View source for Pump and dump

[[File:Bubble.folly.jpg|thumb|right|The "night singer of shares" sold stock on the streets during the [[South Sea Bubble]]. Amsterdam, 1720.]]

"'''Pump and dump'''" is a form of [[microcap stock fraud]] that involves artificially inflating the price of an owned [[stock]] through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price.  Once the operators of the scheme "dump" their overvalued shares, the price falls and investors lose their money. Stocks that are the subject of pump and dump schemes are sometimes called "chop stocks".<ref name="sec">{{cite web |url=http://www.sec.gov/answers/pumpdump.htm |title=Pump and Dump Schemes |publisher=U.S. Securities and Exchange Commission |date=March 12, 2001}}</ref>

While fraudsters in the past relied on [[cold calling|cold call]]s, the [[Internet]] now offers a cheaper and easier way of reaching large numbers of potential investors.<ref name="sec"/>

==Pump and dump scenarios==
Pump and dump schemes may take place on the Internet using an [[e-mail spam]] campaign, through media channels via a fake press release, or through telemarketing from "[[Boiler room (business)|boiler room]]" brokerage houses (for example, see ''[[Boiler Room (film)|Boiler Room]]''). <ref>{{cite web|author=NBC News staff and news wires |url=http://www.nbcnews.com/business/400-million-buyout-hoax-fooled-many-1C7208011 |title=The $400 million buyout hoax that fooled many - Business on |publisher=Nbcnews.com |date=2012-10-24 |accessdate=2012-12-18}}</ref> Often the [[stock promoter]] will claim to have "inside" information about impending news. Newsletters that purport to offer unbiased recommendations then [[tout]] the company as a "hot" stock. Messages in chat rooms and email [[spam (electronic)|spam]] urge readers to buy the stock quickly.<ref name="sec"/>

Unwitting investors then purchase the stock, creating high demand and raising the price. This seemingly "real" rise in prices can entice more people to believe the hype and to buy shares as well. When the people behind the scheme sell their shares and stop promoting the stock, the price plummets, and other investors are left holding stock that is worth significantly less than what they paid for it.

Fraudsters frequently use this ploy with small, thinly traded companies—known as "[[penny stock]]s," generally traded [[over-the-counter (finance)|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]] (NYSE) or [[NASDAQ]]—because it is easier to manipulate a stock when there is little or no independent information available about the company.<ref>{{cite web |url=http://www.sec.gov/investor/pubs/pump.htm |title=Pump&Dump.con: Tips for Avoiding Stock Scams on the Internet |publisher=U.S. Securities and Exchange Commission |date=January 11, 2005}}</ref> The same principle applies in the United Kingdom, where target companies are typically small companies on the [[Alternative Investment Market|AIM]] or [[OFEX]].

A more modern spin on this attack is known as hack, pump and dump.<ref name=WP>{{cite news|last=Nakashima|first=Ellen|title=Hack, Pump and Dump|url=http://www.washingtonpost.com/wp-dyn/content/article/2007/01/25/AR2007012501763.html|work=The Washington Post|date=2007-01-26}}</ref> In this form, a person purchases penny stocks in advance and then uses compromised brokerage accounts to purchase large quantities of that stock.  The net result is a price increase, which is often pushed further by day traders seeing a quick advance in a stock.  The holder of the stock then sells his stock at a premium.<ref name=HWS>{{cite book|last=Krinklebine|first=Karlos|title=Hacking Wall Street: Attacks and Countermeasures|year=2009|publisher=Darkwave Press|location=US|isbn=1-4414-6363-1|pages=83–180|url=http://www.amazon.com/Hacking-Wall-Street-Attacks-Countermeasures/dp/1441463631}}</ref>

===Specific examples===
====Jonathan Lebed====
During the [[Dot-com bubble|dot-com era]], when stock-market fever was at its height and many people spent significant amounts of time on stock Internet message boards, a 15-year-old named [[Jonathan Lebed]] showed how easy it was to use the Internet to run a successful pump and dump. Lebed bought [[penny stock]]s 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 [[Market manipulation|security manipulation]]. 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.<ref>{{Cite news |url=http://www.nytimes.com/2001/02/25/magazine/25STOCK-TRADER.html?pagewanted=all |title=Jonathan Lebed: Stock Manipulator, S.E.C. Nemesis -- and 15 |last=Lewis |first=Michael |date=February 25, 2001 |newspaper=New York Times}}</ref>

