Pump And Dump

Pump and dump (P&D) is a form of securities fraud 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. This is most common with small-cap cryptocurrencies and very small corporations/companies, i.e. " microcaps".

While fraudsters in the past relied on cold calls, the Internet now offers a cheaper and easier way of reaching large numbers of potential investors through spam email, investment research websites, social media, and misinformation.

Scenarios

Pump-and-dump schemes do take place on the Internet using an email spam campaign, through media channels via a fake press release, or through telemarketing from " boiler room" brokerage houses (such as that dramatized in the 2000 film '' Boiler Room''). Often the stock promoter will claim to have "inside" information about impending news. Newsletters would purport to offer unbiased recommendations, then tout a company as a "hot" stock, for their own benefit. Promoters also post messages in online chat groups or internet forums, urging readers to buy the stock quickly.

If a promoter's campaign to "pump" a stock is successful, it will entice unwitting investors to purchase shares of the target company. The increased demand, price, and trading volume of the stock could convince more people to believe the hype and to buy shares as well. When the promoters behind the scheme sell (dump) their shares and stop promoting the stock, the price plummets, and other investors are left holding a stock that is worth significantly less than what they paid for it.

Fraudsters frequently use this ploy with small, thinly traded companies—known as "penny stocks", generally traded over-the-counter (in the United States, this would mean markets such as the OTC Bulletin Board or the Pink Sheets), rather than markets such as the New York Stock Exchange (NYSE) or NASDAQ—because it is easier to manipulate a stock when there is little or no independent information available about the company. The same principle applies in the United Kingdom, where target companies are typically small companies on the AIM or OFEX.

A more modern spin on the attack is known as hack, pump and dump. In this form, a person purchases penny stocks and then uses compromised brokerage accounts to purchase large quantities of that stock. The net result is a price increase, often pushed further by day traders seeing a quick advance in a stock. The original stockholder then cashes out at a premium. Pump-and-dump schemes also permeate the crypto-market, targeting especially low-market-cap, illiquid coins on cryptocurrency exchanges.

Examples

Stratton Oakmont

In the early 1990s, the penny-stock brokerage Stratton Oakmont artificially inflated the price of owned stock through false and misleading positive statements in order to sell the cheaply purchased stock at a higher price. Firm co-founder Jordan Belfort was criminally convicted for applying the scheme. He later turned his story into a memoir, ''The Wolf of Wall Street'', which was later adapted into an Academy Award–nominated film of the same name.

Jonathan Lebed

During the dot-com bubble, when the stock-market fever was at its height and many people spent significant amounts of time on stock Internet message boards, a 15-year-old named Jonathan Lebed allegedly used the Internet to run a successful pump and dump. Lebed bought penny stocks and then promoted them on message boards, pointing at the price increase. Allegedly, when other investors bought the stock, Lebed sold his for a profit, leaving the other investors holding the bag. He came to the attention of the U.S. Securities and Exchange Commission (SEC), which filed a civil suit against him alleging security manipulation. Lebed settled the charges by paying a fraction of his total gains. He neither admitted nor denied wrongdoing, but promised not to manipulate securities in the future.

Enron

As late as April 2001, before Enron collapsed, executives at the company participated in an elaborate pump and dump scheme. Studies of the anonymous messages posted on the Yahoo board dedicated to Enron revealed predictive messages that it was akin to a house of cards, had "fooled even the most sophisticated analysts", and that investors should bail out while the stock was good. After Enron falsely reported profits, which inflated the stock price, they covered the real numbers by using questionable accounting practices. Twenty-nine Enron executives sold overvalued stock for more than a billion dollars before the company went bankrupt.

Park Financial Group and International Media Solutions, LLC

Park Financial Group, Spear & Jackson, and International Media Solutions, LLC were involved in a pump-and-dump scheme where the price per share increased by $14.00 and over 100,000 shares were traded each day, netting Spear & Jackson around $3 million in profits. In 2005, Spear & Jackson and International Media Solutions were fined over $8 million, including its two executive officers, Kermit J. Silva and Yolanda Velazquez, each paying an additional $420,000 out of their personal accounts. On December 5, 2007, Park and the company's president were ordered to pay over $113,000 in fines and penalties.

Langbar International

Started as Crown Corporation, Langbar International was the biggest pump-and-dump fraud on the Alternative Investment Market, part of the London Stock Exchange. The company was at one point valued greater than $1 billion, based on supposed bank deposits in Brazil which did not exist. None of the chief conspirators were convicted, although their whereabouts are known. A patsy who made a negligent false statement about the assets was convicted and banned from being a director. The investors who lost as much as £100 million sued one of the fraudsters and recovered £30 million.

Morrie Tobin

In April 2018, Morrie Tobin and others, using offshore accounts, gained over $165 million from a pump-and-dump scheme. When questioned by federal agents, Tobin told the agents that he was involved in another scheme implicating a soccer coach from Yale University, which in turn led to the 2019 college admissions bribery scandal. In February 2019, Tobin pled guilty to conspiracy and securities fraud

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