“Pump and dump” Schemes
Welcome to Your Money. Today, we’ll talk about one of the most common investment frauds – the “pump and dump” scheme. Here's how it works. First, there’s the glowing press release about a company, usually on its financial health or some new product or innovation. Then, 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 may urge you to buy the stock quickly or to sell before the price goes down. Or you may even hear the company mentioned by a radio or TV analyst.
Unsuspecting investors then purchase the stock in droves, pumping up the price. But when the fraudsters behind the scheme sell their shares at the peak and stop hyping the stock, the price plummets, and innocent investors lose their money.
Fraudsters frequently use this ploy with small, thinly traded companies because it's easier to manipulate a stock when there's little or no information available about the company. To steer clear of potential scams, always investigate before you invest:
Here are a few steps you can take:Don’t Believe the Hype
For investors, unbelievable investment opportunities can be public enemy number one. If you hear about an investment opportunity that sounds good to be true – whether on the Internet, through an email, a fax, a voice mail message, a text message – you name it. Listen to your – insert caring relative’s name here – and assume it’s a scam, unless you can prove through your own research that it is legitimate. And remember that the people touting a stock may well be insiders of the company or paid promoters who stand to profit handsomely if you trade.Find Out Where the Stock Trades
Many of the smallest and most thinly traded stocks cannot meet the listing requirements of the Nasdaq Stock Market, the New York Stock Exchange, or other national securities exchanges. Instead they trade in the "over-the-counter" market and are quoted on OTC systems, such as the OTC Bulletin Board or the Pink Sheets. Stocks that trade in the OTC market are generally among the most risky and most susceptible to manipulation.Independently Verify Claims
It's easy for a company or its promoters to make high-flying claims about new product developments, lucrative contracts, or the company's financial health. Don’t’ take their word for it. Go out and verify those claims on your own and make up your own mind before you invest.Research the Opportunity
Always ask for — and carefully read — the prospectus or current financial statements. Check the SEC's EDGAR database to see whether the investment is registered. Some smaller companies don't have to register their securities offerings with the SEC, so always check with your state securities regulator, too.Watch Out for High-Pressure Pitches
Beware of promoters who pressure you to buy before you have a chance to think about and fully investigate the so-called "opportunity." Don't fall for the line that you'll lose out on a "once-in-a-lifetime" chance to make big money if you don't act quickly.Always Be Skeptical
Whenever someone you don't know offers you a hot stock tip, ask yourself: Why me? Why is this stranger giving me this tip? How might he or she benefit if I trade?
Do you want to learn more about investing wisely and avoiding fraud? Stay tuned (or rather stay subscribed to this podcast). In the meantime, you may want to check out the Investor Information section on the SEC’s website (sec.gov).
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