Pump and dump
Pump and dump (P&D) is a form of securities fraud that involves artificially inflating the price of an owned stock 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[1] and very small corporations/companies, i.e. "microcaps".[2]
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.[2][3]
Scenarios
Pump-and-dump schemes may 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).[4] Often the stock promoter will claim to have "inside" information about impending news. Newsletters may purport to offer unbiased recommendations, then tout a company as a "hot" stock, for their own benefit. Promoters may also post messages in online chat groups or internet forums, urging readers to buy the stock quickly.[2]
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
Fraudsters frequently use this ploy with small, thinly traded companies—known as "
A more modern spin on this attack is known as hack, pump and dump.[6] 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, which is often pushed further by day traders seeing a quick advance in a stock. The original stockholder then cashes out at a premium.[7] Pump-and-dump schemes also permeate the crypto-market, targeting especially low-market-cap, illiquid coins on cryptocurrency exchanges.[8][1]
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.[9] Firm co-founder Jordan Belfort was criminally convicted for his role in 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
Enron
As late as April 2001, before the
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.[14][15]
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.[16] The investors who lost as much as £100 million sued one of the fraudsters and recovered £30 million.[17]
Morrie Tobin
In April 2018,
Cryptocurrency
Being an unregulated market, and due to the concentration of a large amount of
Scam
Pump-and-dump stock
Comparison with other types of schemes
A pump-and-dump scam is a type of economic bubble, 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 (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 that 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 of time 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 a period of 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 employed 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. They are typically much easier to prosecute after they are discovered, and often result in much stiffer criminal penalties.
Pump-and-dump scams differs from many other forms of spam (such as
Scalping and social media
One variation of the pump-and-dump scam is known as "scalping." In a scalping 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.[30][31] 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.[32][33] 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.[34] Given the rise of social media, scalping scams have become a significant focus of regulators in the United States in recent years.[30][35]
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.[36]
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
The
References
- ^ ISBN 978-1-939133-06-9.
- ^ a b c "Pump and Dump Schemes". U.S. Securities and Exchange Commission.
- ^ "Wake Up and Smell the Pump-and-Dump". Finra.org. Financial Industry Regulatory Authority.
- ^ NBC News staff & news wires (2012-10-24). "The $400 million buyout hoax that fooled many - Business on". NBC News. Retrieved 2012-12-18.
- ^ "Pump&Dump.con: Tips for Avoiding Stock Scams on the Internet". U.S. Securities and Exchange Commission. January 11, 2005.
- ^ Nakashima, Ellen (2007-01-26). "Hack, Pump and Dump". The Washington Post.
- ISBN 978-1-4414-6363-0.
- S2CID 218628772.
- ^ Mulligan, Thomas S. (April 17, 1997). "Investor Wins $10 Million in Penny-Stock Broker Case". Los Angeles Times. Retrieved 11 January 2015.
- ^ Lewis, Michael (February 25, 2001). "Jonathan Lebed: Stock Manipulator, S.E.C. Nemesis – and 15". The New York Times.
- ^ Enron: The Smartest Guys in the Room (DVD). Magnolia Pictures. January 17, 2006. Event occurs at 32:58.
- ^ Morgenson, Gretchen (2002-04-28). "The Bears on This Message Board Had Enron Pegged". The New York Times. Retrieved 2010-04-25.
- ^ Chambers, Dan. "Enron the Symptom, Not the Disease". publici.ucimc.org. Archived from the original on 2006-06-22. Retrieved 2010-04-25.
- ^ "Administrative Proceedings: Park Financial Group, Inc. and Gordon C. Cantley" (PDF). U.S. Securities and Exchange Commission. April 11, 2007. Retrieved June 12, 2019.
- ^ "Administrative Proceeding: Park Financial Group, Inc. and Gordon C. Cantley" (PDF). U.S. Securities and Exchange Commission. December 5, 2007. Retrieved June 12, 2019.
- ^ Bowers, Simon (24 June 2011). "Langbar International: the greatest stock market heist of all?". The Guardian.
- ^ El1te. "Langbar International - Verified AIM Fraud".
