Pump and dump: Wikis

  
  

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"Pump and dump" is a form of microcap stock fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price. Once the operators of the scheme "dump" their overvalued shares, the price falls and investors lose their money. Stocks that are the subject of pump-and-dump schemes are sometimes called "chop stocks". [1]

While fraudsters in the past relied on cold calls, the Internet now offers a cheaper and easier way of reaching large numbers of potential investors.[1]

Pump and dump scenarios

Pump and dump schemes tend to take place either on the Internet including e-mail spam campaigns or through telemarketing from "boiler room" brokerage houses (for example, see Boiler Room). Often the stock promoter will claim to have "inside" information about impending news. Newsletters that purport to offer unbiased recommendations then tout the company as a "hot" stock. Messages in chat rooms and email spam urge readers to buy the stock quickly.[1]

Unwitting investors then purchase the stock, creating high demand and raising the price. When the people behind the scheme sell their shares and stop promoting the stock, the price plummets, and other investors are left holding stock that is worth significantly less than what they paid for it.

Fraudsters frequently use this ploy with small, thinly traded companies—known as "penny stocks," generally traded over-the-counter (in the United States, this would mean markets such as the OTC Bulletin Board or the Pink Sheets), rather than markets such as the New York Stock Exchange or NASDAQ—because it is easier to manipulate a stock when there is little or no independent information available about the company.[2] The same principle applies in the United Kingdom, where target companies are typically small companies on the AIM or OFEX.

Specific examples

Jonathan Lebed

During the dot-com era, when stock market fever was at its height and many people spent significant amounts of time on stock Internet message boards, a 15-year-old named Jonathan Lebed showed how easy it was to use the Internet to run a successful pump-and-dump. Lebed bought penny stocks and then promoted them on message boards, pointing at the price increase. When other investors bought the stock, Lebed sold his for a profit, leaving the other investors holding the bag. He came to the attention of the U.S. Securities and Exchange Commission (SEC), which filed a civil suit against him alleging security manipulation. As is commonly the case in SEC actions, Lebed settled the charges by paying a fraction of his total gains. He neither admitted nor denied wrongdoing, but promised not to manipulate securities in the future.[3]

Park Financial Group

In April 2007, the SEC brought charges against Park Financial Group as a result of an investigation into a pump and dump scheme during 2002-2003 of the Pink Sheet listed stock of Spear & Jackson Inc.[4]

Pump and dump spam

Pump and dump stock scams are prevalent in spam, accounting for about 15% of spam e-mail messages. A survey of 75,000 unsolicited emails sent between January 2004 and July 2005 concluded that spammers could make a return of 6% by using this method, while recipients who act on the spam message typically lose 5% of their investment within two days.[5] A study by Böhme and Holz[6] shows a similar effect. Stocks targeted by spam are almost always "penny stocks", selling for less than $5 per share, not traded on major exchanges, are thinly traded, and are difficult or impossible to sell short. Spammers acquire stock before sending the messages, and sell the day the message is sent.[7]

Pump and dump differs from many other forms of spam (such as advance fee fraud emails and lottery scam messages) in that it does not require the recipient to contact the spammer to collect supposed "winnings," or to transfer money from supposed bank accounts. This makes tracking the source of pump and dump spam difficult, and has also given rise to "minimalist" spam consisting of a small untraceable image file containing a picture of a stock symbol.[citation needed]

Short and distort

A variant of the pump and dump scam, the "short and distort" works in the opposite manner. Instead of first buying the stock, and then artificially raising its price before selling, in a "short and distort" the scammer first short-sells the stock, and then artificially lowers the price, using the same techniques as the pump and dump. The scammer then buys back the stock at the lower price.[8]

References

  1. ^ a b c "Pump and Dump Schemes," Securities and Exchange Commission
  2. ^ http://www.sec.gov/investor/pubs/pump.htm
  3. ^ NYTimes
  4. ^ Wall Street Journal, April 12, 2007, pg. C2
  5. ^ Frieder, Laura and Zittrain, Jonathan, "Spam Works: Evidence from Stock Touts and Corresponding Market Activity" (March 14, 2007). Berkman Center Research Publication No. 2006-11. Results of this study are also discussed in a BBC article
  6. ^ The Effect of Stock Spam on Financial Markets, 2006
  7. ^ (Hanke and Hauser, 2006)
  8. ^ Glasner, Joanna. "TNew Market Trend: Short, Distort". Wired. Condé Nast Digital. Archived from the original on February 11, 2010. http://www.webcitation.org/5nSEkhdBd. Retrieved February 11, 2010. 

Further reading

  • Robert H. Tillman and Michael L. Indergaard, Pump and Dump: The Rancid Rules of the New Economy (2005, ISBN 0813536804).
  • Sergey Perminov, Trendocracy and Stock Market Manipulations (2008, ISBN 9781435752443).

External links








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