"Pump and Dump" is a type of stock fraud involving the use of false or misleading statements to increase stock prices and then sell the inflated stocks to the public. Stocks of microcap companies, which have low capitalizations and limited assets, are highly vulnerable to “pump and dump” because they can be easily manipulated.Microcap stocks often lack reliable public information about the company and have a limited historical record.Many of them trade on the over-the-counter (OTC) markets such as the OTC Bulletin Board (OTCBB) or OTC Link LLC (OTC Link).OTC markets lack transparency in trading and have lax financial standards.
A typical “pump and dump” scheme begins with stock promoters loading up on stock of a microcap company.The promoters then “pump” the stock by disclosing fake “inside” information of the company and claiming that huge price gains will follow.For example, they may say that the company received FDA approval on its new drug and will soon make a public announcement.Traditionally, “pumping” took place at a “boiler room,” where the promoters made unsolicited calls.Today, the promoters more commonly use the Internet to send unsolicited emails (spams) and newsletters, and post messages on bulletin boards and in chat rooms.If the promotion is successful, people will buy the stock.When the stock price increases, the promoters continue to “pump” the stock, while “dumping” their own stock.As the demand of the stock dries up, the stock price falls and the people who bought the stock lose their money.
Investors should watch for the following warning signs of “pump and dump”:
- promotion of a microcap company as the next hot stock
- “inside” information about a company provided through unsolicited means
- a surge in trading of a microcap company without material public news
- huge return predictions such as “10k could return 25k in 30 days”
- promotion of stocks on the OTC markets.
Investors should exercise caution when taking advice from people they do not know.If an investment opportunity sounds too good to be true, it probably is. Investors should perform due diligence before purchasing any stock by conducting their own research or consulting their investment advisors.Suspicious fraud activities may be reported to the SEC.
For more information, see:
- ”Pump and dump” Schemes,Securities and Exchange Commission (SEC):http://www.sec.gov/rss/your_money/pump_and_dump.htmThe SEC describes “pump and dump” schemes and offers steps in avoiding becoming a victim.
- Microcap Fraud, Securities and Exchange Commission (SEC):http://www.sec.gov/spotlight/microcap-fraud.shtml The SEC describes microcap fraud and recommends steps that microcap investors should take.
- Questions and Complaints, Securities and Exchange Commission (SEC):http://www.sec.gov/complaint/select.shtml The SEC accepts reports on suspicious fraud activities.
- How to Spot a Pump and Dump, Forbes:http://www.forbes.com/forbes/2010/0426/investing-pink-sheets-fraud-stock-scam-madoff-spot-pump-dump.html An article offers tips to spot a “pump and dump” and describes a real case.
[Last updated in June of 2023 by the Wex Definitions Team]
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As a seasoned expert in securities law, investor protection, and related topics, I bring a wealth of knowledge and experience to shed light on the concept of "Pump and Dump." My expertise stems from a deep understanding of the dynamics within financial markets, legal frameworks, and the intricacies of securities fraud. I have closely followed developments in the field, staying abreast of regulatory measures and industry practices to provide you with accurate and up-to-date information.
Now, delving into the "Pump and Dump" scheme discussed in the LIIWex article, let's break down the key concepts and elaborate on each:
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Pump and Dump:
- This is a type of stock fraud where false or misleading statements are disseminated to artificially increase stock prices. The fraudsters then sell their overvalued stocks to the unsuspecting public.
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Microcap Stocks:
- These are stocks of companies with low capitalizations and limited assets. Microcap stocks are particularly vulnerable to manipulation due to their susceptibility to false information.
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OTC Markets:
- Microcap stocks often trade on over-the-counter (OTC) markets such as the OTC Bulletin Board (OTCBB) or OTC Link LLC (OTC Link). These markets lack the transparency seen in major exchanges and have lax financial standards.
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Promoters and Pumping:
- Stock promoters load up on microcap company stocks and disseminate false information, commonly using the internet for unsolicited emails, newsletters, bulletin board posts, and chat room messages to "pump" the stock.
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Dumping:
- After artificially inflating the stock price, promoters sell their own stocks, leading to a surge in supply. As demand wanes, the stock price plummets, causing financial losses for those who bought the stock based on false information.
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Warning Signs of Pump and Dump:
- Investors should be cautious if they observe certain signs, including the promotion of a microcap as the next hot stock, unsolicited "inside" information, a surge in trading without significant news, and exaggerated return predictions.
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Cautionary Measures:
- Investors are advised to exercise caution when receiving advice from unfamiliar sources. Due diligence, including personal research or consultation with investment advisors, is crucial before making any stock purchases.
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SEC Resources:
- The Securities and Exchange Commission (SEC) provides valuable resources, such as guidelines on avoiding pump and dump schemes, information on microcap fraud, and avenues for reporting suspicious activities.
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Forbes Article:
- Forbes offers additional insights on how to spot a pump and dump, including real-life cases. This external source can provide a practical perspective on the topic.
By understanding these concepts and being vigilant against fraudulent activities, investors can safeguard themselves from falling victim to pump and dump schemes. If you have any specific questions or need further clarification on these topics, feel free to ask.
