This scheme - commonly referred to as a “pump and dump” - creates artificial buying pressure for a targeted security, generally a low-trading volume issuer in the over-the-counter securities market largely controlled by the fraud perpetrators. This artificially increased trading volume has the effect of artificially increasing the price of the targeted security (i.e., the “pump”), which is rapidly sold off into the inflated market for the security by the fraud perpetrators (i.e., the “dump”); resulting in illicit gains to the perpetrators and losses to innocent third party investors. Typically, the increased trading volume is generated by inducing unwitting investors to purchase shares of the targeted security through false or deceptive sales practices and/or public information releases.
How do these scams work? In this case, the ringleaders created shell companies whose penny stock (worth less than $5 a share) was traded on the OTC Bulletin Board (not on the more widely known New York Stock Exchange or NASDAQ). They secretly issued most of the shares for themselves in fictitious names, then touted their companies’ stock through false statements in press releases, electronic bulletin board postings, online newsletters, and the like.
Often using their retirement funds, unsuspecting investors purchased the highly-touted stock - or their unscrupulous financial advisors did so without their knowledge - driving or "pumping" up the price. Then, the fraudsters "dumped," or sold, their stock for thousands or millions of dollars, causing the stock to plummet and innocent investors to lose their shirts.
In many cases, the losses were significant. And while running an undercover operation and gathering enough evidence to put the criminals behind bars, the focus has been on helping victims get some of their hard-earned money back. The FBI spent years interviewing more than 600 mainly elderly victims, painstakingly documenting their sometimes heartbreaking losses.
A modern variation on this scheme involves largely foreign-based computer criminals gaining unauthorized access to the online brokerage accounts of unsuspecting victims in the United States. These victim accounts are then utilized to engage in coordinated online purchases of the targeted security to affect the pump portion of a manipulation, while the fraud perpetrators sell their pre-existing holdings in the targeted security into the inflated market to complete the dump.
Tips for Avoiding Market Manipulation Fraud:
- Don’t believe the hype.
- Find out where the stock trades.
- Independently verify claims.
- Research the opportunity.
- Beware of high-pressure pitches.
- Always be skeptical.