Business Case: The Hack, Pump, and Dump Scheme¹

Criminals have discovered yet another way to steal money. They are combining phishing attacks, Trojan horses, and keyloggers to steal identities for use in investment fraud. The scheme works like this. Hackers first gain the personal information of legitimate investors, including names, account numbers, passwords, and PINs. These criminals then hack into the accounts of unsuspecting investors, selling off their holdings in various companies to purchase shares in penny stocks. As they buy the penny stocks, the share price increases. (A penny stock is a low-priced, speculative stock of a small company.) After a short time, the hackers sell the penny stocks for a profit and transfer the money to offshore accounts.

Aleksey Karmardin, for example, used this scheme 14 times to defraud investors of more than $80,000. He and his accomplices allegedly hacked into four legitimate online trading accounts, sold their holdings, and purchased shares in a penny stock. The stocks price went from 26 cents to 80 cents in less than one day. The hackers promptly sold the shares and moved the profits to an offshore account.

The fraud affects not only investors but also companies whose stocks are pumped and then dumped. One firm (Firm X) had its stock price go from 88 cents to $1.28 in one day. The following day, the stock fell to 13 cents, where it remained. TD Ameritrade, an online broker, restricted online trade on the companys stock. The companys owner had planned to make a large acquisition, but given the declining stock price canceled the purchase.

¹Source: Rainer, R. & Turban, E. (2009). Introduction to Information Systems: Supporting and Transforming Business (2nd edition). John Wiley & Sons: Hoboken, NJ

Question 1

Your Task

TD Ameritrade found out you were taking SRA 365 this semester and would like to capitalize on your high quality services! Ameritrade believes that variations in stock prices can help to determine whether or not the company is being pumped and dumped. You have been tasked with developing models that would flag suspicious trading patterns. This is a difficult task because stock prices fluctuate frequently throughout the day.

After evaluating the patterns in the stock prices of three companies you determine that their means and standard deviations (SD) are as follows:

Company Means and Standard Deviation

Mean SD Firm A 1.01 0.66 Firm B 1.1 0.79

Calculate the z-score to determine the probability that the stock price for Firm A will fall below a penny (i.e., $0.01). NOTE: Please round your final answer to 2 decimal places.

Question 2

Use the space below to show your work for the calculations done in the previous question.

Question 3

While doing your calculations, Ameritrade has asked that you keep their most recent policy in mind. Ameritrade has instituted a policy in which firms with prices within ~68% of the normal distribution of scores are ignored, outside ~68% (but within ~95%) of the normal distribution of scores are monitored, and outside ~95% of the normal distribution of scores are restricted. This policy is based on the most recent fraudulent activities that took place at Firm X.

Provide the cutoff values you would use to ignore, monitor, or restrict trade for Firm A based on the recent policy implemented by Ameritrade. Use the numeric values in the following graphic as a guide.

HINT: You will need to use the means and SDs from the previous table and the 68-95-99 rule to create these cutoffs.

Question 4

Given your calculations in the previous question, state the decision you would make (i.e., ignore, monitor, or restrict trade) if the stock price for Firm A changed to each of the three values presented below.

a) $1.00

b) $2.10

c) $0.85

Question 5

Calculate the z-score to determine the probability that the stock price for Firm B will fall below a penny (i.e., $0.01).

NOTE: Please round your final answer to 2 decimal places and use the space below to show your work for the calculations you've done to arrive at your answer.

Question 6

Using the zscore tables and the zscores you calculated above for Firms A and B, determine the probability that the stock price for Firm A or Firm B will fall below a penny.

NOTE: Please state your answer as a percent (e.g., X.XX%). Be sure to describe how you determined this combined probability in the space provided below.