SEC & FINRA Warn About Spam

Today, the Securities and Exchange Commission (the “SEC”) and the Financial Industry Regulatory Authority (“FINRA”) issued a warning to the public about the dramatic increase in spam email being used in “pump-and-dump” stock schemes.

The SEC investor alert entitled Inbox Alert – Don’t Trade on Pump-And-Dump Stock E-mails reflects a steep rise in spam e-mail linked to “pump-and-dump” stock fraud schemes. False claims may also be distributed using spam to social media channels such as Facebook and Twitter as well as on stock message bulletin board postings and chat rooms.

According to Lori Schock, Director of the SEC’s Office of Investor Education and Advocacy, the best response to investment spam is to hit delete.

About Spam

Spam is unsolicited information-usually cast in the form of an advertisement-that is sent to a large number of recipients electronically. Spam may take the form of an email or a series of message board postings. The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003(the “CAN-SPAM Act”) addresses commercial email, which is defined as “any electronic mail message the primary purpose of which is the commercial advertisement or promotion of a commercial product or service.”

Spam is one of the most effective illegal methods used by stock promoters to promote high risk investments such as penny stocks. Almost all stock spam is illegal because it violates federal securities laws or the CAN-SPAM Act. As regulation has increased, spammers have become more sophisticated, able to avoid detection by using remotely hijacked computers-often located in places like China or Russia-to disseminate millions of emails with the click of a mouse.

Often spam emails concerning pump-and-dump schemes contain unsupoorted predictions of returns and prospects, bogus price predictions and other statements designed to trick investor into purchasing a security. The scammers behind these types of scams often profit by selling their shares after the price of a security is “pumped” up from bogus spam campaigns.

Many of these spam campaigns are untraceable and are generated from outside the U.S., making enforcement of anti-spam laws difficult. While the spammers are able to hide themselves well, the issuers subject to these spam campaigns may become targets of Securities and Exchange Commission (“SEC”) enforcement actions, usually in the form of trading suspensions. Their stock may also be declared ineligible for electronic trading by the Depository Trust Company (“DTC”).

Spam Regulations

The CAN-SPAM Act regulates commercial email messages and requires unsolicited commercial email messages to be labeled as advertisements or solicitation. CAN-SPAM also bans false or misleading email headers and subject lines. It requires as well that commercial email advertisers provide recipients with the option of blocking future messages from the sender by opting out. In addition, any email sent must contain the sender’s valid physical postal address.

State Laws Impacting Spam

Many states have laws prohibiting unsolicited commercial email and false or misleading routing information. Some also prohibit the distribution of software designed to falsify routing information. In addition, many states also require that the spam identify the sender and explain how to opt out of getting more spam from that sender.

SEC Enforcement

Section 17(b) of the Securities Act of 1933, as amended (the “1933 Act”), requires publications that promote a stock to disclose the identity of the person or entity that paid for the promotion and the amount and type of the payment. The SEC has brought enforcement cases involving the use of spam emails, primarily involving pump-and-dump schemes in which insiders or stock touts dump shares into their own pump, as their victims-the public-continue to buy. Selling as you promote is known as “scalping,” and is illegal. Touted stocks are usually quoted on the OTCMarkets quotation service.

Fraudulent spam campaigns frequently feature:

♦ False or no disclosure of the identity of the publisher of the spam and the compensation received for publishing the spam;

♦ Improper revenue predictions;

♦ False statements concerning the filing or effectiveness of an SEC registration statement;

♦ False statements concerning funding of the issuer by a large investor or hedge fund;

♦ Fabricated or exaggerated assets;

♦ Promises of spectacular returns or gains;

♦ Price targets or predictions;

♦ Rumors of future news such as “inside” or “confidential information,” an “upcoming favorable research report,” a “prospective merger or acquisition,” or the announcement of a “dynamic new product”;

♦ Fabricated or exaggerated opportunities;

♦ Language designed to create a sense of urgency to invest;

♦ Promises or guarantees that investors will not lose money on the particular investment being touted; and

♦ Unusually high yields or returns on a dividend or interest-paying security.

Issuers should avoid engaging any investor relations provider that uses spam to provide its services. Additionally, in order to comply with Section 17(b), issuers should ensure that any materials promoting its securities contain proper disclosure of the identity of the publisher, as well as of the compensation paid.


The CAN-SPAM Act requires the following with respect to commercial email:

♦ Identification of the sender of the email;

♦ Subject lines of the email must accurately reflect the email’s content and not be misleading;

♦ The email message must be identified as an advertisement;

♦ The sender must disclose his location by including a physical address;

♦ The email must include an opt-out feature, with clear instructions for use; and

♦ Opt-out requests must be honored within 10 days of the request; the sender cannot sell or transfer an email address once a recipient has opted-out.

It can be difficult for small companies to attract new investors, and some issuers may see a promotion as an attractive option. They should, however, think twice about engaging a promoter. The law of unintended consequences can be harsh. Unscrupulous touts can turn a hoped-for advertising campaign into a pump-and-dump scheme, with disastrous results for the company. A stock that’s been pumped-and-dumped may sink to historic lows by the time the campaign is over, and it may never fully recover. If management sees no alternative to hiring a promoter, it must make very sure that no SEC regulations are broken, either by itself or by the promoters, or there could be more trouble down the road.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 201 South
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855

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