Pump And Dump
   HOME

TheInfoList



OR:

Pump and dump (P&D) is a form of
securities fraud Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information.stock Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the Share (finance), shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporatio ...
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 A cryptocurrency (colloquially crypto) is a digital currency designed to work through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. Individual coin ownership records ...
and very small corporations/companies, i.e. " microcaps". While fraudsters in the past relied on cold calls, the
Internet The Internet (or internet) is the Global network, global system of interconnected computer networks that uses the Internet protocol suite (TCP/IP) to communicate between networks and devices. It is a internetworking, network of networks ...
now offers a cheaper and easier way of reaching large numbers of potential investors through
spam email Email spam, also referred to as junk email, spam mail, or simply spam, refers to unsolicited messages sent in bulk via email. The term originates from a Monty Python sketch, where the name of a canned meat product, "Spam," is used repetitively, m ...
, investment research websites,
social media Social media are interactive technologies that facilitate the Content creation, creation, information exchange, sharing and news aggregator, aggregation of Content (media), content (such as ideas, interests, and other forms of expression) amongs ...
, and misinformation.


Scenarios

Pump-and-dump schemes do take place on the Internet using an
email spam Email spam, also referred to as junk email, spam mail, or simply spam, refers to unsolicited messages sent in bulk via email. The term originates from a Spam (Monty Python), Monty Python sketch, where the name of a canned meat product, "Spam (food ...
campaign, through media channels via a fake press release, or through
telemarketing Telemarketing (sometimes known as inside sales, or telesales in the UK and Ireland) is a method of direct marketing in which a salesperson solicits prospective customers to buy products, subscriptions or services, either over the phone or throu ...
from " boiler room" brokerage houses (such as that dramatized in the 2000 film '' Boiler Room''). Often the
stock promoter A stock promoter is a firm or person who promotes a stock, seeking to induce potential investors to buy it as part of an IPO or in the secondary market. Stock promoters may rely on cold calling prospective investors to acquire stock in a company ...
will claim to have "inside" information about impending news. Newsletters would purport to offer unbiased recommendations, then
tout A tout is any person who solicits business or employment in a persistent and annoying manner (generally equivalent to a '' solicitor'' or '' barker'' in American English, or a '' spruiker'' in Australian English). An example would be a person w ...
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 In economics, demand is the quantity of a goods, good that consumers are willing and able to purchase at various prices during a given time. In economics "demand" for a commodity is not the same thing as "desire" for it. It refers to both the desi ...
, price, and
trading volume In capital markets, volume, or trading volume, is the amount (total number) of a security (or a given set of securities, or an entire market) that was traded during a given period of time. In the context of a single stock trading on a stock exchan ...
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 stock Penny stocks are common shares of small public companies that trade for less than five dollars per share. The U.S. Securities and Exchange Commission (SEC) uses the term "penny stock" to refer to a security, a financial instrument which repr ...
s", generally traded
over-the-counter Over-the-counter (OTC) drugs are medicines sold directly to a consumer without a requirement for a prescription from a healthcare professional, as opposed to prescription drugs, which may be supplied only to consumers possessing a valid pres ...
(in the United States, this would mean markets such as the
OTC Bulletin Board The OTC (Over-The-Counter) Bulletin Board or OTCBB was a United States Financial quote, quotation medium operated by the Financial Industry Regulatory Authority (FINRA) for its subscribing members. FINRA closed the OTCBB on November 8, 2021. The ...
or the Pink Sheets), rather than markets such as the
New York Stock Exchange The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District, Manhattan, Financial District of Lower Manhattan in New York City. It is the List of stock exchanges, largest stock excha ...
(NYSE) or
NASDAQ The Nasdaq Stock Market (; National Association of Securities Dealers Automated Quotations) is an American stock exchange based in New York City. It is the most active stock trading venue in the U.S. by volume, and ranked second on the list ...
—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 exchange A cryptocurrency exchange, or a digital currency exchange (DCE), is a business that allows customers to trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money or other digital currencies. Exchanges may acce ...
s.


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 Jordan Ross Belfort (; born July 9, 1962) is an American former stockbroker, financial criminal, and businessman who pleaded guilty to fraud and related crimes in connection with stock-market manipulation and running a boiler room as part of ...
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 The Academy Awards, commonly known as the Oscars, are awards for artistic and technical merit in film. They are presented annually by the Academy of Motion Picture Arts and Sciences (AMPAS) in the United States in recognition of excellence ...
–nominated film of the same name.