{{cite web}}
: CS1 maint: numeric names: authors list (link) - ^ "SEC Charges Four in Fraudulent Microcap Manipulation Scheme Orchestrated Through International Accounts". U.S. Securities and Exchange Commission. November 28, 2018. Retrieved June 12, 2019.
- ^ Rubin, Joel; Ormseth, Matthew; Hussain, Suhauna; Winton, Richard (March 31, 2019). "The bizarre story of the L.A. dad who exposed the college admissions scandal". Los Angeles Times. Retrieved June 12, 2019.
- ^ Caswell, Mike (June 7, 2019). "SEC defendant Tobin ordered to forfeit $4M (U.S.)". Stock Watch. Retrieved June 12, 2019.
- ^ "SLO/WBNB real-time on-chain dex data". coinmarketcap.com. Retrieved 2023-02-24.
- ^ "What Are Crypto Whales and Can They Manipulate Prices?". Make Use Of. 2022-02-21. Retrieved 2022-11-13.
- ^ "Level of cryptocurrency scams 'unprecedented in modern markets'". Yahoo! Finance. 13 August 2020. Retrieved 2021-02-07.
- ^ "Crypto Pump And Dumps Aim Small Amid Speculative Trading Frenzy". Bloomberg.com. 2021-02-02. Retrieved 2021-02-07.
- ^ Martineau, Paris. "Inside the group chats where people pump and dump cryptocurrency". The Outline. Retrieved 2021-02-07.
- SSRN 920553.)
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(help)CS1 maint: multiple names: authors list (link - ^ "Spammers manipulate stock markets". BBC News. 25 August 2006.
- S2CID 12236853. Retrieved 27 September 2018.
- ^ Hanke, Michael; Hauser, Florian. "On the Effects of Stock Spam E-mails∗" (PDF). EBS Universitat. Archived from the original (PDF) on 2016-03-05. Retrieved 27 September 2018.
- ^ a b "Michael M. Beck, a/K/A @BigMoneyMike6, and Relief Defendant Helen P. Robinson (Release No. LR-25325; Feb. 7, 2022)".
- ^ "Press Release: SEC Charges Operator of Stock Picking Website with Secretly Profiting in Investment Scam; 2006-128; August 1, 2006".
- ^ "SEC Charges Penny Stock "Mailman" With Scalping Investors In Gold Mining Stocks". SEC.gov. 2018-03-09. Retrieved 2022-08-30.
- ^ "Stock Trader Arrested and Charged with Securities Fraud for Using His Twitter Account to Operate a Pump-And-Dump Scheme". 26 October 2021.
- ^ "To the Moon or to the Jail? Social Media Stock Promoters Are Back in the Government's Crosshairs".
- ^ "Accused stock scalper 'Alex DeLarge' was arrested and kicked off of Twitter — now users are asking: Who's next?". 28 October 2021.
- ^ Glasner, Joanna (2002-06-03). "New Market Trend: Short, Distort". Wired. Condé Nast Digital. Archived from the original on May 10, 2009. Retrieved February 11, 2010.
- ^ "SECURITIES AND EXCHANGE COMMISSION" (PDF). sec.gov.
- ^ "SEC Charges Eight Participants in Penny Stock Manipulation Ring". U.S. Securities and Exchange Commission. May 21, 2009.
- ^ Stan Darden (March 20, 1990). "Georgia to OK Tough Law for Penny Stocks". Los Angeles Times. United Press International.
- ^ "Georgia Secretary of State | Securities". Sos.ga.gov. Retrieved 2012-12-18.
- ^ "GEORGIA LAW WON'T HURT BROKERS, JUDGE RULES". Deseret News. July 11, 1990.
- ^ Diana B. Henriques (February 16, 2003). "Penny-Stock Fraud, From Both Sides Now". The New York Times.
Further reading
- Krinklebine, Karlos (2009). Hacking Wall Street: Attacks and Countermeasures. US: Darkwave Press. p. 402. ISBN 978-1-4414-6363-0.
- Sergey Perminov, Trendocracy and Stock Market Manipulations 2008, ISBN 978-1-4357-5244-3.
- Tillman, Robert H.; Indergaard, Michael L. (2005). Pump and Dump: The Rancid Rules of the New Economy. Rutgers University Press. ISBN 0-8135-3680-4.