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Ever Heard of This Scam?

By JLP | May 18, 2006

I have heard of this scam before but was reminded about it in a book I’m reading. I don’t know if scams like this still happen, but if they do, you need to be aware of them.

Here’s How it Works:

A stockbroker buys a list of 5,000 names. He divides the list in half labeling them Group A and Group B. He then picks a stock (most likely a volatile stock so imagine a tech stock named ConStock) and writes two letters.

The first letter, sent to Group A tells them that Constock is going to increase in value soon. He tells them that he doesn’t want their money. He merely wants to earn their trust. The second letter, send to Group B tells them basically the same thing, except that Constock is going to go down soon.

He’s going to be right on one of those letters.

To the group that received the letter with the correct pick, he splits them half and mails out another round of letters just like the first time, only with a different stock. By the time he gets to the third or fourth round of this little scam, some people are going to think he’s a genius. Those who think he’s a genius will most likely fork over some money for him to invest. BIG MISTAKE!

So, what can people do to protect themselves? Throw all letters of this sort away! Ignore them because this is a scam.

Topics: Investing | 4 Comments »


4 Responses to “Ever Heard of This Scam?”

  1. Andrew Says:
    May 18th, 2006 at 4:51 pm

    I agree with staying away from those letters. I don’t recommend anyone invest with a person they heard about through a letter. You are probably setting yourself up for failure. Never heard of that scam before. Interesting.

  2. Anonymous Says:
    May 19th, 2006 at 2:15 pm

    I’m sure I’ve read a description of it before. It may have been in John Paulos’ book “A Mathematician Plays The Stock Market”, or possibly “Fooled By Randomness” by Nassim Nicholas Taleb. Both are good books whether on not they cover this.

  3. » From Other Blogs » Consumerism Commentary: A Blog About Personal Finance Says:
    May 19th, 2006 at 2:59 pm

    […] Here is what others in the MoneyBlogNetwork (and beyond) have been writing about this week. Free Money Finance says stop talking and start listening to do well in job interviews. JLP at AllFinancialMatters wonders if anyone has heard of this scam involving letters and stocks. Jim from Blueprint for Financial Prosperity points out that appliances with the ability to check online for up-to-the-minute energy prices save their owners money. […]

  4. » Week In Review on Blueprint for Financial Prosperity Says:
    May 20th, 2006 at 6:34 pm

    […] JLP talks about a new scam he read about in a book he was reading. It basically involves a scammer getting a mailing list and sending one half of them a hot tip to sell. He/she then sends a tip to the other half to buy. With the half he’s right with, he does it again and again until they trust him enough to invest money with him. Then BAM! […]

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