Jonathan Lebed

During the
dot-com bubble The dot-com bubble (or dot-com boom) was a stock market bubble that ballooned during the late-1990s and peaked on Friday, March 10, 2000. This period of market growth coincided with the widespread adoption of the World Wide Web and the Interne ...
, 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 The United States Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street crash of 1929. Its primary purpose is to enforce laws against market m ...
(SEC), which filed a
civil suit A lawsuit is a proceeding by one or more parties (the plaintiff or claimant) against one or more parties (the defendant) in a civil court of law. The archaic term "suit in law" is found in only a small number of laws still in effect today. T ...
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 Yahoo (, styled yahoo''!'' in its logo) is an American web portal that provides the search engine Yahoo Search and related services including My Yahoo, Yahoo Mail, Yahoo News, Yahoo Finance, Yahoo Sports, y!entertainment, yahoo!life, an ...
board dedicated to Enron revealed predictive messages that it was akin to a
house of cards A house of cards (also known as a card tower or card castle) is a structure created by stacking playing cards on top of each other, often in the shape of a pyramid. "House of cards" is also an expression that dates back to 1645 meaning a struc ...
, 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 AIM (formerly the Alternative Investment Market) is a sub-market of the London Stock Exchange that was launched on 19 June 1995 as a replacement to the previous Unlisted Securities Market, Unlisted Securities Market (USM) that had been in opera ...
, part of the
London Stock Exchange The London Stock Exchange (LSE) is a stock exchange based in London, England. the total market value of all companies trading on the LSE stood at US$3.42 trillion. Its current premises are situated in Paternoster Square close to St Paul's Cath ...
. 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 An offshore bank is a bank that is operated and regulated under international banking license (often called offshore license), which usually prohibits the bank from establishing any business activities in the jurisdiction of establishment. Due to ...
, 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 Yale University is a Private university, private Ivy League research university in New Haven, Connecticut, United States. Founded in 1701, Yale is the List of Colonial Colleges, third-oldest institution of higher education in the United Stat ...
, which in turn led to the 2019 college admissions bribery scandal. In February 2019, Tobin pled guilty to
conspiracy A conspiracy, also known as a plot, ploy, or scheme, is a secret plan or agreement between people (called conspirers or conspirators) for an unlawful or harmful purpose, such as murder, treason, or corruption, especially with a political motivat ...
and
securities fraud Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information.forfeiture.


Cryptocurrency

Being an unregulated market, and due to the concentration of a large amount of
cryptocurrency A cryptocurrency (colloquially crypto) is a digital currency designed to work through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. Individual coin ownership record ...
in a small number of hands, the prices of many cryptocurrencies are sensitive to pump-and-dump schemes. There are organised pump-and-dump schemes run through social media platforms including
Telegram Telegraphy is the long-distance transmission of messages where the sender uses symbolic codes, known to the recipient, rather than a physical exchange of an object bearing the message. Thus flag semaphore is a method of telegraphy, whereas pi ...
and
Discord Discord is an instant messaging and Voice over IP, VoIP social platform which allows communication through Voice over IP, voice calls, Videotelephony, video calls, text messaging, and digital media, media. Communication can be private or take ...
.


Spam

Pump-and-dump stock scams are prevalent in
spam Spam most often refers to: * Spam (food), a consumer brand product of canned processed pork of the Hormel Foods Corporation * Spamming, unsolicited or undesired electronic messages ** Email spam, unsolicited, undesired, or illegal email messages ...
, accounting for about 15% of spam e-mail messages. A survey of 75,000 unsolicited emails sent between January 2004 and July 2005 concluded that spammers could make an average return of 4.29% by using this method, while recipients who act on the spam message typically lose close to 5.5% of their investment within two days. A study by Böhme and Holz shows a similar effect. Stocks targeted by spam are almost always penny stocks, selling for less than $5 per share, not traded on major exchanges, thinly traded, and difficult or impossible to
sell short In finance, being short in an asset means investing in such a way that the investor will profit if the market value of the asset falls. This is the opposite of the more common long position, where the investor will profit if the market value ...
. Spammers acquire stock before sending the messages and sell the day the message is sent.


