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ROBERT SIEGEL, Host:

You may be familiar with the kind of spam - as in junk email - that showers you with stock tips. Well it turns out that those messages are a way to make money. Maybe not for you, the spamee, but for the spammer.

Laura Frieder of Purdue University and Jonathan Zittrain of Oxford University conducted a study of spam emails that tout penny stocks. And Professor Frieder, we're talking about penny stocks. Not stocks that are traded on the New York Stock Exchange or the American Stock Exchange?

LAURA FRIEDER: Yes, that's correct. The stocks that we look at are traded on the Pink Sheets, which is a quotation service that collects and publishes Market Maker Quotes.

SIEGEL: And what did you find about the relationship between the stock being spammed, messages saying buy this stock, it's great, and what happened to the value of the stock?

FRIEDER: We find that after a stock is spammed, on the day of the spam, that the stock price rises and volume increases tremendously. However subsequently, the day after or in the next few days, the stock price falls.

One of the reasons we believe that spammers are sending spam is because many of the Pink Sheet securities are relatively illiquid or thinly traded, and that can often make it very difficult for a spammer to release or to liquidate his position.

And so, if he spams, he can generate interest and trading activity or volume and then that makes it relatively easier for him to liquidate his position.

SIEGEL: You mean he can find someone whom he can unload his stock to by doing that?

FRIEDER: Exactly.

SIEGEL: Well, let's say he does that. You start out and the stock is spammed. How much of an increase might the stock experience in that one day when it goes up?

FRIEDER: We find on average that there's an increase of about five percent, 4.9 percent. And for those that are spammed the most frequently, this increase can be as high as six percent.

SIEGEL: Now overnight, that's a pretty good increase on your investment.

FRIEDER: It is a good increase, however it's not without risk. Lots of these stocks are extremely volatile and illiquid, which makes them difficult to sell. So the spammer does run the risk that no one is going to buy into his email.

SIEGEL: So, what happens to the spammees who buy the stock and then have it after that one-day increase?

FRIEDER: So we find on average that the spamee, the person who buys the stock on that day, in the next two days he's losing about 7 percent. And the part that to me is amazing about this is that there are disclosures on the bottom of the spam email, not on all of them but on some of them, that say the spammer might be in some way connected with the company or might already own shares.

SIEGEL: That's a disclosure that in a sense says I have my hand in your pocket right now.

FRIEDER: Exactly.

SIEGEL: And those people still go ahead and buy the stock in some cases?

FRIEDER: That's correct.

SIEGEL: But it sounds like a classic pump and dump operation, where you do something to pump up the value of the stock and then sell it right away. Is it illegal?

FRIEDER: So, for markets that are examined by the SEC, it is illegal to manipulate markets. However Pink Sheets is not an SEC-registered stock exchange.

SIEGEL: So people are operating in the Wild West of investment here when they're doing this?

FRIEDER: It appears so.

SIEGEL: That's Laura Frieder, assistant professor of management and finance at Purdue University. Professor Frieder, thank you very much for talking with us today.

FRIEDER: Thank you.

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