Pump-and-dump stock scams are nothing new. These scams have been a mainstay of financial fraudsters for decades. And while technology has changed the way they operate, their basic framework and the end goal behind these unlawful practices remain the same.
Elements of a Pump-and-Dump
Pump-and-dump schemes often involve three core elements: the setup (where fraudsters choose their target stock), the pump (where they engage in various tactics to increase the share price), and the dump (where they rapidly sell their stock and cash out).
The Setup
FINRA has historically observed fraudsters targeting low-priced, microcap stocks trading on over-the-counter (OTC) markets. There might be little publicly available information about these stocks, which can make them prime targets for fraudulent and manipulative schemes. Over the past several years, FINRA has increasingly observed fraudsters targeting low-priced stocks—including those that aren’t considered microcap stocks—listed on national exchanges.
After choosing a target stock, fraudsters quietly buy up a large portion of the shares of the company’s stock that are available for everyday investors to trade, known as the public float. They can acquire these shares in several ways, including through both public and private offerings. By accumulating a large portion of the shares, the fraudsters can more easily manipulate the price, pushing it artificially higher when they put their scheme into action.
These fraudulent schemes have also been referred to as ramp-and-dump schemes, which normally feature a slower, more deliberate promotion that takes place in peer-to-peer platforms like online forums, chat rooms and social media threads.
The Pump
Next, fraudsters will engage in various tactics to “pump” up their chosen stock, such as promotion via the internet, social media and email. The promotional materials might claim that bullish news—such as an announcement of a technology breakthrough or major contract—is imminent or might reference prior announcements by the company related to “hot topic” initiatives.
While fraudsters typically reached out to targets in the past via word of mouth or cold telephone calls, they’re increasingly communicating out of public view through texts and encrypted messaging applications. For example, they might send an unsolicited text message or use social media advertising for an "investment club" that directs investors to an encrypted group chat. The bad actors then use the group chat to promote and ultimately manipulate the demand for and price of the target stock.
These efforts might cause the company’s share price to rise quickly and substantially. This not only increases the value of the fraudsters’ profit potential but also draws the attention of other investors, who might then purchase the stock and drive its share price even higher. Unaware of the ongoing scam, some investors, such as those who follow a momentum investing strategy, might buy and promote the stock based solely on its rapid advance.
The Dump
As the share price rises, the fraudsters will begin to sell their shares. This is the “dump” phase of the “pump-and-dump.” The selling activity and resulting share price crash often occur very rapidly, sometimes in a matter of seconds. The speed of the dump can make it difficult for other shareholders to sell their holdings without incurring substantial losses.
In some instances, fraudsters might also reach out to investors who were harmed by pump-and-dump scams, engaging them in recovery scams by promising to help recoup their investment losses—for a fee.
The Power of FOMO
Pump-and-dump operators rely on the fear of missing out (FOMO), which they recognize as a powerful motivator for many investors. The fraudsters generally include a time component to their pitch, stressing that if you don’t act immediately, you’ll never get another chance. And if the pump part of the scam is successful and moves the target stock substantially, it might amplify the sense of FOMO and generate even more buying.
How to Recognize a Potential Pump-and-Dump Scheme
While it might be difficult to distinguish a pump-and-dump from enthusiastic, legitimate investment advice, there are ways to protect yourself:
- Don’t accept investment advice from strangers—especially on social media. A stranger might “accidentally” contact you on social media or an encrypted messaging app. After befriending you, they might quickly turn the conversation to a “can’t lose” investment. In these situations, it’s best not to engage. Fraudsters often impersonate known entities or individuals to build trust with their targets. Do your own research on those promoting investment opportunities, including checking their background and experience on FINRA BrokerCheck. To confirm that the person you’re communicating with isn’t impersonating a FINRA-registered professional, call the phone number listed for them in BrokerCheck or the firm’s public website—not a number they give you themselves—to confirm their identity.
- Independently evaluate offerings. In many cases, fraudulent investment club schemes initially promote better known investments before pivoting to less familiar low-priced stocks. The fraudster’s goal is to build credibility by helping you generate small gains before later pitching you on the stock that’s the focus of the pump-and-dump scheme. Before investing, always take time to perform your own due diligence on securities that someone is promoting or recommending to you. Also, be wary of suggestions that you borrow money, such as through a home equity line of credit (HELOC), to obtain additional funds for investing in these securities.
- Watch for shares that are extremely volatile. Volatility can stem from sudden interest in a normally illiquid stock, which could be an indicator of a pump-and-dump in progress. Fraudsters often use short-term, upward-trending trading data to persuade investors to buy. Use FINRA’s Market Data tool to view price and volume trends over longer periods—over months and years—and to research the company’s financial health before executing a stock purchase.
- Don’t give out personal or investment information to strangers. The more that bad actors know about you, the greater their opportunity to commit fraud. And if someone offering you investment advice asks you to send a screenshot from your account confirming you executed a trade, disengage—this is a common scam tactic.
If you think you’ve been a target or victim of a pump-and-dump or other stock manipulation scheme, submit a regulatory tip to FINRA. Also report any potentially fraudulent or illegal activity to your local law enforcement agency and, if you think you’ve been the victim of any cyber-enabled scam, the FBI’s Internet Crime Complaint Center.
Learn more about avoiding investment fraud.