Pump and dump
Encyclopedia
"Pump and dump" is a form of microcap stock fraud
Microcap stock fraud
Microcap stock fraud is a form of securities fraud involving stocks of "microcap" companies, generally defined in the United States as those with a market capitalization of under $250 million. Its prevalence has been estimated to run into the billions of dollars a year...

 that involves artificially inflating the price of an owned stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...

 through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price.
Once the operators of the scheme "dump" their overvalued shares, the price falls and investors lose their money. Stocks that are the subject of pump-and-dump schemes are sometimes called "chop stocks".
While fraudsters in the past relied on cold call
Cold calling
Cold calling is the marketing process of approaching prospective customers or clients, typically via telephone, who were not expecting such an interaction...

s, the Internet
Internet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...

 now offers a cheaper and easier way of reaching large numbers of potential investors.

Pump and dump scenarios

Pump and dump schemes tend to take place either on the Internet including e-mail spam
E-mail spam
Email spam, also known as junk email or unsolicited bulk email , is a subset of spam that involves nearly identical messages sent to numerous recipients by email. Definitions of spam usually include the aspects that email is unsolicited and sent in bulk. One subset of UBE is UCE...

 campaigns or through telemarketing from "boiler room
Boiler room (business)
In business, the term boiler room refers to a busy centre of activity, often selling questionable goods by telephone. It typically refers to a room where salesmen work using unfair, dishonest sales tactics, sometimes selling penny stock or committing outright stock fraud...

" brokerage houses (for example, see Boiler Room
Boiler Room (film)
Boiler Room is a 2000 American drama film written and directed by Ben Younger, and starring Giovanni Ribisi, Vin Diesel, Nia Long, Ben Affleck, Nicky Katt, Scott Caan, Tom Everett Scott, Ron Rifkin and Jamie Kennedy....

). Often the stock promoter
Stock promoter
A stock promoter is someone who promotes a stock, ultimately attempting to persuade others to purchase it so that its price goes up. Stock promoters first relied on cold calling prospective investors to acquire stock in a company, and then later moved on to using the Internet, which provides for a...

 will claim to have "inside" information about impending news. Newsletters that purport to offer unbiased recommendations then tout
Tout
In British English, a tout is any person who solicits business or employment in a persistent and annoying manner...

 the company as a "hot" stock. Messages in chat rooms and email spam
Spam (electronic)
Spam is the use of electronic messaging systems to send unsolicited bulk messages indiscriminately...

 urge readers to buy the stock quickly.

Unwitting investors then purchase the stock, creating high demand and raising the price. This seemingly "real" rise in prices can entice more people to believe the hype and to buy shares as well. When the people behind the scheme sell their shares and stop promoting the stock, the price plummets, and other investors are left holding stock that is worth significantly less than what they paid for it.

Fraudsters frequently use this ploy with small, thinly traded companies—known as "penny stock
Penny stock
In the United States, penny stocks are common shares of small public companies that trade at less than $1.00. In some countries, similar shares of stock are known as cent stocks.-Concerns for investors:...

s," generally traded over-the-counter
Over-the-counter (finance)
Within the derivatives markets, many products are traded through exchanges. An exchange has the benefit of facilitating liquidity and also mitigates all credit risk concerning the default of a member of the exchange. Products traded on the exchange must be well standardised to transparent trading....

 (in the United States, this would mean markets such as the OTC Bulletin Board
OTC Bulletin Board
The OTC Bulletin Board or OTCBB is an interdealer electronic quotation system in the United States that displays real-time quotes, last-sale prices, and volume information for many over-the-counter equity securities that are not listed on the NASDAQ stock exchange or a national securities exchange...

 or the Pink Sheets
Pink Sheets
OTC Markets Group, Inc., informally known as "Pink Sheets", is a private company that provides services to the U.S. over-the-counter securities market including electronic quotations, trading, messaging, and information platforms. According to the U.S. Securities and Exchange Commission, OTC...

), rather than markets such as the New York Stock Exchange
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...

 or NASDAQ
NASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...

—because it is easier to manipulate a stock when there is little or no independent information available about the company. The same principle applies in the United Kingdom, where target companies are typically small companies on the AIM
Alternative Investment Market
AIM is a sub-market of the London Stock Exchange, allowing smaller companies to float shares with a more flexible regulatory system than is applicable to the main market....

 or OFEX.

A more modern spin on this attack is known as hack, pump and dump. In this form a person purchases penny stocks in advance and then uses compromised brokerage accounts to purchase large quantities of that stock. The net result is a price increase, which is often pushed further by day traders seeing a quick advance in a stock. The holder of the stock then sells his stock at a premium.

Jonathan Lebed

During the dot-com era
Dot-com bubble
The dot-com bubble was a speculative bubble covering roughly 1995–2000 during which stock markets in industrialized nations saw their equity value rise rapidly from growth in the more...

