FEATURE — I have a book called “100 Years of Wall Street,” which I have found to be very enlightening. I love history because I believe that so many mistakes of the present could be avoided if we would only learn from the past. It is a sad commentary on humanity that we generally choose to keep repeating the same mistakes. I recently had a conversation with a person who lost money to a financial scam, yet the fraud he fell into was well-documented and as old as Wall Street itself.
In the early days of Wall Street, the stock market was unregulated and often treacherous. Shady traders worked out on the corner of Broad Street and Wall Street and would sometimes stir up buying and selling frenzies to benefit themselves, not their customers. Small investors were easily caught up in the excitement and often made hasty and poor decisions. The brokers understood the human emotions of greed and fear and would use them against their own clients.
Some of the smaller traders, known as bucket shops, used client money to manipulate stock prices. These schemes became known as the “Pump and Dump.” In this scam, a stock trader, or a group of them, would buy up shares in a particular stock. They would then spread rumors and “hot tips” about the company. The uninformed public, not wanting to miss out on a good deal, would frantically buy up the shares — the pump.
As the share price rose, more orders would flood in. When the price reached an attractive level, phase two of the scam would kick in — the dump. The original traders would sell their own shares at huge profits, leaving their customers holding the bag as the artificially high stock price collapsed.
Pump-and-dump schemes are still common today, but rather than yelling on the street, traders now use radio, television, social media sites and email. Hardly a week goes by that someone doesn’t call to ask about some great stock they just learned about from a stranger.
These scams are pretty easy to recognize if you just look for a few warning signs. First, they come from a stranger. Right away, ask yourself why a complete stranger is offering you, and a million other strangers, a stock tip. Think of an old prospector who just found a vein of pure gold. Would he run into town and start handing out maps? People who find a hidden treasure like it to stay that way.
Secondly, the offer will stir the emotions of fear or greed. They may mention some great new invention that only a chosen few know about. Or they may warn of dire tragedies about to occur, and then tell how you can be one of the few to be saved. Again, stop and ask yourself, “Why is a stranger telling me this?”
The final warning sign is urgency. They say you must act quickly to obtain a great gain or to avoid a terrible loss. You must act before others find out, even though the same email was already sent to millions of others. Never let yourself be rushed into an investment decision. It is better to miss a rare hot deal than to be suckered by a phony, and costly one.
After receiving another call this week from someone considering one of these offers, I decided it was time to warn people once again. The stranger who is emailing you hot investment ideas is not your friend.
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