How Do Pump & Dump Scams Work?

The “pump and dump” investment scam can be tricky for investors looking to get in on a good opportunity. The financial fraudsters who are responsible for this kind of investment fraud know exactly how to manipulate innocent investors and make an investment seem like a great deal going fast. Sometimes even the company responsible for the stocks used in the scam is completely unaware that fraud is going on until it’s too late—and ends up suffering for it. We believe understanding how financial fraud works is a big step in learning how to avoid it.

“Pump & Dump” Scams Usually Work Like This:

• The fraudsters buy up stock, usually choosing a cheap “penny stock.”
• The fraudsters start spreading the word about the “promising” stock, aiming to “pump” up the stock and get people excited about potential gains on a supposedly limited-time offer.
• Investors start pouring money into the investment and the price starts to rise.
• The fraudsters start the next round of “pumping” the stock—sometimes even with made-up press releases or expert statements—and point to the rising price as evidence of its performance, which falsely inflates the price even more.
• The fraudsters keep it up until eventually “dumping” their shares for a huge profit and leaving investors scrambling to get rid of worthless stock as the price plummets.

Avoiding Pump & Dump Scams

In order to avoid a “pump and dump” investment scam, you should always:

• Be hesitant to listen to recommendations from strangers, especially those that promise an impending announcement from a company or a new product.
• Be suspicious of “limited-time offers” or promises of huge profits.
• Don’t give in to high-pressure sales tactics or increasingly aggressive marketing.
• Be sure that the stock trades on a national exchange.
• Be wary of any investment tips or offers that you receive online.
• Do your research before you invest to ensure everything looks as promised.

Get in Touch with Meyer Wilson Today

This type of investment fraud is very effective because it really seems like you’re getting results. Investors can watch the stock prices rise, and may spread the word about their excellent investment choice. The companies are often completely legitimate, so even investors who research the investment may not realize what is happening until it is too late. The prices start to fall so quickly once the fraudsters pull out, that honest investors just don’t have time to react.

If you have been taken advantage of through stockbroker misconduct, stock scams, or a “pump and dump” scheme, talk to one of the respected securities fraud attorneys with Meyer Wilson. We have over 50 years of collective experience helping victims of stock scams recover their losses through FINRA arbitration, mediation, and litigation. Give us a call for a FREE consultation.