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Penny-stock schemes not just for the Wolf of Wall St.
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Penny-stock schemes not just for the Wolf of Wall St.

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Penny-stock schemes not just for the Wolf of Wall St.

Red Granite Pictures Leonoardo DiCaprio portraying Jordan Belfort in “The Wolf of Wall Street.”

Spam messages hyping penny stocks are multiplying, accounting for 16% of unwanted email in 2013, up from less than 1% the year before, according to a report released last week by the Chicago-based security company Trustwave. Regulators also charged five penny-stock promoters last week for schemes to inflate share prices to feign market interest, including two cases that involved plans to send email blasts.

The “pump and dump” scam is better known as the tactic depicted in the movie “The Wolf of Wall Street,” in which Leonardo DiCaprio plays ex-stockbroker Jordan Belfort. Here’s how it works: Fraudsters promote a stock worth just a few cents, telling investors they have the inside scoop about upcoming events that will send the share price soaring. After people buy, the crooks dump their own overvalued shares back into the market, nabbing a profit.

To be sure, penny stocks aren’t just for the scammers and the gullible. Investors are snapping up penny stocks on their own in industries with high potential for growth, in hopes of pocketing outsize returns, The Wall Street Journal reported Thursday.

But for years, regulators have been warning investors to beware of penny-stock scams, given that there is less public information on companies with low-priced stocks and many don’t file financial reports with the Securities and Exchange Commission. In June, the SEC and Wall Street’s self-regulator, the Financial Industry Regulatory Authority, said stock spam messages were in high gear, representing the “inbox equivalent of a boiler room sales operation.”

The promoters “blast spam out saying this is the deal of the century, this company is about to make some major announcement, the stock is going to increase 800-fold, we recommend you buy this as soon as possible,” Karl Sigler, threat intelligence manager at Trustwave, says. “The original spammer is going to get a huge increase in their initial stock.”

Most spam comes from zombie computers, called “bots” (short for robots). Criminals infect computers with malicious software and then take control of the network of machines, or botnets. Penny-stock spam is usually circulated via botnets as well, Sigler says, and the primary cause of the surge in these messages was Kelihos. Kelihos is a botnet of an estimated 40,000 infected computers that pushed out stock spam last year. It has since shifted its focus to promoting online pharmacies.

One company, Rich Pharmaceuticals (RCHA), saw its stock price triple to about 37 cents a share during the height of a spam campaign in mid-April. The company said in a notice about a week after the spam onslaught that it “has not, and does not, authorize, endorse or sponsor this illegal spam stock promotion or any of the information contained in these emails” and it is working with the Financial Industry Regulatory Authority and OTC Markets to investigate the messages.

The SEC’s Miami office has charged 48 people and 25 companies for penny stock schemes since October 2010, according to an agency release. The agency says investors should be skeptical of email tips, do their own research and be wary of high-pressure pitches. (Jordan Belfort’s key to a successful sales pitch? Urgency.)

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