====Enron====
As late as April 2001, before the [[Enron scandal|company's collapse]], [[Enron]] executives participated in an elaborate scheme of pump and dump,<ref name="DVD132">{{cite video|title=[[Enron: The Smartest Guys in the Room]]|medium=DVD|publisher=[[Magnolia Pictures]]|time=32:58|date=January&nbsp;17, 2006}}</ref> in addition to other illegal practices that fooled even the most experienced analysts on Wall Street. Studies of the anonymous messages posted on the [[Yahoo]] board dedicated to Enron revealed predictive messages that the company was basically a house of cards, and that investors should bail out while the stock was good.<ref name="BMB-NYT">{{Cite news |author=[[Gretchen Morgenson|Morgenson, Gretchen]] |url=http://www.nytimes.com/2002/04/28/business/yourmoney/28WATC.html?pagewanted=1 |title=The Bears on This Message Board Had Enron Pegged |work=The New York Times |date=2002-04-28 |accessdate=2010-04-25}}</ref> After Enron falsely reported profits which inflated the stock price, they covered the real numbers by using questionable accounting practices. Twenty-nine Enron executives sold overvalued stock for more than a billion dollars before the company went bankrupt.<ref name="Publici"> Dan Chambers."[http://publici.ucimc.org/mar2002/32002_7.htm Enron the Symptom, Not the Disease]." ''publici.ucimc.org.'' Retrieved on 2010-04-25.</ref>

====Park Financial Group====
In April 2007, the U.S. SEC brought charges against Park Financial Group as a result of an investigation into a pump and dump scheme during 2002-2003 of the Pink Sheet listed stock of Spear & Jackson Inc.<ref>Wall Street Journal, April 12, 2007, pg. C2</ref>

===Pump and dump spam===
Pump and dump stock [[scams]] are prevalent in [[spam (electronic)|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 an average return of 4.29% by using this method, while recipients who act on the spam message typically lose close to 5.5% of their investment within two days.<ref>{{cite journal|author=Frieder, Laura and [[Jonathan Zittrain|Zittrain, Jonathan]]|title=Spam Works: Evidence from Stock Touts and Corresponding Market Activity|date=March 14, 2007|publisher=Berkman Center Research Publication No. 2006-11|ssrn=920553}} Results of this study are also discussed in this article:
* {{Cite news |url=http://news.bbc.co.uk/1/hi/technology/5284618.stm |title=Spammers manipulate stock markets |date=25 August 2006 |work=BBC News}}</ref> A study by Böhme and Holz<ref>[http://papers.ssrn.com/sol3/papers.cfm?abstract_id=897431 The Effect of Stock Spam on Financial Markets], 2006</ref> shows a similar effect. Stocks targeted by spam are almost always "[[penny stock]]s", selling for less than $5 per share, not traded on major exchanges, are thinly traded, and are difficult or impossible to [[Short (finance)|sell short]].  Spammers acquire stock before sending the messages, and sell the day the message is sent.<ref>[http://www.ebs.de/fileadmin/redakteur/funkt.dept.finance/DGF/downloads/Paper/No-262.pdf (Hanke and Hauser, 2006)]</ref>

Pump and dump differs from many other forms of spam (such as [[advance fee fraud]] emails and [[lottery scam]] messages) in that it does not require the recipient to contact the spammer to collect supposed "winnings," or to transfer money from supposed bank accounts. This makes tracking the source of pump and dump spam difficult, and has also given rise to "minimalist" spam consisting of a small untraceable image file containing a picture of a stock symbol.{{Citation needed|date=July 2007}}

==Short and distort==
{{main|Short and distort}}
A variant of the pump and dump scam, the "short and distort" works in the opposite manner.  Instead of first buying the stock, and then artificially raising its price before selling, in a "short and distort" the scammer first [[Short (finance)|short-sells]] the stock, and then artificially ''lowers'' the price, using the same techniques as the pump and dump but using criticism or negative predictions regarding the stock.  The scammer then buys back the stock at the lower price.<ref>{{cite news| url = http://www.wired.com/techbiz/media/news/2002/06/52785| last = Glasner| first = Joanna| title = New Market Trend: Short, Distort| work = Wired| publisher = Condé Nast Digital| archiveurl = http://www.webcitation.org/5nSEkhdBd| archivedate = February 11, 2010| accessdate = February 11, 2010| date=2002-06-03}}</ref>

