Pump and dump
What is a pump and dump?
In this scheme, fraudsters promote the purchase of a publicly traded stock in order to drive up its price (pump it up), and then sell it into the artificial market they have created (dump it), making a huge profit. Once the promotion ends, investors own a stock that is worth far less than they paid for it. This scheme is also sometimes called micro- or small-cap stock fraud because the promotions target small, tightly controlled companies.
How does it work?
To run a successful pump and dump, the promoters must control (usually through associates or family) or own most of the stock of a publicly traded company. Often the company will trade in lightly regulated markets or quotation services, like the Pink Sheets
or the OTC Bulletin Board (OTCBB) in the United States.
The stock is promoted in many ways. The scam artists may use boiler rooms, stock spam, or social media websites to promote the stock to investors all over the world. They may also hire newsletter writers to suggest that the company is a great buy or an unbeatable investment. All of this effort results in a stock price increase, allowing the scam artists to sell at a much higher price than their original purchase price before the market price falls dramatically when the fraudsters stop promoting the company.
In the end, the lack of a market for investors to trade the stock in results in the investors owning a nearly worthless, untradeable stock. Sometimes the holders of these stocks are targeted in re-victimization or “re-up” schemes or by boiler room schemes.
Watch out for one or more of these common characteristics:
- A start-up company with little or no business history being promoted as the next big thing or new ‘break out’ company in its field
- Pressure sales tactics or ‘get in now before it’s too late’ language
- The stock is being promoted over the phone, through e-mail, or on websites by unregistered individuals or offshore companies
- There is a sudden surge in the buying and selling of a stock that has little or no trading history
- Promotional language like ‘limitless demand’ for a product or service, or ‘this stock will explode’, etc.
Research before you invest
Check our Fraud warning signs section to familiarize yourself with the language and techniques found in almost every investment scheme. There are also videos of people who talk about how they had their savings taken by a fraud artist.
Visit our Avoid investment fraud section to learn about techniques and tools you can use to protect yourself against fraudulent investment schemes and their promoters.
Report it and warn others
If you have been approached or know of an investment that fits the description above, contact your provincial securities regulator immediately.
In BC, contact BCSC Inquiries. You can also anonymously report suspicious activity through InvestRight’s Report a scam webpage.
Residents from other Canadian provinces can find contact information for their provincial securities regulator at
www.securities-administrators.ca.
If you know a person who has put money into, or is considering contributing, to an investment like the one described above, give or send them this information, and encourage them to do more research.