A "pump and dump scheme" is a form of stock fraud that involves
artificially inflating the price of an owned stock through false and misleading
positive statements in order for the promoter to sell its cheaply purchase
stock at a higher price. Once the schemers sell their overvalued shares,
the price falls and investors lose their money. Fraudsters frequently
use this ploy with small companies – known as penny stocks. While
promoting stocks is legal, U.S. securities law prohibits market manipulation.
The Securities and Exchange Commission ("SEC") routinely sanctions
promoters for buying cheap stock, hyping it to investors, then secretly
selling their holdings.
The SEC began its latest crackdown on penny-stock fraud in 2010 and had
sued 40 individuals and 24 companies as of August 2013, according to its
website. In March, it filed a lawsuit against the operator of one of the largest
penny stock websites, AwesomePennyStocks. The lawsuit seeks to hold John
Babikian liable for his use his website and an email list to tout a coal
company's stock while dumping his own shares. The SEC alleged that
Bibikian sold off his 1.3 million shares in the company 90 minutes after
sending material to investors hyping the stock's rise. According to
the SEC, Babikian made approximately 1.9 million in ill-gotten gains.
You can read the complaint
Pump and dump schemes carry a number of recognizable warning signs. Fraudsters
frequently use large-scale email pushes to lure in potential victims.
Many of these emails tout a company's stock—typically small
companies—through false and/or misleading statements. The false
claims could also be made on social media sites, bulletin boards, and
chat rooms. Often the promoters will claim to have inside information
about an imminent development, or to use a foolproof system to pick stocks.
Subject lines and short messages are designed to lure investors into buying
the stock—all with the goal of creating a run-up in price. The Financial
Industry Regulatory Authority ("FINRA") and the SEC's Office
of Investor Education and Advocacy have one message for investors: "Don't
fall for these scams. They are the inbox equivalent of a boiler room sales
operation, hounding investors with potentially
false information about a company. When it comes to pump-and-dump spam, the smartest play
is the easiest. Just hit the delete key." You can read the FINRA