A pump-and-dump scheme is a type of securities fraud in which the price of a stock or other asset is artificially inflated (“pumped”) through publication of false or misleading statements. Once the price goes up, the fraudsters sell off (“dump”) their shares at the inflated price, leaving other investors with significant losses as the price plummets.
How it works
Methods vary, but the usual process follows a general pattern:
- Acquisition: Fraudsters acquire a large number of shares of a low-value stock, often a micro-cap or penny stock.
- Promotion: They spread false and misleading positive information about the stock to create hype and attract other investors. They can use social media, email campaigns, online forums or other avenues to spread this misleading information.
- Inflation: As more investors buy into the hype, the stock price rises.
- Sell-off: Once the price peaks, the fraudsters sell their shares at the inflated price.
- Collapse: The stock price crashes, leaving the new investors with devalued or worthless shares.
Infamous examples
There are countless examples of pump-and-dump schemes, but some of the most famous ones are:
- Wolf of Wall Street (1990s): Jordan Belfort’s Stratton Oakmont firm manipulated penny stocks, driving up prices before selling off their holdings.
- Cryptocurrency schemes (2020s): In recent years, pump-and-dump scammers targeted various cryptocurrencies because of the market’s lack of regulation.
Plaintiffs can file class action lawsuits
Class action lawsuits can hold the perpetrators of pump-and-dump schemes accountable by allowing a group of affected investors to sue the fraudsters collectively. Legal action can lead to:
- Financial Compensation: Victims may receive a portion of the recovered funds.
- Deterrence: Successful lawsuits can deter future fraud by imposing significant financial penalties.
- Regulatory Action: Lawsuits can prompt regulators like the SEC to take action, leading to stricter regulations and oversight.
Are you a victim of this type of scam?
Spotting a pump-and-dump scheme can be tricky, so it is often wise to consult with attorneys who handle securities fraud class actions for plaintiffs. These professionals can help identify potential schemes and hold the scammers accountable.