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Stock Scams 101
Secret Service Nigerian Advance Fee Fraud page
Nigerian fraud email
Internet Fraud Complaint Center
Internet Fraud Center’s
page on Nigerian mail scams
For more on Victor Lustig’s
life, see 'King Con'
File a complaint with the
Securities and Exchange Commission
SEC Investor alerts page
Trade Commission: Investment Risks
Interviews on CNBC'
• Why a bad golfer
makes a better CEO, 2/13/2003
• A nice surprise may
not mean a nice profit, 2/6/2003
• Investing lessons you
can't refuse, 1/30/2003
trades and other scams
Cons are a part of investing and of life. Some
are so audacious that they border on art. But most simply appeal to our
Niederhoffer and Laurel Kenner
A con man approaches the mark with the old story that he needs an
honest man to finance a dishonest project.
David W. Maurer, "The American Confidence Man"
scams and related shenanigans are as common in the stock market as losses.
Most come-ons aren’t as exotic as the Nigerian scam letters that pour over
the e-mail transom these days, but grifters have plenty to teach us about
commission to you” offers from brokers
fund “B” shares laden with hidden fees and exit penalties
up opens in the market that seem to say “buy now”
bounces in shares of newly bankrupt companies
companies that hint at big pending government contracts for fighting
bioterrorism or cancer.
are so prevalent, so various, so all-encompassing that the normal weapons
that the Specs use to shed light on a subject -- the pencil and envelope --
provide only a partial vista.
we start from the bottom up with a few counts, insights and stories; and
then turn the subject over to our readers, whose knowledge is much superior
to our own.
The artistry of short and big cons
games can conveniently be divided in markets and life into short and big. A
typical modern short con is the pump-and-dump: Someone goes on the Net,
seeds the rumor that some penny biotech company has a cure for cancer,
waits for the stock to go up a few hundred percent and then sells before
the Securities and Exchange Commission halts trading.
related shenanigan is the chief executive officer who goes on television to
talk about his company’s stock. J. Felix Meschke, a doctoral candidate at
Arizona State University, finds in his paper “CEO Interviews on CNBC” --
based on the 3,641 CEO interviews between 1999 and 2001 -- that the average
performance of a companies’ shares on the day of an interview was up 1.65%.
In the 10 days after the interview, the average performance was down 2.78%.
(To read the paper, click on “Read CEOs on CNBC” under related sites at
big con is a theatrical production of operatic sweep, luxurious props and
supporting actors in which the mark is taken not for the money he has on
him (the short con) but for everything he has. One of the most famous big
cons was pulled off in the 1920s by Victor Lustig. Posing as a government
bureaucrat, he sold the Eiffel Tower twice to scrap metal dealers. Adding
to the realism, he pocketed a bribe from one of the winning bidders.
(Lustig was a renowned con artist both in Europe and America and so good an
escape artist that he was ultimately locked up in Alcatraz, where he died
big bankruptcies, with their income-statement revisions and secret
off-the-books partnerships, might be likened to big cons. Such scams are so
frequent now that some people have ceased investing in stocks altogether.
But stock cons are nothing new. In the 1920s, phony brokerage and gambling
houses served as stage sets for victims lured by supposed insider tips. The
1950s grifter Lowell McAfee Birrell, a practitioner of a game that’s still
going strong today, would acquire a respected company, increase its shares
astronomically and switch its assets to another company on the verge of
collapse. He would then promote the shares of the watered-down company and
quickly sell when the price ran up, ruining other shareholders.
sympathize with the investors and authorities who find it so hard to
appropriately punish the perpetrators of the big cons. One of the reasons
is detailed in a highly recommended book by Victor Santoro, "Frauds,
Ripoffs and Con Games," which notes that a code of silence exists
between lower-level executives and those higher up in big cons involving
stocks. When the scam collapses, the lower executives are expected to
assume responsibility for the fraud, while the CEO disclaims all knowledge.
“In reality,” Santoro observes, “the CEO knows very well what’s going on;
he did it himself when he was a subordinate.”
mark in today’s market is, of course, the public.
A mark’s qualifications: money -- and larceny in his
to the big con is the “convincer” -- that’s the stock that rises,
convincing the mark there is vast money in the operation. But the crucial
ingredient is the bait, the opportunity for easy money that lures the
victim with larceny in his veins into throwing the whole kit and caboodle,
often including his house and bank accounts, into the scheme.
can’t cheat an honest man,” the saying goes. Today’s marks, however, do not
so much lack integrity as they lack the willingness to do hard work, to
count, to visit the premises and employees of the big con.
will concentrate on the easy-money aspect of the big cons. In reality,
goods are scarce and desires are unlimited. You cannot have one good
without the cost of giving up the opportunity of spending your money or
time on another. You cannot produce one kind of good without giving up the
opportunity to use your resources to produce another. The concept is so
important that first-year economics classes in almost all universities
start out by memorializing the principle with the acronym TNSTAAFL:
“There’s no such thing as a free lunch.”
you see a proposition that guarantees you a high return with no risk, take
the elevator to the ground floor immediately and start walking.
wishes he had taken this advice himself. In 1996, investments in the Asian
Tiger countries Thailand, Malaysia and Singapore were touted as
opportunities for a free lunch. Not only would investors profit in the
fast-growing economies, the story went, they would also enjoy the benefits
of diversification. Enhanced return and reduced risk -- what could be
better? What’s more, these countries paid high interest rates, and since
stocks would no doubt return the standard 3% to 5% above the rate of
interest, investors would lock in a 20% return by investing in their stock
denouement was terrible. One tiger after another couldn’t maintain a stable
currency while paying those high interest rates. The money these countries
attracted was invested in real-estate scams and crony capitalist venture.