Comparison with other types of schemes

A pump-and-dump scam is a type of
economic bubble An economy is an area of the Production (economics), production, Distribution (economics), distribution and trade, as well as Consumption (economics), consumption of Goods (economics), goods and Service (economics), services. In general, it is ...
, with the main difference between this scheme and most other types of bubbles being that the pump-and-dump bubble is deliberately perpetrated by unlawful activity. A pump-and-dump scheme is similar in many ways to a
Ponzi scheme A Ponzi scheme (, ) is a form of fraud that lures investors and pays Profit (accounting), profits to earlier investors with Funding, funds from more recent investors. Named after Italians, Italian confidence artist Charles Ponzi, this type of s ...
(in that both types of scam use misrepresentations in an effort to enrich the promoters and/or initial investors with money from later investors), however, there are a number of differences between the schemes: * Ponzi-type investments are privately traded, often between individuals who are known to one another, whereas pump-and-dump schemes are typically marketed to the general public and traded on public stock exchanges and the victims and perpetrators are not acquainted with each other. * Ponzi schemes typically promise very specific returns on investments and/or include falsified records implying consistent and steady returns, whereas pump-and-dump schemes only come with general and/or implied promises of substantial profits. * Ponzi schemes typically come with the expectation of profit over a relatively extended period and typically last for months, years or even decades before their inevitable collapse. By comparison, pump-and-dump scams are designed to make profits extremely quickly and are executed over weeks, days or even hours. * Ponzi schemes are occasionally the result of investment vehicles that are originally intended to be legitimate but ultimately fail to perform as expected. By comparison, pump-and-dump schemes are invariably intended to be scams from their conception, although a fairly common tactic used by pump-and-dump schemers is to take over a once-legitimate business (one that is either failing or defunct), or even just its name, in order to pump and dump its stock. * For all of the above reasons, Ponzi schemes tend to leave a far more extensive trail of
evidence Evidence for a proposition is what supports the proposition. It is usually understood as an indication that the proposition is truth, true. The exact definition and role of evidence vary across different fields. In epistemology, evidence is what J ...
. They are typically much easier to prosecute after they are discovered, and often result in much stiffer criminal penalties. Pump-and-dump scams differ from many other forms of spam (such as advance fee fraud emails and lottery scam messages) in that it does not require the recipient to contact the spammer to collect supposed "winnings", or to transfer money from supposed bank accounts. This makes tracking the source of pump-and-dump spam difficult, and has also given rise to "minimalist" spam consisting of a small untraceable image file containing a picture of a stock symbol.


Scalping and social media

One variation of the pump-and-dump scam is known as "scalping." In a
scalping Scalping is the act of cutting or tearing a part of the human scalp, with hair attached, from the head, and generally occurred in warfare with the scalp being a trophy. Scalp-taking is considered part of the broader cultural practice of the taki ...
scheme, a stock promoter takes a position in a stock and then touts the stock without disclosing his or her intent to sell the stock. By recommending the stock (often, but not always, by providing inflated price targets or more generic promises of substantial returns), the promoter convinces others to purchase the stock, providing a temporary rise in share price and volume which allows the "scalper" to then sell his shares on unsuspecting investors and obtain a profit. Scalping scams are frequently effectuated through social media (e.g., Twitter), and may lead to both criminal and civil liability in the United States. Like other pump-and-dump schemes, scalping scams frequently target microcap stocks because their low volume allows relatively small purchase volumes to cause significant spikes in the share price. Given the rise of social media, scalping scams have become a significant focus of regulators in the United States in recent years.


Short and distort

Another variant of the pump-and-dump scam, the " short and distort" works in the opposite manner. Instead of first buying the stock, and then artificially raising its price before selling, in a "short and distort" the scammer first short-sells the stock, and then artificially ''lowers'' the price, using the same techniques as the pump and dump but using criticism or negative predictions regarding the stock. The scammer then covers their short position when they buy back the stock at a lower price.


