A pump-and-dump scheme is a type of securities fraud that involves artificially inflating the price of a security through false and misleading positive statements (pump), in order to sell the cheaply purchased stock at a higher price (dump). Once the operators of the scheme "dump" (sell) their overvalued shares, the price falls and investors lose their money.
Here are the steps involved in a pump-and-dump scheme:
The perpetrators of the scheme acquire a large number of shares of a thinly traded stock.
They then spread false or misleading information about the company, such as rumors of a takeover or positive news about its products or services. This information is often spread through social media, online forums, or email.
The false information causes the stock price to rise, and other investors are attracted to buy the stock.
Once the stock price has risen to a high level, the perpetrators of the scheme sell their shares, making a profit.
The stock price then falls, and the investors who bought the stock at the inflated price lose money.
Pump-and-dump schemes are illegal in most countries. The Securities and Exchange Commission (SEC) in the United States has brought enforcement actions against perpetrators of pump-and-dump schemes, and they can face civil and criminal penalties.
Here are some tips to avoid being a victim of a pump-and-dump scheme:
Do your own research before investing in a stock. Don't rely on information from promoters who are trying to sell you the stock.
Be suspicious of stocks that are rising sharply for no apparent reason.
Don't invest in stocks that are promoted through social media or online forums.
Here are some examples of pump-and-dump schemes:
In 2013, a group of hedge funds were accused of engaging in a pump-and-dump scheme involving the stock of a small pharmaceutical company. The hedge funds allegedly spread false information about the company's drug development pipeline, which caused the stock price to rise. The hedge funds then sold their shares at the inflated price, making a profit.
In 2017, a group of individuals were accused of engaging in a pump-and-dump scheme involving the cryptocurrency Ripple. The individuals allegedly spread false information about Ripple's technology and partnerships, which caused the price of the cryptocurrency to rise. The individuals then sold their Ripple coins at the inflated price, making a profit.
Pump-and-dump schemes can be difficult to detect. If you think you may have been a victim of a pump-and-dump scheme, contact our law firm to discuss your legal rights.