The average decline in these markets in 1997 was some 50%. Many individual
stocks -- such as the leading bank in Thailand, Krung Thai Bank, in which
Vic had invested -- went down 99%. So much for the free lunch in emerging markets.
is one excuse Vic can make for his proneness to be victimized by scams: It
runs in the family. His great-grandfather, who delivered fruit by horse and
carriage to wealthy customers on the Upper East Side of Manhattan in the
early 20th century, once fell for a Manhattan version of the Eiffel Tower
con. Two businessmen from the “Grand Central Development Authority”
approached him with a top-secret proposition. The management of Grand
Central Terminal, they said, had decided to close the building's central
information booth. Why take up all that valuable floor space when the
ticket agents could answer questions? If the Niederhoffers would deposit
$25,000 in cash with them, the space was theirs. The family managed to come
up with the finder’s fee, but before things went any further, the crooks
found a pair of brothers who agreed to an even higher price for the chance
to peddle fruit at Grand Central.
day after handing over $100,000 in cash, the brothers showed up at the
booth to start building shelves. The flabbergasted clerks told them there
was no such thing as the Grand Central Development Authority -- and the
cops showed them the door.
‘Net to You, Doctor’
always happens when the Specs come up with an idea, our readers have the
best elaborations, based on their specific knowledge of time and place. A
trader friend of ours, Scott Barrie, notes:
The best clue that a stock is ripe for shorting is when your broker
calls you with a hot stock tip, informing you that you can purchase this wonderful
company sans commissions! Usually this is a tip-off that the brokerage has
a large inventory of it that they wish to part with.
broker in the Midwest expresses with inimitable style the skepticism that
all investors should have toward such offers:
The guys in the office used to call those "Net to you,
Doctor" deals. Doctors and lawyers were the worst investors, always
thinking primarily about the fee. Doctors paid little attention to whatever
the investment was, and lawyers always thought they were being screwed in
some way -- and the "Net to you, Doctor" (or “Counselor”)
secondary or new offerings or the hideous bond funds, etc., made them
extremely happy. “You don't pay me -- the issuer pays me” was music to
their moronic ears, and they bought, figuring they were so smart. They had
sidestepped the nasty commission, and bought -- largely -- junk.
commission to you,” says our veteran broker friend, Tim Melvin of
Baltimore, is one of the oldest and most effective lines in the brokerage
business. “Retail investors are suckers for commission-free deals,” Melvin
said. “This technique shows up in the peddling of Nasdaq stocks and
secondary preferred stocks, one of the more frequent showings in today’s
markets. All too often, these preferred stocks are bought at the offer and
then marked up as a principal trade -- perfectly legal, but less than open.
The investor is paying the bid/ask spread plus a bump that doesn’t show on
the confirmation. He feels he got a cost-free deal; in reality he paid a vig
(or fee) of 5% to 6%.”
Bankrupt companies, ruined traders
apparent free lunch in the market is the company that admits its assets are
not enough to pay off its liabilities, yet still carries a stock price
above zero. When a company files for Chapter 11 bankruptcy protection,
trading in the stock is often immediately halted and only reopens when the
market makers figure out best how to take advantage of the millions of sell
orders that flood the gates. The fact that a bankrupt stock is reopened at
all gives the market makers and specialists one last chance to buy low and
sell high, confirming the notion that even shorting a company worth nothing
is the quickest way to ruin.
Altucher, of Subway Capital, a reformed addict of shorting bankrupt companies,
pointed out the following recent, large-scale bankruptcies that lined the
pockets of the professionals and took one more chunk out of the
Recent Chapter 11 filings
of Chapter 11 filing
after halt lifted
after halt lifted
F.A.O. Schwartz (FAOOQ,
UAL Corp. (UAL,
wonder how a real broker sees things from his side of the phone line?
Michael Lewis’ “Liar’s Poker” and the movie “Boiler Room” didn’t have the
half of it. This week, a broker spills the beans on our Web
site. Read what your “market consultant” really thinks.
write to us with your own stories of cons in life and markets. We'll send
the good ones a cane. Those who e-mail us with comments, augmentations and
critiques will receive our workout of how the up open is a con.
If you’re looking for more information on scams
no end of sites on or about investment and consumer fraud scams. MSN Search lists some 39,000 sites on
stock scams alone. We found a number of interesting sites on the topic. The
links to these sites are under Related Web sites at left. Here’s a
Stock Scams 101
site lists 10 top investor scams, including the pump-and-dump and
short-and-distort, and tells how to spot investment con games. It also
explains techniques promoters use, gives the lowdown on off-exchange
foreign currency speculations, prime bank investments and affinity frauds,
offers tips for online investing and explains how to tell if investment
newsletters are biased. There’s also a section on penny stocks vs. saving
Nigerian fraud e-mail gallery
less than 421 versions of Nigerian con letters are reproduced here.
U.S. Secret Service Nigerian Advance Fee Fraud page
U.S. Secret Service says Americans lose hundreds of millions of dollars
each year to Nigerian advance fee scams.
Internet Fraud Complaint Center
Internet Fraud Complaint Center (IFCC) is a partnership between the Federal
Bureau of Investigation (FBI) and the National White Collar Crime Center
(NW3C). You can report fraud complaints and check news. It also has a
useful tips section. It also has a separate page on Nigerian mail scans.