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BULL STREET - The art of the Con

The Pump-and-Dump

Using the internet it is not too hard to make up totally fabricated stories about companies in which you own stock. Even if you do not have a website, there are numerous securities financial message boards that literally have a space for every stock with a symbol. These boards are rather interesting because they take up the slack for the lack of coverage by securities analysts of many of these smaller companies. Real people talk about these companies and talk online about why they purchased the stock and what they think of the company’s management and products. Anyone can play the game and most statements are made anonymously.

The pump-and-dump folks get a lot of “freely tradable” stock from a company that wants to see an increase in  its value in the marketplace or in lieu of that, the trader may have bought or sold a substantial position and now would like to fulfill his purchase of sale. In the case of the United States v. Moldofsky, it turns out that Moldofsky was a professional day trader and had sold the stock of Lucent Corporation short. Lucent is highly followed by analysts and the company was about to report its earnings. Everyone that was following the stock had made their own predictions about how the company would perform and the Lucent itself had issued guidelines regarding how they expected to do.

Countless time Moldofsky went onto various message boards on the net and often used a name that appeared to be an analysis that he been very positive on the stock. Using that and many other aliases, Moldofsky indicated that Lucent’s earnings were going to come in lower than anybodies previous expectations. The stock tanked, Moldofsky covered his short and cleaned. The company once appraised of what had occurred issued a denial of what Moldofsky said and the stock soared. However, many people believing his comments had sold their stock on his erroneously and fiction story. The stock had gone down 3.7% on the originally phony story and recovered 8% once Lucent denied it. Moldofsky was convicted on March 8, 2001 for his dalliance.

In this case we used an example of a stock traded on the New York Stock Exchange, but this is much more easily accomplished in highly volatile over-the-counter issues when the management is sleeping at the switch. On of the common ploys there is to indicate that the company is being investigated by the SEC or that the FDA has pulled its approval of their most recent product. Another great ploy the one where the someone says on the bulletin board that the company’s founding president has been summarily fired by the board and that the Postal Department has descended on the company with a search warrant. In this wild and wholly marketplace, anything can be believed. And this marketplace offers instant gratification to the evil-doers. Reactions to news, both bad and good is instantaneous and dramatic. Unbelievable price swings occur and until you look at the bulletin board no one would have a clue.

 

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