Miami Investment & Fraud Attorneys
305.372.9700
1 SE 3rd Ave # 1200
SunTrust International Center
Miami, Florida 33131

The Pump-and-Dump: How False Tips Move Money from Your Pocket to Someone Else’s

As investment waters grow murkier and financial planning more specialized in today’s economy, securities fraud is increasingly common and complicated. What is an example of a typical securities fraud setup? The pump-and-dump is a common example, a fraudulent method of manipulating the price of a stock. It’s often carried out through the internet, focuses on small-cap or low-value investments, and is aimed at novice investors looking for some smart investment tips.

How the Pump-and-Dump Works

First, fraudsters select an investment product that they plan to use as fodder for their scheme. The target investment product is usually a low-cost investment, for example, a stock with a low price, typically a little-known product or industry to avoid unnecessary scrutiny. Particularly popular selections for pump-and-dump plans are stocks considered “pink sheet” companies, whose capital is too low or whose investors are too few to require the business to file financial records with the Securities Exchange Commission. The chosen investment product also may have spotty financials, a history of losses, or have become publicly traded through a reverse merger instead of by “going public” the way a corporation typically would. Once the fraudsters have selected a product, they buy a large block of shares, usually for pennies.

Then, the fraudsters begin hyping the investment product. If there is more than one participant in the fraud, the perpetrators may trade the product back and forth to each other to increase trading volume and make demand appear higher than it actually is. Often, the fraudsters use internet investment discussion forums, emails, listserv mailings, or other methods to tout the investment product. All of the positive information about the product encourages investors who use email investment tips and internet forums in making their financial decisions to invest in the product.

The new investors in the “pumped” investment product cause the price to increase even more, exponentially boosting the fraudsters’ initial cost. Fraudsters rely on the investors, who are often poorly informed, to continue spreading the positive press about the investment product in order to keep pumping up the pricing.

Finally, when the value of the investment product is high enough, say $5 or $10 per shares, the fraudsters sell or “dump” all of their shares into the market, making a huge profit for themselves. When the fraudsters stop hyping up the investment product, it sends the price plummeting and causing fooled investors to lose their capital.

More Help

If you have been the victim of securities fraud through a pump-and-dump scheme or some other unsavory investment plan, consider seeking legal advice. It may be possible to recover all or part of your losses. You can contact an experienced investment and financial attorney at Carlson & Associates, P.A. in Miami at 1-305-372-9700 today for a consultation.

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