As part of our ongoing series of articles about investment scams, we’d like to have a look at one of the oldest, yet most dangerous tricks in the book — the pump-and-dump. If you have ever given your email address to a financial website, chances are you’ve received spam emails like the following:

HXPN IS GAINING GREAT MOMENTUM!

WE ARE ABOUT TO SEE FIRWORKS!

WATCH IT ON MONDAY MAY 21!

__________

Company: Harris Exploration Inc

Symbol: HXPN

Price: 0.78

5-day Target: $2.5

Rating: Agressive Buy

__________

HXPN HAS GAINED OVER 50% IN 2 DAYS!

WE ARE EXPECTING GAINS TOPPING 200% AND MORE!

GET IN NOW WHILE YOU STILL CAN MAKE PROFIT!

I subscribe to a number of financial sites, so I get one of these practically every day. This particular one arrived on May 20th. It has all the classic signs of a pump-and-dump scam. The trading in this stock is very thin, with an average volume of only about 66,000 shares a day, and the stock price is less than a dollar, meaning that this issue is highly sensitive to even modest spikes in trading.

Let’s have a look at the company in question. HXPN trades on the OTC bulletin board, which is not subject to the reporting requirements of the more stock markets. Unsurprisingly, a search of the major financial websites turned up absolutely no financial information about this company. A search for financials on pinksheets.com resulted only thin the following message: “There are no financial reports available for this company.”

Uh Oh.

This kind of stock is a scammer’s dream. With no data available, they can make any sort of claims they like with no fear of being disproven, and with such a thin market, the share price can be manipulated with ease. Could the price potentially shoot up and make you a boatload of cash? Anything is possible, but we have no reliable way of evaluating the odds, which means that chances are they are razor-slim.

Typically, the senders of these sorts of spam emails buy up a number of shares in a company like HXPN gradually, over a period of time, taking care not to bid up the price themselves. They then aggressively market the stock, claiming it has huge breakout potential, deluging the Internet with hype-filled spam. When unsuspecting victims jump in and buy, the scammers pounce and sell at the bid-up price, raking in a quick profit. The stock invariably crashes shortly afterwards.

Note the mention of a specific date to “watch” the stock. This is a classic tactic. The scammers will typically buy a few shares early in the day in question, bidding up the price a bit to get the ball rolling. Anyone foolish enough to pay attention to their message will see that their “prediction” is coming true, and will be sorely tempted to jump in, not wanting to miss out on the gravy train. If a few of them bite, it can start a chain reaction as more and more jump in. The scammers then dump their shares and leave the rest holding the bag.

Let’s have a look and see how this played out in the market:

As you can see, the scam went off in textbook fashion. HXPN opened on May 21st at about $.87, up over 11% from the previous day’s close of $.78 per share. It spiked up to a dollar, its highest price since March, then dipped as low as $.80, before closing at about $.85. In the few days since, it has fallen to $.55, for a loss of 45% from its high on the 21st. Chances are, anyone who got sucked in by this scheme took a nasty loss, and the spammers walked away with a tidy sum at their expense.

This sort of scheme is illegal, of course, and the perpetrators belong in prison. But chances are slim of their ever being caught, and even if they are, it won’t be long before another outfit comes along to take their place. These schemes have been around as long as financial markets have existed, and are unlikely ever to disappear entirely. So be vigilant, and choose your advisors carefully.

There’s an old saying that will serve you well when an email like this one slips through your spam filters: There’s nothing more expensive than free advice.

P.S. Harris Exploration, Inc. has issued a press release disavowing any involvement with the spam emails. Chances are this statement is sincere — these sorts of schemes are frequently perpetrated by outsiders without the knowledge of the company in question.