From September 1999 to February 2000, a 15-year-old made more than $250,000 pumping and dumping penny stocks.
It was the largest financial frauds of its time, especially given that the perpetrator wasn't even old enough to drive. The man, Jonathan Lebed, is possibly still at it today, depending on who you ask. And he's not alone.
The anatomy of a pump and dump
The pump and dump scheme is simple. Find a stock that trades cheaply, ideally with normally light volume, and buy in early. Send out bulk email spam, promotional postcards, and other materials promoting its surefire potential to be the next big winner.
If you reach the right people, enough eager buyers will send the shares flying. That's exactly what happened with Cynk Technology (NASDAQOTH:CYNK), a company with just $39 in cash to its name and only one employee. The company reached its peak price this July, hitting a market cap of $6 billion on the promise to create some sort of social network.
However, the SEC suspended trading in the stock from July 11 to July 24. When it opens, it will likely crater, as demand for shares in an unprofitable, asset-poor company find a more realistic valuation that's closer to $0.
How pumps and dumps have changed
I'm not entirely convinced there are undeserving losers in the modern pump and dump. Virtually everyone with a brokerage account has heard of the scam. And it seems that more and more people are hopping on pumped stocks just to make a quick buck, knowing full well the risk of buying valueless shares.
Case in point: the myriad of websites that serve as databases for stock promoters.
A quick trip through Google led me to StockPromoters.com, which highlights the involvement of at least three different firms in promoting Cynk Technology to their email subscribers. It even shows the date of the promotion, and the change in trading volume following any given promotional email. It's as if the website serves as a "who's who" in promoting terrible stocks to millions of people.
The message seems to be that there's money to be made gambling on the promotional abilities of the worst of the financial world.
On Twitter, I found countless messages from daytraders who note that while Cynk Technology is obviously not worth its valuation, the price could just keep going higher. Many of them have positions. It's completely backward thinking -- buying in the anticipation of someone paying just a penny more per share -- but for some, it seems like a cheap way to gamble.
Who's to blame?
Some want to blame the SEC and FINRA for halting the stock. After all, the regulatory agencies prohibited the stock from going higher, curtailing the profits of early investors who would earn obscene returns from the gullibility of later buyers.
Then again, there has to be at least a few people who were misled into thinking Cynk Technology was actually a top stock pick. If you're one of them, I'd love to hear from you in the comments below. I'm sorry you were duped.
But for those who got in for the sake of riding a scam for all it's worth, I have little sympathy. The stock market isn't a place to gamble -- it isn't a place to double up on those who will certainly lose all they have. The stock market serves as a place to provide permanent capital -- equity capital -- to businesses that offer valuable goods and services to their customers.
Cynk Technology isn't that company. Neither are the hundreds of stocks that a promoted day after day, year after year. Be careful out there, things can blow up in your face. If at any point a disclaimer notes that a promoter was paid to tell you about a stock, you can bet that it is a surefire scam.
Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.