Regulation

One method of regulating and restricting pump-and-dump manipulators is to target the category of stocks most often associated with this scheme. To that end, penny stocks have been the target of heightened enforcement efforts. In the United States, regulators have defined a
penny stock Penny stocks are common shares of small public companies that trade for less than five dollars per share. The U.S. Securities and Exchange Commission (SEC) uses the term "penny stock" to refer to a security, a financial instrument which repr ...
as a security that must meet a number of specific standards. The criteria include price,
market capitalization Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders. Market capitalization is equal to the market price per common share multiplied by ...
, and minimum shareholder equity. Securities traded on a national
stock exchange A stock exchange, securities exchange, or bourse is an exchange where stockbrokers and traders can buy and sell securities, such as shares of stock, bonds and other financial instruments. Stock exchanges may also provide facilities for ...
, regardless of price, are exempt from regulatory designation as a penny stock, since it is thought that exchange-traded securities are less vulnerable to manipulation. Therefore,
Citigroup Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services company based in New York City. The company was formed in 1998 by the merger of Citicorp, t ...
(NYSE:C) and other NYSE listed securities which traded below $1.00 during the market downturn of 2008–2009, while properly regarded as "low priced" securities, were not technically "penny stocks". Although penny stock trading in the United States is now primarily controlled through
rules Rule or ruling may refer to: Human activity * The exercise of political or personal control by someone with authority or power * Business rule, a rule pertaining to the structure or behavior internal to a business * School rule, a rule tha ...
and
regulation Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. Fo ...
s enforced by the
Securities and Exchange Commission The United States Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street crash of 1929. Its primary purpose is to enforce laws against market m ...
and the
Financial Industry Regulatory Authority The Financial Industry Regulatory Authority (FINRA) is a private American corporation that acts as a self-regulatory organization (SRO) that regulates member brokerage firms and exchange markets. FINRA is the successor to the National Associati ...
(FINRA), the genesis of this control is found in state securities law. The
State of Georgia Georgia is a state in the Southeastern United States. It borders Tennessee and North Carolina to the north, South Carolina and the Atlantic Ocean to the east, Florida to the south, and Alabama to the west. Of the 50 U.S. states, Georgia i ...
was the first state to codify a comprehensive penny stock securities law. Secretary of State
Max Cleland Joseph Maxwell Cleland (August 24, 1942 – November 9, 2021) was an American politician from Georgia (U.S. state), Georgia. A member of the Democratic Party (United States), Democratic Party, he was a disabled United States Army, U.S. Army vete ...
, whose office enforced state securities laws, was a principal proponent of the legislation. Representative Chesley V. Morton, the only
stockbroker A stockbroker is an individual or company that buys and sells stocks and other investments for a financial market participant in return for a commission, markup, or fee. In most countries they are regulated as a broker or broker-dealer and ...
in the
Georgia General Assembly The Georgia General Assembly is the state legislature of the U.S. state of Georgia. It is bicameral, consisting of the Senate and the House of Representatives. Each of the General Assembly's 236 members serve two-year terms and are directl ...
at the time, was a principal sponsor of the bill in the
Georgia House of Representatives The Georgia House of Representatives is the lower house of the Georgia General Assembly (the state legislature) of the U.S. state of Georgia (U.S. state), Georgia. There are currently 180 elected members. Republican Party (United States), Repu ...
. Georgia's penny stock law was subsequently challenged in court. However, the law was eventually upheld in U.S. District Court, and the
statute A statute is a law or formal written enactment of a legislature. Statutes typically declare, command or prohibit something. Statutes are distinguished from court law and unwritten law (also known as common law) in that they are the expressed wil ...
became the template for laws enacted in other states. Shortly thereafter, both FINRA and the SEC enacted comprehensive revisions of their penny stock regulations. These regulations proved effective in either shuttering or greatly restricting brokers/dealers, such as Blinder, Robinson & Company, which specialized in the penny stocks sector. Meyer Blinder was jailed for securities fraud in 1992, after the collapse of his firm. However, sanctions under these specific regulations lack an effective means to address pump-and-dump schemes perpetrated by unregistered groups and individuals.


In popular culture

The 2000 film '' Boiler Room'' stars Giovanni Ribisi as Seth Davis, a young man who gets a job as a trainee at a small
brokerage firm A broker is a person or entity that arranges transactions between a Purchasing, buyer and a sales, seller. This may be done for a commission (remuneration), commission when the deal is executed. A broker who also acts as a seller or as a buyer b ...
called J.T. Marlin. He finds out that the firm engages in pump-and-dump schemes, selling stocks for fake or defunct companies.


References


Further reading

* * Sergey Perminov, ''Trendocracy and Stock Market Manipulations'' 2008, . *


External links


Pump and dump stock Schemes in 2001
The SEC

The SEC
The movie ''Boiler Room'', a fictional account of a pump and dump company
{{DEFAULTSORT:Pump And Dump Financial regulation Finance fraud Spamming Stock market