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What is a ‘pump-and-dump’ scheme?

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Securities fraud is an umbrella term that includes various financial crimes such as Ponzi schemes, pyramid schemes and other fraudulent activities. One fairly common type of securities fraud is known as a “pump and dump” scheme. This type of fraud can be difficult for investors to detect until it is too late. It can also be hard to track down the perpetrators and secure justice after committing the crime.

Misrepresentation is the root of many types of securities fraud

In most types of securities fraud, a person or business makes misrepresentations about their business to deceive investors into handing over their money. For instance, in a Ponzi scheme, the perpetrator attracts investors with the promise of high rates of return on their investment while concealing the fact that the money paid out is simply coming from other investors instead of from any legitimate profit.

The perpetrator of a pump and dump scheme attracts investors by using what appears to be third parties’ words. For instance, they may post in Internet chat rooms, claiming to be someone with inside knowledge about a business opportunity. They spread false information about a stock, making it look attractive to investors. The aim is to increase the value of these stocks – “pumping” up their value. Once the stock reaches a certain price, the perpetrator sells their shares – “dumping” them before the fraud is discovered.

In the past, pump and dump schemes often took place over the phone, with perpetrators calling individual investors with what they said were hot stock tips. Today, these schemes take place mostly online, and they have been given new life with the growing popularity of cryptocurrency.

Justice can be obtained

A certain amount of puffery can be expected when someone is trying to sell an investment, but when that crosses a line into securities fraud, it is important that justice be done. Defrauded investors can seek out help from an attorney with experience in securities fraud.