The pump and dump may be described as a manipulative scheme designed to boost a stock price through fraudulent recommendations. The recommendations are based on misleading, false or greatly exaggerated claims. The perpetrators of this illegal scheme are already invested in the stock and are planning to sell their positions once the hype has increased the share price.
Understanding the pump and dump
Once the stock price is pumped up from the buying frenzy, the promoters dump the stock for a profit. After the perpetrators sell their positions and stop artificially pumping the stock, the price drops, and investors lose their money. False and misleading information about a company’s stock price may be disseminated through investment research websites, social media, email newsletters, and online advertisements, among others. Microcaps are especially susceptible since publicly available information about smaller companies is often limited.
Illegal pump and dump schemes
Perpetrators of a pump and dump scheme are violating securities laws and may be subjected to heavy fines from the Securities and Exchange Commission. In addition to the small cap stocks on over-the-counter exchanges, the cryptocurrency industry has become a coveted target for pump and dump schemers. Stocks with low volume and limited information are ripe for this type of unlawful scheme. The price action induces more buying, and the promoter sells for a profit before the buying drops off.
Avoiding the pump and dump
According to the FBI, social media platforms like LinkedIn have now become a hotbed for fraudsters targeting working professionals with investment schemes. The SEC advises investors to be wary of unsolicited investment offers, obvious red flags like guaranteed returns and affinity fraud, where perpetrators attempt to conflate an investment scheme with a group you’re affiliated with, like a religious organization.
