Regulators warn of chat room stock 'pumping'

Canada's securities regulators say Internet chat rooms and bulletin boards are increasingly being used to artificially inflate the prices of thinly-traded stocks a process known as "pumping".

"Buying stocks based on information posted in a chat room is like buying stocks based on a note tacked to a wall outside a grocery store," said Doug Hyndman, chair of the Canadian Securities Administrators.

The CSA says stocks trading over-the-counter on Bulletin Boards are particularly vulnerable.

Chat rooms dedicated to individual stocks can be found on many Canadian and U.S. Web sites, including Stockhouse.ca, Yahoo, Silicon Investor, and Raging Bull.

Users can post opinions about stocks under a cloak of anonymity. Many times, posters will claim inside knowledge about a company's future plans that turns out to be patently false.

The CSA cites two recent cases in Canada. In one, the B.C. Securities Commission looked into a fake posting on Stockhouse.ca that said two companies were about to merge (they weren't).

In the second, Quebec's Securities Commission suspended a former TD Evergreen employee for pumping a stock in a popular Internet chat room for francophones. The poster claimed knowledge of a major positive announcement about to come from a company. No such announcement was imminent.

Many more cases have surfaced in the U.S., including the story of a New Jersey teenager who pumped dozens of penny stocks on chat rooms and bulletin boards, using hundreds of aliases. He made more than $800,000 US.

The CSA released the following guidelines for Internet investors:

• Don't believe everything you read. Remember how easy it is to disguise your identity online. The scams usually involve projects in remote corners of the globe that can't be easily checked out, or use endless technical jargon that can only be debunked by experts.
• Avoid claims of "inside information." Hot tips posted online are seldom, if ever, true. Remember, trading on inside information is illegal in Canada.
• Don't buy thinly- traded, little known stocks based on information from a chat room. These types of securities are easily manipulated. Unlike blue chip stocks, the price of thinly traded, low priced shares can be moved significantly by relatively small trades.
• Don't assume that your online service provider polices its investment bulletin boards. Most don't. The volume of postings often swamp the ones that try. Often there is nothing to stop a con artist from posting one or 100 pitches for a swindle.
• Always take the time to do your own research using reputable information sources. Seek advice from a qualified, independent financial adviser.