How does a "pump and dump" scam work?
The “pump and dump” investment scam can be tricky for investors looking to get in on a good opportunity. The fraudsters who are responsible for this kind of investment fraud know exactly how to manipulate innocent investors and make an investment seem like a great deal that’s going fast. Sometimes even the company responsible for the stocks used in the scam is completely unaware that financial fraud is going on until it’s too late – and ends up suffering for it. As investment fraud attorneys, we believe that understanding how financial fraud works is a big step in learning how to avoid it.
A “pump and dump” scam usually works like this:
- The fraudsters buy up stock, usually choosing a cheap “penny stock.”
- The fraudsters start spreading the word about the “promising” stock, aiming to “pump” up the stock and get people excited and curious about the potential gains on a supposedly limited-time offer.
- Investors start pouring money into the investment, and the price starts to rise.
- The fraudsters start the next round of “pumping” the stock – sometimes even with made-up press releases or expert statements - and point to the rising price as evidence of its performance, which falsely inflates the price even more.
- The fraudsters keep it up until eventually “dumping” their shares for a huge profit and leaving investors scrambling to get rid of worthless stock as the price plummets.
Although some scams are hard to spot, it always pays to be suspicious of offers that sound too good to be true. If you have already fallen victim to a pump and dump investment scam or other form of financial fraud, speak with our experienced investment fraud attorneys today. Don’t forget to also request your free copy of our must-read book for investors Five Signs of Investment Fraud …And What to Do if it’s Happened to You.