by Lawrence C. Melton, Esq. firstname.lastname@example.org
THE HAYES LAW FIRM, P.C., www.dhayeslaw.com
The pump and dump scam is a form of securities fraud that involves artificially inflating the price of a stock or other security through untrue or exaggerated promotion in order to sell stock, previously purchased cheaply, at the inflated price. When the promotion stops (or flaws in the promotion are exposed) the artificial demand is removed. This causes a collapse in the price of the investment, and the other investors lose their money.
For the purpose of simplification, here is a step-by-step explanation:
STEP 1: ACQUIRE STOCK AT CHEAP PRICE: The people behind the pump and dump scam acquire a large number of stock at a cheap price in a particular company.
STEP 2: PROMOTION: The perpetrators artificially inflate the price of the stock through a promotion campaign based on untrue and exaggerated statements. The most common vehicle for pump and dump promotion is internet spam.
STEP 3: PUMP UP THE PRICE: In response to the fraudulent promotion, investors purchase the stock in droves, creating a high demand.
STEP 4: DUMP ARTIFICIALLY INFLATED PRICE: The persons behind the scam sell their shares at the artificially inflated price and make a large profit.
STEP 5: PRICE PLUMMETS: The scam artist stop promoting the stock and the price plummets. As a result, the other investors lose their money.
The stock in a pump and dump scheme is usually thinly-traded, penny stock. The smallest and most thinly traded stocks cannot meet the listing requirements of the NASDAQ Stock Market or a national exchange, such as the New York Stock Exchange. Instead, they trade "over the counter." For pump and dump scams the relevant markets are the OTC Bulletin Board and the Pink Sheets. Stocks that trade in the OTC market are generally among the most risky and most susceptible to manipulation. The reason is obvious: It is easier to manipulate stock when there is little or no information available about the company.
Stocks that are the subject of pump-and-dump schemes are referred to as "chop stocks." The term "chop," also called "rip," describes the illegal profits realized by stock swindlers in their pump and dump scheme.
The swindlers employ a variety of techniques to pump up the price: a glowing press release on a company's web site, newsletters recommending the latest "hot" stock, messages in chat rooms, bulletin board postings on internet, and of course internet spam.
Pump and dump stock schemes are now a common part of spam, accounting for about 15% of spam email messages. To trap the investors attention, the spam might promise huge PR campaigns, mergers, buy-outs and other buzz-words. The spams often contain outlandish price projections.
Unfortunately, the pump and dump spams do not advertise a web site and do not require the recipient to contact the spammer. As such, they are anonymous and untraceable. However, there are ways you can protect yourself. You can be skeptical when reading your emails. You can identify red-flags. As stated above, heavy hype on an impending event in the stock is a good indication of a pump and dump style spam. When you see multiple posts containing the same message, but different origins, you should be suspicious. When you see nonsensical gibberish at the beginning or end of a post, you should be suspicious. Also be careful when you see replaced characters meant to confuse spam filters.
So who are the crooks behind the scenes? They are difficult to identify. The crooks could be the company offering the stock, friends of the company,or unrelated criminals just pumping new emerging companies.
The SEC has actively pursued pump and dumps for years and prosecuted the primary violators. But only recently has the SEC pursued a case against a major brokerage firm. On April 12, 2007, the SEC brought charges against Park Financial Group for the role they played in a pump and dump scheme of the common stock of Spear & Jackson, Inc. At the time of the scheme (2002-03), the stock of Spear & Jackson traded on the Pink Sheets. The primary violator was Dennis Crowley, the CEO of Spear & Jackson. In 2005, the SEC fined Crowley $6.1 million. Now in 2007 the SEC wants to punish the brokerage house of Park Financial Group for not reporting suspicious activities in Crowley's account. Although the brokerage firm did not perpetrate the pump and dump scheme, it was in a position to observe the illicit activity. Park Financial was supposed to file Suspicious Activity Reports (SARs) when it discovered red flags indicating Crowley's involvement in a pump and dump scam. Because Park Financial did not file the SARs, the SEC said Park Financial essentially aided and abetted Crowley's fraud. This is a step in the right direction. Imputing brokerage liability will reduce the number of pump and dump scams in the country and will further protect the investor's interest.
The Hayes Law Firm is a plaintiff's firm with a focus on securities arbitration. The Hayes Law Firm represents defrauded investors all across the country. Please contact us at 1-866-332-3567 and visit our web site at www.dhayeslaw.com.