known as the Pink Sheets.

To compile a database of stock-touting spam, the researchers surveyed 1.8 million specimens of spam received January 2004 to July 2005 by the Internet newsgroup called NANAS (for net.admin.network.abuse.sightings).

All told, about 300 stocks were recommended in the studied messages, each of which contained a time-stamp indicating when it was sent. Because not all of the messages hyping a particular stock were delivered at precisely the same time, or even on the same day, the professors focused on the day when the greatest number of messages touting a certain stock were received. On that day, they found, the stock was 13 times more likely to be the most actively traded Pink Sheet issue than it was on days when they had no evidence that junk e-mail was sent urging its purchase.

The professors found a pattern in the touted stocks. It pointed unambiguously to spammers buying stock before the days when they sent their messages and selling as those messages were received.

An average stock rose 4.6 percent more than comparable issues on the trading day just before the spam's peak volume day. On the peak volume day itself -- when the professors believe that the spammers sell the bulk of their shares -- the stock's price stayed more or less even. But one trading day later, the return was 5.9 percent lower than that of comparable issues.