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Library » A Stock Fraud Lawyer Explains the “Pump and Dump” Scam

A Stock Fraud Lawyer Explains the “Pump and Dump” Scam

There are a lot of different kinds of stock fraud, but the "pump and dump" stock scam has really taken off in this electronic age. Fraudsters are increasingly able to reach millions of potential investors through e-mail and text messages, and it seems to work. Investors are left holding worthless stock, and the fraudsters make off with your hard-earned cash.

How does a "pump and dump" stock scam work?
In a "pump and dump" stock scam, the fraudsters will:

  • Buy up worthless "penny stocks" that can be purchased in bulk with little cost.
  • Start sending out e-mails and text messages that the company is an excellent investment and set to start sky-rocketing in price due to a coming announcement or new technology.
  • Sit back and watch the prices rise as people rush to buy.
  • Wait for the price to get as high as possible or until the company starts to get worried about the rising stock prices.
  • Sell the stock off at the high price, creating a ripple effect that drives the price of the stock back down.
  • Count the money as duped investors are left holding stock that's worth nothing.

Are the companies to blame?
Not necessarily. In many of these cases, the company is chosen by the fraudster based on their stock prices. The company probably has no idea until their stock prices start rising, and even then it may just seem like "good luck." The fraudster will watch closely, and as soon as the company makes any sign that the rise in stock prices is concerning, the fraudsters are ready to dump the stock.

Sadly, stock scams like this often leave the company unfairly "blacklisted" while the fraudster enjoys the ill-gotten gains. It's not unusual for the stock price to end up even lower than before.

This type of investment fraud is very effective because it really seems like you're getting results. Investors can watch the stock prices rise, and may spread the word to friends and family members about their excellent investment choice. The companies are often completely legitimate, so even investors who research the investment may not realize what is happening until it's too late. The prices start to fall so quickly once the fraudsters pull out, that honest investors just don't have time to react they lose everything.

If you have been taken advantage of through stockbroker misconduct, stock scams, or a "pump and dump" scheme, talk to one of the respected securities fraud attorneys with the Law Firm of Meyer Wilson. We have over 50 years of collective experience helping victims of stock scams recover their losses through FINRA arbitration, mediation, and litigation. Give us a call today for a completely FREE consultation.

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