Pump-and-dump scams, also known as boiler room scams, used to rely on cold calls as a way to artificially increase the price of a stock and take advantage of unsuspecting investors.
Nowadays, scammers also utilize social media, websites, and press releases. In one case back in late 2013 and early 2014, a company called Money Runners Group began tweeting high praise for a small company called GrowLife, Inc. (traded under the ticker PHOT) that specialized in providing supplies and logistics support to marijuana farmers. At the time of their first tweet on December 20, 2013, the stock was valued at $0.14 per share – by January 9, 2014, it had more than tripled in value and was valued at $0.47. Less than two weeks later, the stock closed at $0.19.
Afterwards, Money Runners switched to posting on Facebook to continue proclaiming PHOT as the next great investment. Within a week, the stock’s value shot back up It didn’t take long for the United States Securities and Exchange Commission (SEC) to take notice – the regulatory body lodged a civil complaint in August of 2014, alleging that Christopher Mwroca and Mikhail Galas, the men behind Money Runners, bought millions of shares of PHOT stock, along with five other stocks, and worked behind the scenes to make them appear to be active and highly-traded stocks by purchasing each other’s shares and transferring shares between multiple brokerage accounts. According to the SEC, Mwroca made $165,700 from the PHOT stock alone, and Mwroca, Galas, and two other associates made around $2.5 million in total through their scheme.
Investors need to be wary of any unsolicited stock tips. Some red flags suggesting a possible pump-and-dump scheme include:
- Constantly pressuring you to take advantage a limited time offer. High-pressure sales tactics are a tell-tale sign of potential fraud. Never purchase a stock from anyone who is pressuring you to make a quick decision.
- Hiding their identity. If you can’t verify the identity of the person pushing the sale, then what’s to say they’re a reputable source? If they claim to be a legitimate broker, it should be easy for them to prove their credentials. There are multiple tools available to verify their claims, including the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck.
- Difficulty retrieving information about the stock. Small companies may not have enough publicly available information available for you to make an informed decision. Their stocks, commonly referred to as “penny stocks,” also tend to be highly volatile in price.
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