Pump And Dump

By Kathleen Adams

The frenzied growth of investing via the Internet has spawned a more virulent kind of stock manipulation where, in a matter of minutes someone can drive up a stock price, reap the profits and run. The SEC's recent complaint against Douglas Colt highlights an old scam called pump and dump.

1 Finding a stock

The perpetrator searches for a vulnerable stock that is thinly traded, little known and cheap. Among Colt's picks was American Education Corp., trading at around $1 a share.

2 Buying cheap

On March 5, 1999, Colt started buying the stock at 10:47 a.m. and continued until 2:19 p.m., amassing 19,000 shares and driving up the price

3 The pump

Colt first hypes the stock on various Internet message boards before naming it favorite pick on his own bogus stock-selection website, Fast-Trades.com

4 The sheep follow

The price skyrockets. By 2:45 p.m., when Colt posts the stock on Fast-Trade, 100,000 shares had been traded. In half an hour it rises to an intraday high of $10

5 The dump

Having earlier entered a sell-limit order of $6.50 a share, Colt quickly sells his stock and rakes in more than $41,000. His friends and family also profit

6 The plunge

By day's end the stock had dropped to $3.25 a share, stinging many investors. In a week it was back above a dollar, inspiring Colt to "laugh all the way to the bank."

How to protect yourself

The SEC offers tips for investors at www.sec.gov/consumer/offertip.htm Also ask three important questions:

--Is the stock legitimate? To find out. check the SEC's EDGAR database and with your state securities regulator www.nasaa.org

--Who's behind the pitch? Make sure the seller is licensed in your state

--Is it too good to be true? Then it probably is. Remember, just because it's on the Web doesn't mean it's legitimate