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Once the operators of the scheme "dump" sell their overvalued shares, the price falls and investors lose their money. This is most common with small cap cryptocurrencies and very small corporations, i.
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 through spam email, bad data, social media, and fake news. Pump and dump schemes may take place on the Internet using an e-mail spam campaign, through media channels via a fake press release, or through telemarketing from " boiler room " brokerage houses for example, see Boiler Room. Promoters may also post messages in chat rooms or stock message boards such as ADVFN , urging readers to buy the stock quickly.
If a promoter's campaign to "pump" a stock is successful, it will entice unwitting investors to purchase shares of the target company. The increased demand, price, and trading volume of the stock may convince more people to believe the hype, and to buy shares as well. When the promoters behind the scheme sell dump their shares and stop promoting the stock, the price plummets, and other investors are left holding a stock that is worth significantly less than 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 NYSE or NASDAQ —because it is easier to manipulate a stock when there is little or no independent information available about the company.
A more modern spin on this attack is known as hack, pump and dump. The net result is a price increase, which is often pushed further by day traders seeing a quick advance in a stock. The original stockholder then cashes out at a premium. In the early s the penny-stock brokerage Stratton Oakmont artificially inflated the price of owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price.
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 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. Securities and Exchange Commission SEC , which filed a civil suit against him alleging security manipulation. 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. As late as April , before the company's collapse , Enron executives participated in an elaborate scheme of pump and dump, [9] in addition to other illegal practices that fooled even the most experienced analysts on Wall Street.
Studies of the anonymous messages posted on the Yahoo board dedicated to Enron revealed predictive messages that the company was basically a house of cards, and that investors should bail out while the stock was good. Twenty-nine Enron executives sold overvalued stock for more than a billion dollars before the company went bankrupt. In April , the U. None of the chief conspirators were convicted, although their whereabouts are known.
A patsy who made a negligent false statement about the assets was convicted and banned from being a director. A survey of 75, unsolicited emails sent between January and July concluded that spammers could make an average return of 4.
Spammers acquire stock before sending the messages, and sell the day the message is sent. A pump and dump scam is a type of economic bubble , with the main difference between this scheme and most other types of bubbles being that the pump and dump bubble is deliberately perpetrated by unlawful activity. 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. 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 but using criticism or negative predictions regarding the stock.
The scammer then covers their short position when they buy back the stock at a lower price. One method of regulating and restricting pump and dump manipulators is to target the category of stocks most often associated with this scheme.
To that end, penny stocks have been the target of heightened enforcement efforts. In the United States, regulators have defined a penny stock as a security that must meet a number of specific standards. The criteria include price, market capitalization , and minimum shareholder equity. Securities traded on a national stock exchange , regardless of price, are exempt from regulatory designation as a penny stock, [19] since it is thought that exchange traded securities are less vulnerable to manipulation.
Although penny stock trading in the United States is now primarily controlled through rules and regulations enforced by the Securities and Exchange Commission and the Financial Industry Regulatory Authority FINRA , the genesis of this control is found in State securities law.
The State of Georgia was the first state to codify a comprehensive penny stock securities law. Morton , the only stockbroker in the Georgia General Assembly at the time, was principal sponsor of the bill in the House of Representatives.
Georgia's penny stock law was subsequently challenged in court. However, the law was eventually upheld in U. District Court , [23] and the statute became the template for laws enacted in other states. Meyer Blinder was jailed for securities fraud in , after the collapse of his firm. From Wikipedia, the free encyclopedia. This is the latest accepted revision , reviewed on 29 June For the sexual slang, see One-night stand. Securities and Exchange Commission.
Retrieved August 3, Tips for Avoiding Stock Scams on the Internet". Retrieved 11 January Nemesis — and 15". The New York Times.
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