Identifying the pump and dump scheme

On Behalf of | Apr 26, 2022 | Securities Fraud |

The pump and dump scheme is an attempt to defraud investors who are not familiar with stock pricing. They inflate the stock’s price through false or exaggerated statements and then look for buyers. New and experienced consumers in South Carolina often encounter these scams in the stock market.

The meaning of pump and dump

A pump and dump scheme is the intentional inflation, known as a pump, of a security’s price through false, misleading statements. It is a type of securities fraud that is done to inflate the price, known as a pump, and then sell the security quickly at that higher price, which is the dump. After the security is bought, its price likely falls and causes its new owner to lose much of their capital.

The process

The likely targets of this scam are beginner stock buyers. They are often not used to researching actual information about a company’s securities. Perpetrators of the pump and dump scheme falsify information about the securities that they plan to sell. They may contact buyers through online advertisements, telemarketing calls or spam emails. In any method they use, they try to create a buying frenzy to make the stock seem more appealing than it is. To commit the scam, fraudsters often use penny stocks, known as microcap stocks, that are traded at very low prices and have low trading volumes.

The rise of securities fraud

Pump and dump scammers have numerous opportunities to operate their scams. The Internet is the perfect place to receive fake stock tips and fraudulent ads that provide false information about stock prices. In some cases, telemarketer scammers call people at their homes, applying the same methods that they use online. Falsely inflating the value of a stock is illegal and can be prosecuted in court.

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