Pump-and-dump scams hit brokerages

SEC says latest wave victimizes 7 online firms, earning fraudsters $732,941 in illicit profits.

By Katie Benner, Fortune reporter

NEW YORK (Fortune) -- Trading has been suspended on 35 stocks that were the subjects of misleading spam e-mail campaigns, the Securities and Exchange Commission said Thursday.

The Commission had previously announced that unknown traders hacked into accounts at seven online brokerage firms, sold off investors' holdings and used the proceeds to pump up the stocks of 15 different companies, some of which currently trade on the Nasdaq.

The brokerages affected include E*Trade (Charts), Scottrade, TD Ameritrade (Charts), Vanguard Brokerage Services, Fidelity Investments, Merrill Lynch (Charts), and Charles Schwab (Charts).

"We ordered the suspension because of serious questions about the accuracy of the information about these companies... For investors who succumb, there is no fast money," SEC Chairman Christopher Cox said. "When spam clogs our mailboxes, it's annoying. When it rips off investors, it's illegal and destructive."

Cox estimated that 5.2 billion stock-pumping e-mails are sent a year, and demonstrated that shady stocks have rallied as much as 152 percent in a single day following a flurry of bullish e-mails.

The "pump and dump" scheme announced Wednesday generated at least $732,941 in illicit profits for the unknown traders and cost brokerages some $2 million in losses, according to the SEC. The SEC's announcement Thursday marks the third enforcement action filed in as many months involving online account break-ins and market manipulation.

Regulators won an emergency court order to freeze profits held in a Latvian-based bank's trading account that was used to conduct the hi-tech crimes, the SEC said. One or more offshore sub-account holders used the JSC Parex Bank account.

"Using sophisticated computer hacking and identity theft techniques to break into the accounts of innocent online brokerage customers, these perpetrators effectively cut out the middleman of the old fashioned pump-and-dump scheme, eliminating phony stock promotions, creating their own artificial trading demand, and consummating their frauds in as little time as a couple of hours," John Reed Stark, SEC Office of Internet Enforcement chief, said in a statement.

The SEC believes that since December 2005 one or more foreign traders purchased shares in 15 thinly traded companies using the JSC Parex Bank sub-accounts.

They then hacked into online brokerage accounts, sold off existing holdings and used the money to artificially boost prices in the following stocks, the SEC said: Remote Dynamics, DepoMed, Orchid Cellmark, Repligen, Dura Automotive Systems, Valentis, WTS Dime Bankcorp, Bluefly, Netwolves Corp, Integrated Alarm Services Group, I-Many, Tapestry Pharmaceuticals, Onvia, BriteSmile, and Netguru, which was acquired by BPO Management Services at the end of 2006.

The commission has had its hands full with a string of illegal insider trading scandals that broke at the beginning of the month.

The first scandal, announced March 1, involved eight Wall Street professionals, a Morgan Stanley (Charts) attorney, two broker-dealers, a day-trading firm, and three hedge funds.

A tipster from UBS (Charts) allegedly leaked upgrade and downgrade reports so that friends and colleagues could buy and sell ahead of the market-moving news. The Morgan Stanley attorney leaked information about upcoming acquisitions involving the firm's investment banking clients, according to the SEC.

Four of the defendants have pleaded guilty to conspiracy, securities fraud and commercial bribery charges.

On March 2, the SEC said that a group of unknown investors were trading on insider knowledge ahead of TXU's announcement of a $31.8 billion buyout led by private equity heavyweight Kohlberg Kravis Roberts.


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