Pump and dump
Pump and Dump is a scheme, most often used by scammers, to artificially inflate the price of a stock in order to gain profits.
It usually involves two types of investors:
The first type of investor is called a "pumper" - a person or group of people who attempt to manipulate the stock market by spreading false information or rumors about a company's stock in order to get other investors to buy the stock and drive up the price. This can also be done by buying large amounts of the stock in order to make it seem like there is a buying spree.
The second type of investor involved in pump and dump schemes are those who benefit from the rising stock price before selling it at a higher price. These investors are called "dumps" or "dumpers". They take advantage of the pumpers by buying the stock at a lower price and then quickly selling it at a much higher price once the pumpers have driven up the price.
The classic form of pump and dump works like this - the pumper (often part of a circle of co-conspirators) will pick a target stock that they believe has potential for a rapid price increase. The group will then start buying the stock in large amounts thus driving up the price in order to attract attention from other investors and trigger a buying frenzy.
Once the market is abuzz with news about the targeted stock, the conspirators will then start to dump their shares, while the unsuspecting investors are still buying them at the artificially high price. This creates an artificial bubble which is quickly burst as the stock price goes back to its original level and the perpetrators reap the profits.
Yes, pump and dump schemes are illegal in the United States as well as in many other countries. The U.S. Securities and Exchange Commission (SEC) has strict laws and regulations against this type of market manipulation and any investors found to be participating are subject to civil and criminal prosecution.
The major risk of pump and dump schemes is that unsuspecting investors may get burned when the price collapses after the dumping phase. In the worst-case scenario, victims can lose their entire investment. Therefore, it’s important to do your homework before investing in any company and only invest in companies that you understand and believe in.
The best way to avoid getting caught up in pump and dump schemes is to be aware of some of the telltale signs. Be aware of promoters touting stocks that appear too good to be true, do your own research before investing in any company, and always stay updated with the latest financial news and trends. Additionally, avoid investing large sums of money in penny stocks, as they are often the favorite target for pump and dump promoters.
In any case, it's always best to rely on research and long-term investing principles in order to develop a successful investing plan. Checking a stock's prospectus or fundamentals is a good starting point when it comes to researching an investment. Lastly, if you have any doubts about an investment, it's best to avoid it altogether.
Probably the most famous case of a pump and dump is depicted in the movie "The Wolf of Wall Street", based on the real-life story of Jordan Belfort. Belfort was a stockbroker who manipulated penny stocks and misled investors by creating an artificial buying frenzy then selling his own shares at a huge profit.
Another famous pump and dump scheme was carried out by Sam Israel III, which resulted in defrauding investors of over $400 million. Israel and his accomplices spread false information about Allied Automotive Group in order to lure investors and make a profit.
Another more recent case of pump and dump occurred in March 2020, when the SEC announced that it had shut down a 27 million cryptocurrency scam. The perpetrators had created fake press releases, websites, and social media accounts to persuade investors to purchase cryptocurrency through them. The SEC lawsuit eventually revealed that the defendants had made \3.7 million from the scam.