Pump and Dump Scam: How It Works and How Not to Become a Victim of Scammers
What Is the Pump and Dump Scam?
If you believe your investment losses were caused by Pump and Dump Scams, you should investigate your legal options right away. Unfortunately, pumping and pumping operations are frequent and can cause significant material damage to their victims.
Pump and dump scheme lawyers at Shepherd Smith Edwards and Kantas. You can find more information at investorlawyers.com. They can help investors who have lost money in this sort of scam, which is highly planned and meticulous. After all, pump and dump is illegal.
Unfortunately, certain brokers and broker-dealers will profit from customers and other investors by using current pump and dump stocks.
What Is a Pump and Dump Scam, and How Does a Pump and Dump Scam Work?
The price of a stock is artificially inflated in a pump and dump strategy. The fraudsters generally do this by providing incorrect, deceptive, or exaggerated assertions that encourage more individuals to acquire the investment, increasing its value.
When demand for the pump stock hits critical mass, the con artists will sell their shares, dumping them into the stock market and profiting handsomely at the increased price. They will then stop pushing the stock, which will begin to lose value and may eventually return to its former price, if not lower. Other investors who had acquired the stock at greater levels have suffered big losses at this time.
A scammer will usually try to pump and dump a small-cap stock, a micro stock, or a penny stock. A con artist may pull this off by hyping the shares of a small, unknown firm that investors won’t want to miss out on.
The scheme’s promoter might be the company’s owner or another opportunist. Furthermore, as previously indicated, pump and dump frauds have been known to include broker-dealers and their brokers. A financial advisor may promote a stock without realizing they are promoting a financial scam due to a lack of due investigation.
How Does a Pump and Dump Work and Violate SEC Rules?
- Pump and dump schemes break a number of regulations, including: • Rule 10b-5 of the Securities Exchange Act of 1934, which forbids the use of misstatements and omissions in securities transactions.
- Section 17(a) of the Securities Act of 1933, which prohibits anybody from selling or providing securities in order to mislead others. It’s also against the law to make false claims or omissions in order to deceive potential investors in a security.
An Example of a Pump and Dump Fraud
Here is one of the pump and dump scheme example:
Using a “wrong number” hoax, a pump and dump operation was started in the stock below throughout the summer months. The victims’ answering machines were left with a message about a hot stock tip, meant to make them feel it was an accident.
People were told that the price climbed from roughly $0.30 to over $1.00 in a week, a more than 200 percent rise. This significant rise was accompanied by an equally significant increase in volume. Before the price increase, the stock had an average daily trading volume of less than 250,000 shares, but during the fraud, the stock traded up to approximately one million shares on many trading days. The shares would have been purchased for roughly $1.00 by naïve investors. And the price plummeted to roughly $0.20, representing an 80% loss in value for those unlucky investors.
Pump and dump scheme is considered fraud, so we have compiled some tips on how to avoid becoming a victim of the scam.
How to Spot a Pump and Dump?
There are steps that investors can take to avoid falling victim to the stock pump and dump scam. While you may not always be able to identify your broker’s fraudulent activities, you should be aware of the following red flags:
Be careful of hot stock ideas you hear about on social media, newsletters, radio/TV advertisements, in emails, chat forums, direct mail, or other marketing collateral.
- Consider whether the stock promoter stands to benefit financially from your purchase of the shares. Is your broker compensated for your purchase, even if they are the one who recommended the stock?
- Explore the stock on your own. The shares are traded on major exchanges. You shouldn’t buy stocks on the OTC market. This could be more dangerous. It is better to use old proven exchanges and not get fooled by the tales of scammers. Find out if the investment is registered with the Securities and Exchange Commission in the United States.
- Do some research on the firm. Who are the owners of this property?
- Avoid stock promoters that employ high-pressure sales methods like “purchase now, or you’ll lose out.”
- If the investment appears to be too good to be true, you’re probably right. Be wary of investments that promise no risk or a certain return.
What to Do If You Become a Victim of Pump and Dump Scam?
Please contact experienced pump and dump fraud lawsuit attorneys. They can look at the stock and consult with your broker-dealer to solve your problem. In this situation, perhaps this is the only thing you can do. Be careful with such scam schemes and try to follow our advice to keep your money for yourself. Share this information with other people so that fewer people fall for the trick of scammers.
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