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Pump and dump: A common market manipulation scam

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Perhaps it’s only natural that salespeople talk up the value of the goods or services they are selling. After all, they want to make a sale. To some extent, the buyer knows to expect some exaggeration from a salesperson, and takes this into account when deciding whether to go through with the purchase.

That said, there are times when sellers go beyond simple exaggeration when they’re trying to make a sale. Sometimes they lie about what they’re selling to defraud another person into buying something.

Sometimes they go to elaborate lengths to fool the buyer.

Pump-and-dump schemes

In securities trading, many fraudulent schemes revolve around the idea of manipulating the market for a stock. Some of these scams are known as pump-and-dump schemes, and they can become quite complicated.

A pump-and-dump scheme consists of an effort to fool people into thinking an investment is more valuable than it is. For instance, the fraudsters spread a false rumor that stock in a small company is about to rise astronomically. Investors seek to buy the stock while its share price is still low, and so they make a quick purchase.

Other investors see that people are buying the stock, so they buy it too. Soon the share price rises. The fraudsters wait for the price to hit a certain level and then sell their shares.

Sometimes the rumor-mongering aspect of pump-and-dump schemes consists of simply lying to people’s faces. In other cases, it can be more elaborate. Sometimes the fraudsters post anonymous or pseudonymous comments about the investment on Internet chatrooms, hoping to lure investors.

In at least one case, the fraudsters went so far as to leave messages about an investment in other people’s voicemail systems. The messages were made to appear as if they were hot tips for someone else, left in error. The intended targets, thinking they were getting an unexpected hot tip, eagerly purchased shares of the investment, driving up the price. By the time they learned they had been tricked, the fraudsters had long since sold their shares and run off with their profits.

Justice can be sought

The SEC and other government organizations investigate and prosecute individuals and groups that engage in pump-and-dump schemes and other types of securities fraud. The defendants can face stiff fines, jail time, and other penalties if convicted.

While these criminal penalties are important for the cause of justice and discouraging fraud, they don’t necessarily help the people who lost their money. A skilled attorney can help victims of fraud understand their option for getting money back after they have been victims of a crime.