The Art of the Pump and Dump

Representing Investors throughout the United States.

How does the "pump and dump" scheme work?

First, there is a glowing press release about a company, usually on its financial health, some new product, invention, patent or substantial contract that will greatly enhance the business or prospects of the company

Then, allegedly unbiased newsletters magically appear that tout the company as the most recent "hot" stock. Messages in financial chat rooms and bulletin board postings will urge you to buy the stock quickly before the price "takes-off" or to sell it before the price goes down. Sometimes, you may even hear the company mentioned on sponsored radio or television programs.

Unsuspecting investors then begin purchasing the stock as if they are involved in an old time "California Land Rush." Obviously, this causes the price of the stock to sky rocket, thereby "pumping" up the price of the stock. While this is happening, the fraudsters begin selling their stock. Once they had sold all their shares, they stop hyping the stock and the price e plummets and the innocent investors suffer substantial, if not, total loss of their investment.

Fraudsters frequently use this ploy with small, thinly traded companies because it is easier to manipulate a stock when there is little or no information available about the company. The type of companies that are most often used are generally described as "micro cap" or "penny stock" companies. To learn more about the general characteristics of these companies follow the link, " micro caps."

How can I attempt to protect myself?

The first thing that can be done is to steer clear of "penny stock" issues. While some investors in these types of companies do make money, the question that must be answered is the risk worth the potential for gain?

Note: Over the years, I have consulted with clients who, knowing some of the risks associated with "penny stocks," still deal in them anyway solely because they have "play" money. To them it is a hobby. So what if they win or loose. However, if they become addicted to the game, it ends up like gambling in Las Vegas, the winnings at the end of the day are usually given back to the house.

How do you protect yourself?

  • Don't believe the hype
  • Find out where the stock trades
  • Independently verify the claims being made
  • Research the opportunity
  • Beware of high-pressure pitches
  • Always be skeptical
  • Don't get involved in the bait and switch

A practical example of how these scams work

The fraudsters create shell companies whose penny stock (worth less than $5 a share) is traded on the OTC Bulletin Board (not on the more widely known New York Stock Exchange or NASDAQ). They secretly issued most of the shares to themselves in fictitious names, then touted their companies' stock through false statements in press releases, electronic bulletin board postings, online newsletters, and the like.

Unsuspecting investors then purchase the highly-touted stock-driving or "pumping" up the price. Then, the fraudsters "dump," or sell, their stock for thousands or millions of dollars, causing the stock to plummet and innocent investors to lose their shirts.

Contact Us

With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.