Pump & Dump Scheme
What is a Pump & Dump?
In this scheme, fraudsters promote the purchase of a publicly traded stock in order to drive up its price (pump up the market), and then sell it into the artificial market they have created (dump their shares), making a huge profit. Once the promotion ends, investors own a stock that is worth far less than they paid for it.
How Does a Pump & Dump Scheme 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.
The stock is promoted in many ways. The scam artists may use boiler rooms, stock spam, or social media 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 results in the investors owning a nearly worthless, untradeable stock. Sometimes the holders of these stocks are targeted in re-victimization “re-up” or “recovery-room” 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.
- Pressure sales tactics or promotional language such as “get in now before it’s too late”.
- Investments aggressively promoted over the phone, through email, or on websites by unregistered individuals or offshore companies.
- A sudden surge in the buying and selling of a stock that has little or no trading history.