==Regulation==
One method of regulating and restricting pump and dump manipulators, is to target the category of stocks most often associated with this scheme. To that end, penny stocks have been the target of heightened enforcement efforts. In the United States, regulators have defined a [[penny stock]] as a security that must meet a number of specific standards. The criteria include price, [[market capitalization]], and minimum [[shareholder|shareholder equity]]. Securities traded on a national [[stock exchange]], regardless of price, are exempt from regulatory designation as a penny stock,<ref>http://www.sec.gov/rules/final/34-51983.pdf</ref> since it is thought that exchange traded securities are less vulnerable to [[market manipulation|manipulation]].<ref>{{cite web |url=http://www.sec.gov/news/press/2009/2009-117.htm |title=SEC Charges Eight Participants in Penny Stock Manipulation Ring |date=May 21, 2009 |publisher=U.S. Securities and Exchange Commission}}</ref> Therefore, [[CitiGroup]] (NYSE:C) and other NYSE listed securities which traded below $1.00 during the market downturn of 2008-2009, while properly regarded as "low priced" securities, were not technically "penny stocks". Although penny stock trading in the United States is now primarily controlled through [[rulemaking|rules]] and [[regulation]]s enforced by the [[Securities and Exchange Commission]] and the [[Financial Industry Regulatory Authority]] (FINRA), the genesis of this control is found in State securities law. The [[State of Georgia]] was the first state to [[codification (law)|codify]] a comprehensive penny stock securities law.<ref>{{Cite news |url=http://articles.latimes.com/1990-03-20/business/fi-532_1_penny-stock |title=Georgia to OK Tough Law for Penny Stocks |date=March 20, 1990 |author=Stan Darden |work=Los Angeles Times |agency=[[UPI]]}}</ref> Secretary of State [[Max Cleland]], whose office enforced State securities laws<ref>{{cite web|url=http://www.sos.ga.gov/securities/ |title=Georgia Secretary of State &#124; Securities |publisher=Sos.ga.gov |date= |accessdate=2012-12-18}}</ref> was a principal proponent of the legislation. Representative Chesley V. Morton, the only [[stockbroker]] in the [[Georgia General Assembly]] at the time, was principal sponsor of the bill in the House of Representatives. Georgia's penny stock law was subsequently challenged in court. However, the law was eventually upheld in [[U.S. District Court]],<ref>{{Cite news |url=http://www.deseretnews.com/article/111783/GEORGIA-LAW-WONT-HURT-BROKERS-JUDGE-RULES.html?pg=all |title=GEORGIA LAW WON'T HURT BROKERS, JUDGE RULES |date=July 11, 1990 |work=Deseret News}}</ref> and the [[statute]] became the template for laws enacted in other states. Shortly thereafter, both FINRA and the SEC enacted comprehensive revisions of their penny stock regulations. These regulations proved effective in either closing or greatly restricting broker/dealers, such as Blinder, Robinson & Company, which specialized in the penny stocks sector. Meyer Blinder was jailed for securities fraud in 1992, after the collapse of his firm.<ref>{{Cite news |url=http://www.nytimes.com/2003/02/16/business/penny-stock-fraud-from-both-sides-now.html?pagewanted=all&src=pm |title=Penny-Stock Fraud, From Both Sides Now |author=Diana B. Henriques |date=February 16, 2003 |work=New York Times}}</ref> However, sanctions under these specific regulations lack an effective means to address pump and dump schemes perpetrated by unregistered groups and individuals.

==References==
{{Reflist|2}}

== Further reading ==
*{{cite book|last=Krinklebine|first=Karlos|title=Hacking Wall Street: Attacks and Countermeasures|year=2009|publisher=Darkwave Press|location=US|isbn=978-1-4414-6363-0|page=402}}
* Robert H. Tillman and Michael L. Indergaard, ''Pump and Dump: The Rancid Rules of the New Economy'' (2005, ISBN 0-8135-3680-4).
* Sergey Perminov, ''Trendocracy and Stock Market Manipulations'' (2008, ISBN 978-1-4357-5244-3).

== External links ==
* [http://www.sec.gov/investor/pubs/pump.htm The SEC on Pump and dump stock Schemes in 2005]
* [http://www.sec.gov/answers/pumpdump.htm The SEC on Pump and dump stock Schemes in 2001]
* [http://www.imdb.com/title/tt0181984/ The movie ''Boiler Room'', a fictional account of a pump and dump company]
{{DEFAULTSORT:Pump And Dump}}
{{Scams and confidence tricks}}

[[Category:Financial regulation]]
[[Category:Finance fraud]]
[[Category:Spamming]]
[[Category:Stock market]]