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Encyclopedia > Pump and dump
The "night singer of shares" sold stock on the streets during the South Sea Bubble. Amsterdam, 1720.
The "night singer of shares" sold stock on the streets during the South Sea Bubble. Amsterdam, 1720.

"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. Image File history File links Download high-resolution version (597x707, 106 KB)Source (specific): http://lids. ... Image File history File links Download high-resolution version (597x707, 106 KB)Source (specific): http://lids. ... Hogarthian image of the South Sea Bubble by Edward Matthew Ward, Tate Gallery More well known than The South Sea Company is perhaps the South Sea Bubble (1711 - September 1720) which is the name given to the economic bubble that occurred through overheated speculation in the company shares during 1720. ... This article does not cite its references or sources. ... For security (collateral), the legal right given to a creditor by a borrower, see security interest A security is a fungible, negotiable interest representing financial value. ... Artificial demand constitues demand for something that in the abscence of exposure to the vehicle of creating demand, would not exist. ...


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. In personal selling, cold calling is the processing of approaching prospective clients, typically via telephone, who have not agreed to such an interaction. ...

Contents

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. This article or section does not adequately cite its references or sources. ...


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.


Markets where stocks have been manipulated in this manner

Fraudsters frequently use this ploy with small, thinly traded companies—known as "penny stocks," generally traded on over-the-counter. In the United States, this would mean markets such as the OTC Bulletin Board or the Pink Sheets), rather than markets 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 in the United Kingdom, where target companies are typically small companies quoted on AIM or OFEX. Most of the companies that are promoted 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. In the U.S. financial markets, the term penny stock commonly refers to any stock trading outside one of the major exchanges (NYSE, NASDAQ, or AMEX), and is often considered pejorative. ... Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, or derivatives directly between two parties. ... Pink Sheets is an electronic system, published by Pink Sheets LLC, to display bid and ask quotation prices. ... The New York Stock Exchange (NYSE), nicknamed the Big Board, is a New York City-based stock exchange. ... NASDAQ in Times Square, New York City. ... AIM is a three-letter abbreviation with multiple meanings, as described below: AOL Instant Messenger A I M Management Group Inc. ... An unregulated over-the-counter market in U.K. shares which specialises in small companies. ...


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. A chop stock is an equity, usually trading trading on the OTCBB or Pink Sheets listing services, that is sold by unscrupulous stock brokers to unsuspecting retail customers at a considerable commission, often as high as 50%. The penny stock being promoted typically has few financial prospects and a large...


Specific examples

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] Jonathan Lebed (born circa 1985) is an American who, in 2001 as a teenager, made hundreds of thousands of dollars by going into internet chat rooms and encouraging people to buy stocks he already owned. ... The U.S. Securities and Exchange Commission, commonly referred to as the SEC, is the United States governing body which has primary responsibility for overseeing the regulation of the securities industry. ...


More recently, on April 12, 2007 it was reported that the SEC had brought charges against Park Financial Group for the role they played in a pump and dump scheme of the common stock of Spear & Jackson Inc. At the time of the scheme, in 2002 and 2003, the stock of Spear & Jackson traded on the Pink Sheets. (Wall Street Journal, April 12, 2007, pg. C2) SEC is a TLA which can refer to: In general context, an abbreviation for second. ...


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. Organized crime or criminal organizations are groups or operations run by criminals, most commonly for the purpose of generating a monetary profit. ... The Five Families are the major crime families of the Italian-American Mafia based in New York City which have dominated traditional organized crime in New York. ...


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] Gary Weiss is an award-winning investigative journalist and author of Born to Steal and Both books are harshly critical humorous examinations of the ethics and morality of Wall Street, often tinged with humor. ... BusinessWeek is a business magazine published by McGraw-Hill. ...


Weiss explored the Mafia's Wall Street scams in his book Born to Steal: When the Mafia Hit Wall Street.


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.[1] A study by Böhme and Holz[2] 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.[3] This article or section does not adequately cite its references or sources. ... Stocks with market price below 1 unit of the local currency are called penny stocks (although it is not uncommon for stocks up to $5 to also be referred by this name). ... In finance, short selling is selling something that one does not (yet) own. ...


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. An advance fee fraud is a confidence trick in which the target is persuaded to advance relatively small sums of money in the hope of realizing a much larger gain. ... A typical lottery scam begins with an unexpected email notification that You have won! a large sum of money in a lottery. ...


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 fictionalised by Jeffrey Archer in his book Not a Penny More, Not a Penny Less.

Gary Weiss is an award-winning investigative journalist and author of Born to Steal and Both books are harshly critical humorous examinations of the ethics and morality of Wall Street, often tinged with humor. ... The Mafia (also referred to as Cosa Nostra or the Mob), is a criminal secret society which first developed in the mid-19th century in Sicily. ... Boiler Room is a 2000 U.S. drama, written and directed by Ben Younger, and starring Giovanni Ribisi, Vin Diesel and Nia Long. ... This article, image, template or category should belong in one or more categories. ... Wall Street is an American film released in 1987. ... For other people bearing this name, see Michael Douglas (disambiguation). ... Charles Irwin Sheen (born Carlos Irwin Estévez on September 3, 1965) is a Golden Globe Award-winning and Emmy-nominated American actor. ... HBO (Home Box Office) is an American premium cable television network. ... This article is about the TV series. ... The following is a listing of fictional characters from the HBO series The Sopranos that are associated with the DiMeo/Soprano Crime Family. ... The following is a listing of fictional characters from the HBO series The Sopranos that are associated with the DiMeo/Soprano Crime Family. ... Jeffrey Howard Archer, Baron Archer of Weston-super-Mare (born 15 April 1940) is a British author and politician. ... Not a Penny More, Not a Penny Less was Jeffrey Archers first novel, first published in 1974. ...

References

  1. ^ Frieder, Laura and Zittrain, Jonathan, "Spam Works: Evidence from Stock Touts and Corresponding Market Activity" (March 14, 2007). Berkman Center Research Publication No. 2006-11. Results of this study are also discussed in a BBC article
  2. ^ The Effect of Stock Spam on Financial Markets, 2006
  3. ^ (Hanke and Hauser, 2006)

External links


  Results from FactBites:
 
Encyclopedia: Pump and dump (954 words)
They have pumped a worthless stock and then dumped it, probably within a period of six months, and are gone from the scene before stock purchasers realize that they are victims of a vicious fraud and file complaints.
Pump and Dump stock frauds may number in the hundreds at any one time, each raking in several million dollars before the inevitable dumping as worthless.
Only if the pump and dump has engaged the services of a traditional brokerage for certificate clearing or other services, an arbitration action for some recovery may be possible through the National Association of Securities Dealers, Inc. If not, investors can kiss the money and their dreams of riches goodbye.
  More results at FactBites »

 
 

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