Investment Scams and Ethics (2006 Oct)

by Barry A. Liebling

Within the torrent of unsolicited, anonymous, worthless e-mails that floods the internet is the stock tip investment scam. In September 2006 Evgeny Morozov published a column at that examined how the stunt works and what keeps it going.

An e-mail is broadcasted – essentially a high-tech variant of the old pump-and-dump scheme – which says that the price of an inexpensive microcap stock is on the verge of skyrocketing. It urges the reader to buy the stock immediately to realize huge profits. Usually the communication is not signed or is attributed to an unknown analyst. The scam artist already has holdings in the stock and is hoping that enough people will act on the e-mail to push the price up – whereupon he quickly sells his shares. Apparently, the trick works often enough to attract many rascals into the field.

There is no controversy regarding the moral status of the investment scammer. He is up to no good as he attempts to trick unwise investors with obviously fake assertions. The Morozov column asks the question “what should we do about them?”, and the answer may be that private condemnation and shunning is enough.

While the scammer is acting atrociously and deserves to be ostracized, his antics do not sink to the level of a con artist who tries to wheedle money or personal information from his victims. The scoundrel’s performance is equivalent to entering a public park and shouting out insistent, unjustified, arbitrary investment advice. Listeners have no valid reason to consider his ravings seriously, and nearly all will ignore him. What makes the e-mail technique pay off – where the public park does not – is that the internet enables the scammer to contact many thousands of people easily. Thus, if only a tiny proportion of recipients comply, the con artist can achieve his goals.

Take note that the person who sends the preposterous e-mail is not the only moral agent in the drama. Consider those who respond to the scam. They can be divided into two groups – those who know what is going on and those who do not.

Some responders to investment scams know precisely what is behind it. They understand that someone is attempting to inflate the price of a stock so he can sell his shares for more than they are worth. They reckon that they can take advantage of the scam – buy the shares quickly before the price balloons and cash out before it collapses. Essentially, they are speculators trying to turn their knowledge of scam artists to their advantage. They would not send the e-mail themselves, but they believe that the e-mail will temporarily increase the price of the stock and they attempt to profit from this. Of course, these speculators are taking a substantial risk and can lose money. The scammer’s e-mail might not push the price of the stock up. Alternatively, speculators might not act quickly enough to benefit from the spike.

A speculator who responds to a scammer’s e-mail may well be acting in an acceptable manner. He is not making false claims or attempting to fool anyone. Consistent with the role of a speculator, he is formulating his investment tactics on estimates of how other investors will behave.

Now consider responders who do not have a clue that the e-mail is an investment scam. They receive the message, take the advice, and buy shares of the touted microcap. Are these individuals innocent victims or are they culpable? What possible excuse could they have for their ignorance?

In many cases people who succumb to the stock tip investment scam are guilty of gross dishonesty. It is not that they are trying to deceive others, but – more fundamentally – they are purposely evading reality. Being an investor – as in any business activity – requires examining the facts and discerning the difference between what is true and what is not. While no person is infallible, and errors are inevitable, everyone has the responsibility to strive to see things as they are.

Anyone who has the capability of purchasing and selling securities also should be competent at spotting advice that is obviously phony. Why move on a recommendation with no basis that comes from someone you know nothing about? Gullibility at this level is likely to be deliberate – deciding to discount the facts of reality in favor of wishes and fantasies.

And even as an originator of a scam deserves scorn, a participant who willfully refuses to see the truth is guilty of an ethical breach. There is no loophole. Acting honestly applies to everyone.

*** See other entries at in “Monthly Columns.” ***

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