Trading Halted For 35 Firms Over E-Mails

By Carrie Johnson
Washington Post Staff Writer
Friday, March 9, 2007

Securities regulators yesterday halted trading in nearly three dozen companies -- the initial salvo in "Operation Spamalot," a campaign to block e-mails promoting stocks to unsuspecting investors.

The crackdown against investment spam amounts to the biggest such action in the history of the Securities and Exchange Commission. Shareholders lost tens of millions of dollars in the past year by biting on fraudulent Internet offers to "ride the bull" or win "fast money" by buying thinly traded stocks, agency officials said. They continue to investigate whether the spam emanated from third-party stock promoters, corporate insiders or both.

Some of the hyped messages found their way to the e-mail accounts of SEC enforcement lawyers as they spent weeks tracing the alleged scams and their origins. Authorities said the decision to halt trading at 35 penny-stock companies, including a California business that provides computer security services, is merely the first step in a systematic effort to root out the people who sent misleading stock promotions and others who profited from them.

"When spam clogs our in-boxes, it's annoying," SEC Chairman Christopher Cox told reporters. "When it rips off investors, it's illegal and destructive."

Americans face at least 100 million spam e-mails hyping stocks each week, and the number continues to rise steadily, said Oxford University law professor Jonathan Zittrain, who has researched the issue. The unsolicited messages work by encouraging people to invest in a stock, driving up the price and trading volume in the days following the solicitations, only to plummet after the culprits have sold their shares at a profit.

Pump-and-dump schemes date to Wall Street's early days, but the Internet has transformed the dark, smoky boiler rooms filled with fraudsters making phone calls to unsuspecting investors into an easier, cheaper way to reach potential marks with the click of a button, said SEC enforcement chief Linda Chatman Thomsen. Publicly traded companies must tell the truth about their operations and have a reasonable basis for making positive statements, she added.

One of the e-mails investigators released yesterday promoted the "huge news expected out on APPM, get in before the wire." Trading volume on Dec. 18, 2006, the first weekday after the e-mail launch, rose nearly 140-fold, to 484,568 from 3,500 shares, and the stock price rose to 19 cents per share from 6 cents. Less than two weeks later, the stock of Apparel Manufacturing Associates, of Bloomfield, Conn., slid back to 10 cents per share.

Stock trading in each of the companies, including CTR Investments & Consulting of Pasadena, Md., will be halted for at least 10 days, according to the terms of an emergency order that regulators sought yesterday. Authorities said that "questions have arisen regarding the adequacy and accuracy of press releases concerning the company's operations," according to the order.

Jerry Janik, chief executive of CTR, said in a telephone interview that word of the stop in trading came as a surprise. The company, which sells such things as online visitor sign-in books, was the target of a vigorous e-mail spam campaign last year. Janik said he later issued a news release disavowing the messages and portraying the company as a victim of the spam attack.

Janik disavowed any connection to the offending e-mails and said the trading shutdown was already causing problems. "This is going to cause me some heartache. It raises eyebrows, which we don't need," he said.

Mark K. Schonfeld, director of the SEC's New York office, which launched the initiative, said that the potential damage to investors outweighed the inconvenience of the trading halt to companies that were targeted by spam.

Each of the stocks at issue trades on the "pink sheets," a stock quote service that is more lightly policed than the New York Stock Exchange or the Nasdaq Stock Market. Pink sheet companies are not required to file financial reports with regulators, and brokers do not have to perform due diligence on them, unlike with other markets.

To make their case, lawyers in the SEC's New York office have since last fall tracked hundreds of spam messages and uncovered phony claims about patents, acquisitions and inflated assets. Bruce Karpati, an SEC assistant regional director, said he and other lawyers received electronic investment hype about Goldmark Industries, one of the companies whose trading was stopped yesterday, in their agency in-boxes.

Officials selected the 35 companies because they were the subject of repeated spam initiatives or particularly egregious claims about their operations or financial performance. Schonfeld said regulators are trying to assess whether a ring of stock promoters might be responsible for multiple spam messages involving different companies and whether executives at some of the companies may have played a role in the hype.

At least some of the spam originated outside the United States. Regulators thanked the Royal Canadian Mounted Police and the Ontario Securities Commission, among other international authorities, for their help at the news conference.

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