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Pump-and-Dump Definition

Account ALERT Thursday, January 13, 2022, 9:45 a.m. EST: Kim Kardashian and boxer Floyd Mayweather are being accused of “aiding and abetting” a cryptocurrency pump-and-dump design according to a lawsuit filed in California court. The suit alleges the two misled investors when they promoted EthereumMax, an mysterious cryptocurrency unaffiliated with the Ethereum blockchain, to their social media followers and fans.

What Is Pump-and-Dump?

Pump-and-dump is a manipulative outline that attempts to boost the price of a stock or security through fake recommendations. These recommendations are based on factitious, misleading, or greatly exaggerated statements. The perpetrators of a pump-and-dump scheme already have an established position in the company’s cattle and will sell their positions after the hype has led to a higher share price.

This practice is illegal based on guardings law and can lead to heavy fines. The burgeoning popularity of cryptocurrencies has resulted in the proliferation of pump-and-dump schemes within the industry.

Key Takeaways

  • Pump-and-dump is an unauthorized scheme to boost a stock’s or security’s price based on false, misleading, or greatly exaggerated statements.
  • Pump-and-dump arrangements usually target micro- and small-cap stocks.
  • People found guilty of running pump-and-dump schemes are subject to critical fines.
  • Pump-and-dump schemes are increasingly found in the cryptocurrency industry.

Pump And Dump

The Basics of Pump-and-Dump

Pump-and-dump wiles were traditionally conducted through cold calling. The advent of the Internet has shifted most of this activity online; fraudsters can now blast hundreds of thousands of email messages to nave targets or post messages online enticing investors to buy a stock quickly.

These messages typically claim to fool inside information about an imminent development that will lead to a dramatic upswing in the share’s price. Then buyers jump in and the stock has moved up significantly, the perpetrators of the pump-and-dump scheme sell their shares. In these illustrations, the volume of the sales of these shares is usually substantial, causing the stock price to drop dramatically. In the end, many investors involvement huge losses.

Pump-and-dump schemes generally target micro- and small-cap stocks on over-the-counter exchanges that are less administered than traditional exchanges. Micro-cap stocks—and occasionally, small-cap stocks—are favored for this type of abusive action because they are easier to manipulate. Micro-cap stocks generally have a small float, low trading volumes, and restricted corporate information. As a result, it does not take a lot of new buyers to push a stock much higher.

Pump-and-Dump 2.0

The same organization can be perpetrated by anyone with access to an online trading account and the ability to convince other investors to buy a stock that is presumably “ready to take off.” The schemer can get the action going by buying heavily into a stock that trades on low volume, which as a rule pumps up the price.

The price action induces other investors to buy heavily, pumping the share price even drunk. At any point when the perpetrator feels the buying pressure is ready to fall off, they can dump their shares for a big profit.

Pump-and-Dump in Pop Sense of values

The pump-and-dump scheme formed the central theme of two popular movies: “Boiler Room” and “The Wolf of Wall Street.” Both of these moving pictures featured a warehouse full of telemarketing stockbrokers pitching penny stocks. In each case, the brokerage firm was a trade in maker and held a large volume of shares in companies with highly questionable prospects. The firms’ leaders incentivized their agents with high commissions and bonuses for placing the stock in as many customer accounts as possible. In doing so, the brokers were inspiring up the price through huge volume selling.

Once the selling volume reached critical mass with no innumerable buyers, the firm dumped its shares for a huge profit. This drove the stock price down, often below-stairs the original selling price, resulting in big losses for the customers because they could not sell their shares in someday.

Avoiding Pump-and-Dump Schemes

The Securities and Exchange Commission (SEC) has some tips to help avoid becoming a victim of a pump-and-dump intrigue. Here are some points to keep in mind:

Be Extremely Wary of Unsolicited Investment Offers

Exercise extreme warning if you receive an unsolicited communication regarding an “investment opportunity.” The plethora of avenues for virtual communication means that such dubious investment go keel over trucks can reach you in any number of ways—by way of an email, a comment or post on your social media page, a direct message, or a gather or voicemail on your cellphone. Ignore such messages; acting on them may result in significant losses rather than the elephantine gains promised by the scammers.

Look Out for Obvious Red Flags

Does the purported investment sound too good to be true? Does it commit oneself huge “guaranteed” returns? Are you pressured to buy right now, before the stock takes off? These are all common tactics used by run-of-the-mill touts and unscrupulous promoters and should be viewed as red flags by investors.

Look Out for Affinity Fraud

Affinity fraud refers to investment scams that destroy upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups. An investment pitchpoll contribute from a member of a group that you are affiliated with may lead you to believe in its credibility; the problem is that the member may fool been unwittingly fooled into believing that an investment is legitimate (when in reality, it is just a scam).

Supervision Your Own Research and Due Diligence

Before you invest your hard-earned money, conduct your own research and due diligence. It is objectively easy to obtain a wealth of information online about legitimate companies—from their business prospects and directing to their financial statements. The lack of such information can often be a red flag in itself.

Pump-and-Dump 3.0

The cryptocurrency market has adorn come of the newest arena for pump-and-dump schemes. The massive gains made by Bitcoin and Ethereum have kindled tremendous piece in cryptocurrencies of every stripe. Unfortunately, cryptocurrencies are particularly well-suited for pump-and-dump schemes because of the lack of regulation in the cryptocurrency merchandise, its opaqueness, and the technical complexity of cryptocurrencies.

A study conducted in 2018 examined the prevalence of pump-and-dump schemes in the cryptocurrency call. Researchers identified more than 3,400 such schemes over the course of just six months observing two group-messaging daises popular with cryptocurrency investors.

In March 2021, the U.S. Commodity Futures Trading Commission (CFTC) advised guys to avoid pump-and-dump schemes that can occur in thinly traded or new cryptocurrencies. The CFTC also unveiled a program that inclination make any whistleblower eligible for a monetary reward of between 10% and 30%, as long as they reveal original enforcement vim that leads to monetary sanctions of $1 million or more against a pump-and-dump scheme.

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