Pump and dump
From Wikipedia, the free encyclopedia
"Pump and dump" (also known as "Stock Dump" and "Hype and Dump Manipulation") is a term used to describe a form of financial fraud that typically involves artificially inflating the price of a stock or other security through untrue or exaggerated promotion (creating artificial demand), 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, causing a collapse in the price of the investment, leaving many investors out of pocket.
In many countries it is illegal, yet it is particularly common. While fraudsters in the past relied on cold calls, the emergence of the Internet offered a cheaper and easier way of reaching large numbers of potential investors. The fraud is in many cases conducted by people who are not involved in a company that is targeted, but despite this the process can do great harm to the reputation of the companies involved.
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[edit] The process
A company's web site may feature a glowing press release about its financial health or some new product or innovation. Newsletters that purport to offer unbiased recommendations may suddenly tout the company as the latest "hot" stock. Messages in chat rooms and bulletin board postings—or, more often, spam—may urge readers to buy the stock quickly.
Unwitting investors purchase the stock in droves, creating high demand and pumping up the price. When the persons behind the scheme sell their shares (at what will soon become the peak) and stop promoting the stock, the price plummets, and other investors lose their money.
[edit] Stocks manipulated in this manner
Fraudsters frequently use this ploy with small, thinly traded companies—known as "penny stocks," generally traded on the over-the-counter bulletin boards (such as Pink Sheets), rather than on larger exchanges such as the New York Stock Exchange or NASDAQ—because it is easier to manipulate a stock when there is little or no information available about the company. [1] The same principle applies to the London Stock Exchange, where target companies are typically small companies quoted on AIM or OFEX. Many companies that are targeted are located in China, where pump-and-dump stock spam is more tolerated, there is less of a chance of the stock price being blocked, and many Chinese company stock prices are low and can be easily manipulated.
Stocks that are the subject of pump-and-dump schemes are sometimes referred to as "chop stocks." [2] The term "chop," also called "rip," describes the massive and often illegal profits realized by stock swindlers in their schemes.
[edit] Jonathan Lebed example
During the dot-com era, when stock market fever was at its height and many people spent significant amounts of time on stock bulletin boards, 15-year-old Jonathan Lebed showed how easy it was to use the Internet to run a successful pump-and-dump. Lebed bought penny stocks 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. 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. [3]
[edit] Organized crime involvement
Pump and dump stock schemes have become major sources of income for organized crime. [4] Mob figures from each of the Five Families of the New York mafia, as well as the New Jersey mob, have become involved in Mafia stock schemes.
The prevalence of Mafia involvement in 1990s stock swindles was first explored by investigative reporter Gary Weiss in a December 1996 Business Week article, "The Mob on Wall Street." [5]
Weiss explored the Mafia's Wall Street scams in his book Born to Steal: When the Mafia Hit Wall Street.
[edit] Pump and dump spam
Pump and dump stock schemes are now a common part of spam, 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 4.9%-6% by using this method, while recipients who act on the spam message typically lose 5.25% (and sometimes up to 8%) of their investment within two days – not including the costs of trading shares [6]. A study by Böhme and Holz ("The Effect of Stock Spam on Financial Markets", 2006) shows a similar effect. Stocks targeted by this spam are typically "penny stocks", selling for less than $1 per share, not traded on organized exchanges, have small capitalization, are thinly traded, and are difficult or impossible to sell short. Consequentially, stock spam messages are universally positive. Spammers are likely to acquire stock the day before sending the message (as suggested by increased market volatility, and the generally negative average returns of targeted stocks), and sell the day the message is sent.(Hanke and Hauser, 2006).
An important structural difference between pump and dump spam and other forms of spam (such as advance fee fraud emails and lottery scam messages) is that pump and dump spam can be sent with complete anonymity. Nearly all other forms of spam require the recipient (the target) to contact the spammer in some way, either to collect supposed "winnings," to transfer money from supposed bank accounts, or to purchase commercial products. Pump and dump spam, by contrast, is pure advertising, and there is no need for the target to be able to contact the spammer. This makes tracking the source of pump and dump spam especially difficult. It has also given rise to examples of what might be called "minimalist" spam, consisting of nothing more than a small untraceable image file containing a picture of a stock symbol.
[edit] Pump and dump in popular culture
Pump and dump stock schemes have been explored in several books and movies.
- A book that explored pump and dump was the 2003 book Born to Steal by Gary Weiss (ISBN 0446528579). It described the microcap underworld of the 1990s through the eyes of a young broker named Louis Pasciuto. Although the book focuses on Mafia infiltration of brokerages, it also describes in detail the operation of pump and dump fraud.
- Pump and dump fraud was explored in the anonymously written books License to Steal and in The Scorpion and the Frog. Both books explore pump and dump schemes in some detail but, unlike Born to Steal, do not provide the real names of the specific firms and people described.
- This kind of fraud has also provided the title for a book by Robert H. Tillman and Michael L. Indergaard called Pump and Dump: The Rancid Rules of the New Economy (2005, ISBN 0813536804).
- A fictional account of pump and dump schemes can be seen in the movie Boiler Room. According to press accounts, the director and writer of the film worked briefly as a cold-caller for the Stratton Oakmont brokerage house, which was shut down by regulators in the late 1990s.
- Another movie exploring brokerage chicanery is Wall Street, starring Michael Douglas and Charlie Sheen.
- A pump and dump scam was also the subject of several episodes of the popular HBO series, The Sopranos, pulled off by Matthew Bevilaqua and Sean Gismonte.
- This strategy was also used by Jeffrey Archer in his book Not a Penny More, Not a Penny Less.
[edit] External links
- The SEC on Pump-and-Dump stock Schemes
- Stock Spam FAQ
- Spam Stock Tracker, shows that in the long run you will almost always lose money buying spammed stocks
- Chronological database of pump and dump spam
- 1997 Article on "Chop Stocks" and stock fraud, from Business Week
- "The Mob on Wall Street" Business Week article from 1996
- SEC Testimony on Organized Crime in the Markets, 13 September 2000
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