Beware 'Hot' Stock Tips on Your Cell

Editor's Note: The following is an investor alert from NASD originally posted on Dec. 13. It is being republished here with their permission as a service to TheStreet.com's readers.

You get text messaged on your cell phone. You check it -- and it's not from anyone you know. Instead, it's an unsolicited promotion for a low-priced "hot stock." The short message includes a stock symbol and reads: HOT BUY. 200% Profit Mon. 100% IN 2WKS. You've been cell phone spammed!

NASD is issuing this alert because it is aware of numerous instances in which stocks are promoted through cell phone text messaging. With email filtering systems becoming more effective, spammers are now turning to mobile text messages to get their messages out, resulting in significant increases in spam text messaging. (Wireless Services Corporation, which runs the data networks transporting text messages for several wireless carriers in North America, reported that the number of spam text messages more than doubled in the past year, from 18% of traffic in 2003 to 43% of traffic in 2004.)

Unfortunately, spam blockers for text messaging software may not be as effective as email filters. Even worse, cell phone customers may have to pay for the spam text messages they receive.

Be advised that in many cases the people behind these messages are likely to be paid to promote the stock or own some of the stock themselves. They are hoping that you and other investors will buy the stock, creating demand and causing the share price to go up. While you're holding your stock, the fraudsters sell their shares when the price peaks. Before long the stock price falls, and you lose money.

New Tactic, Old Scam

Cell phone text messaging to hype a stock is a wireless-age version of the old "pump and dump" scheme. While the technology has changed, the scam has not. "Pump and dump" schemes involve somebody recommending a company's stock through false and misleading statements (the pump). Misled investors then buy the stock, creating demand for the stock and often causing its price to soar. Fraudsters then sell their shares off (the dump), usually leaving investors with worthless or near worthless stock.