, when stock market fever was at its height and many people spent significant amounts of time on stock Internet message boards, a 15-year-old named Jonathan Lebed
Jonathan Lebed
Jonathan Lebed is an American notorious for using internet technology to hype stocks.Between September 1999 and February 2000 Lebed made hundreds of thousands of dollars by posting in internet chat rooms and on message boards encouraging people to buy penny stocks he already owned, thus, according...

 showed how easy it was to use the Internet to run a successful pump-and-dump. Lebed bought penny stock
Penny stock
In the United States, penny stocks are common shares of small public companies that trade at less than $1.00. In some countries, similar shares of stock are known as cent stocks.-Concerns for investors:...

s 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.S. Securities and Exchange Commission (SEC), which filed a civil suit against him alleging security manipulation
Market manipulation
Market manipulation describes a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a security, commodity or currency...

. As is commonly the case in SEC actions, 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.

Enron

As late as April 2001, before the company's collapse
Enron scandal
The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world...

, Enron
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 22,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with...

 executives participated in an elaborate scheme of pump-and-dump in addition to other illegal practices that fooled 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. Enron had falsely reported profits which inflated the stock price, and then covered the real numbers by using questionable accounting practices. 29 Enron executives sold overvalued stock for more than a billion dollars before the company went bankrupt.

Park Financial Group

In April 2007, the SEC
United States Securities and Exchange Commission
The U.S. Securities and Exchange Commission is a federal agency which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets in the United States...

 brought charges against Park Financial Group as a result of an investigation into a pump and dump scheme during 2002-2003 of the Pink Sheet listed stock of Spear & Jackson Inc.

Pump and dump spam

Pump and dump stock scams are prevalent in spam
Spam (electronic)
Spam is the use of electronic messaging systems to send unsolicited bulk messages indiscriminately...

, accounting for about 15% of spam e-mail messages. A survey of 75,000 unsolicited emails sent between January 2004 and July 2005 concluded that spammers could make a return of 6% by using this method, while recipients who act on the spam message typically lose 5% of their investment within two days. A study by Böhme and Holz shows a similar effect. Stocks targeted by spam are almost always "penny stock
Penny stock
In the United States, penny stocks are common shares of small public companies that trade at less than $1.00. In some countries, similar shares of stock are known as cent stocks.-Concerns for investors:...

s", selling for less than $5 per share, not traded
on major exchanges, are thinly traded, and are difficult or impossible to sell short. Spammers acquire stock before sending the messages, and sell the day the message is sent.

Pump and dump differs from many other forms of spam (such as advance fee fraud
Advance fee fraud
An advance-fee fraud is a confidence trick in which the target is persuaded to advance sums of money in the hope of realizing a significantly larger gain...

 emails and lottery scam
Lottery scam
A lottery scam is a type of advance-fee fraud which begins with an unexpected email notification that "You have won!" a large sum of money in a lottery...

 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.

Some pump and dump spam was traced to a breach of TD Ameritrade
TD Ameritrade
TD Ameritrade is an American online broker with over 6 million U.S. customers, and many more internationally, that has grown rapidly through acquisition to become the 746th-largest US firm in 2008. TD Ameritrade Holding Corporation is the owner of TD Ameritrade Inc...

's customer databases. In October 2005, several people posting to nanae (the news.admin.net-abuse.email Usenet newsgroup) began to uncover what was at the time the 3rd largest dataloss incident ever when they reported pump-n-dump spam to the disposable email address
Disposable e-mail address
Disposable email addressing refers to an alternative way of sharing and managing email addressing. DEA aims to set up a new, unique email address for every contact or entity, making a point-to-point connection between the sender and the recipient...

 they had given (only) to Ameritrade that were not the result of a Directory Harvest Attack
Directory Harvest Attack
A Directory Harvest Attack or DHA is a technique used by spammers in an attempt to find valid/existent e-mail addresses at a domain by using brute force. The attack is usually carried out by way of a standard dictionary attack, where valid e-mail addresses are found by brute force guessing valid...

.

Reports of an ongoing problem continued. For example, on March 30, 2007, a Slashdot
Slashdot
Slashdot is a technology-related news website owned by Geeknet, Inc. The site, which bills itself as "News for Nerds. Stuff that Matters", features user-submitted and ‑evaluated current affairs news stories about science- and technology-related topics. Each story has a comments section...

 article reported that unique email addresses provided only to TD Ameritrade were frequently becoming
targets for spammers. There was speculation that one of TD Ameritrade's affiliated companies was the source of the leaks. However 2 years later, TD Ameritrade announced that its main database, containing over 6.3 million customers’ social security numbers , names, addresses, mailing addresses, email addresses, trading histories, account numbers, account balances, and dates of birth had been compromised, and that unique stolen addresses had received pump-n-dump spam.

Short and distort

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 buys back the stock at the lower price.

Further reading

  • Robert H. Tillman and Michael L. Indergaard, Pump and Dump: The Rancid Rules of the New Economy (2005, ISBN 0813536804).
  • Sergey Perminov, Trendocracy and Stock Market Manipulations (2008, ISBN 9781435752443).

External links

The source of this article is wikipedia, the free encyclopedia.  The text of this article is licensed under the GFDL.
 
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