A pump and dump scheme is a form of investment fraud where people artificially inflate the price of stock they own, and once it has reached a certain price they will sell it before the price goes down again. The perpetrators of such a scheme raise the stock price by creating synthetic hype around the stock. At one time this was normally done by cold calling. An individual claiming to be an expert stockbroker might randomly call people to inform them of a stock that was virtually guaranteed to go up, and that failing to invest in it would mean missing out on perhaps thousands of dollars. One variant of cold calls would be to leave a message on somebody’s answering machine or voice mail. The message is worded in such a manner that the victim believes the caller had reached the wrong number, and now has access to valuable inside information which must be acted on very quickly.
These days such fraud is more often committed online. The Internet allows for far more potential victims to be reached, over a shorter period of time. Messages might be posted on bulletin boards advising visitors to purchase the next hot stock. If enough people take the bait, the stock price will go up. Later posts might point out that the price of the stock in question has, in fact, become more expensive, which leads to even more shares being sold.
At some point the perpetrators of the scheme will sell, or dump, all of the shares. This is generally done when they are satisfied with the profits that will result. When a large number of shares are dumped the stock price plummets, usually to a price that is less than what the victims of the scheme paid, resulting in monetary losses for them. Pump and dump schemes generally target micro- and small-cap stocks, because they are most easily manipulated. These stocks do not have a great number of shares being traded, and therefore their price can be influenced by a smaller number of trades. If you have been the victim of a pump and dump scheme, please contact us today to discuss your options.