Pump-and-Dump

What Is Pump-and-Dump?

Pump-and-dump is a manipulative scheme that attempts to boost the price of a stock or security through fake recommendations. These recommendations are based on false, misleading, or greatly exaggerated statements. The perpetrators of a pump-and-dump scheme already have an established position in the company's stock and will sell their positions after the hype has led to a higher share price.

This practice is illegal based on securities law and can lead to heavy fines. The burgeoning popularity of cryptocurrencies has resulted in the proliferation of pump-and-dump schemes within the industry.1

KEY TAKEAWAYS

Pump-and-dump is an illegal scheme to boost a stock's or security's price based on false, misleading, or greatly exaggerated statements.
Pump-and-dump schemes usually target micro- and small-cap stocks.
People found guilty of running pump-and-dump schemes are subject to heavy fines.
Pump-and-dump schemes are increasingly found in the cryptocurrency industry.

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Pump And Dump

The Basics of Pump-and-Dump

Pump-and-dump schemes were traditionally conducted through cold calling. The advent of the Internet has shifted most of this activity online; fraudsters can now blast hundreds of thousands of email messages to unsuspecting targets or post messages online enticing investors to buy a stock quickly.

These messages typically claim to have inside information about an imminent development that will lead to a dramatic upswing in the share's price. Once buyers jump in and the stock has moved up significantly, the perpetrators of the pump-and-dump scheme sell their shares. In these instances, the volume of the sales of these shares is usually substantial, causing the stock price to drop dramatically. In the end, many investors experience huge losses.

Pump-and-dump schemes generally target micro- and small-cap stocks on over-the-counter exchanges that are less regulated than traditional exchanges. Micro-cap stocks—and occasionally, small-cap stocks—are favored for this type of abusive activity because they are easier to manipulate.2 Micro-cap stocks generally have a small float, low trading volumes, and limited corporate information. As a result, it does not take a lot of new buyers to push a stock much higher.

Pump-and-Dump 2.0

The same scheme can be perpetrated by anyone with access to an online trading account and the ability to convince other investors to buy a stock that is supposedly "ready to take off." The schemer can get the action going by buying heavily into a stock that trades on low volume, which usually pumps up the price.

The price action induces other investors to buy heavily, pumping the share price even higher. At any point when the perpetrator feels the buying pressure is ready to fall off, they can dump their shares for a big profit.3

Pump-and-Dump in Pop Culture

The pump-and-dump scheme formed the central theme of two popular movies: "Boiler Room" and "The Wolf of Wall Street." Both of these movies featured a warehouse full of telemarketing stockbrokers pitching penny stocks. In each case, the brokerage firm was a market maker and held a large volume of shares in companies with highly questionable prospects. The firms' leaders incentivized their brokers with high commissions and bonuses for placing the stock in as many customer accounts as possible. In doing so, the brokers were pumping up the price through huge volume selling.

Once the selling volume reached critical mass with no more buyers, the firm dumped its shares for a huge profit. This drove the stock price down, often below the original selling price, resulting in big losses for the customers because they could not sell their shares in time.

Avoiding Pump-and-Dump Schemes

The Securities and Exchange Commission (SEC) has some tips to help avoid becoming a victim of a pump-and-dump scheme. Here are some points to keep in mind:

Be Extremely Wary of Unsolicited Investment Offers

Exercise extreme caution if you receive an unsolicited communication regarding an "investment opportunity." The plethora of avenues for virtual communication means that such dubious investment pitches can reach you in any number of ways—by way of an email, a comment or post on your social media page, a direct message, or a call or voicemail on your cellphone. Ignore such messages; acting on them may result in significant losses rather than the massive gains promised by the scammers.3

Look Out for Obvious Red Flags

Does the purported investment sound too good to be true? Does it promise huge "guaranteed" returns? Are you pressured to buy right now, before the stock takes off? These are all common tactics used by stock touts and unscrupulous promoters and should be viewed as red flags by investors.3

Look Out for Affinity Fraud

Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, aging adults, or professional groups. An investment pitch from a member of a group that you are affiliated with may lead you to believe in its credibility; the problem is that the member may have been unwittingly fooled into believing that an investment is legitimate (when in reality, it is just a scam).3

Conduct Your Own Research and Due Diligence

Before you invest your hard-earned money, conduct your own research and due diligence. It is fairly easy to obtain a wealth of information online about legitimate companies—from their business prospects and management to their financial statements. The lack of such information can often be a red flag in itself.3

Pump-and-Dump 3.0

The cryptocurrency market has become the newest arena for pump-and-dump schemes. The massive gains made by Bitcoin and Ethereum have kindled tremendous interest in cryptocurrencies of every stripe. Unfortunately, cryptocurrencies are particularly well-suited for pump-and-dump schemes because of the lack of regulation in the cryptocurrency market, its opaqueness, and the technical complexity of cryptocurrencies.

A study conducted in 2018 examined the prevalence of pump-and-dump schemes in the cryptocurrency market. Researchers identified more than 3,400 such schemes over the course of just six months observing two group-messaging platforms popular with cryptocurrency investors.4

In March 2021, the U.S. Commodity Futures Trading Commission (CFTC) advised customers to avoid pump-and-dump schemes that can occur in thinly traded or new cryptocurrencies. The CFTC also unveiled a program that would make any whistleblower eligible for a monetary reward of between 10% and 30%, as long as they reveal original enforcement action that leads to monetary sanctions of $1 million or more against a pump-and-dump scheme.5

The Securities and Exchange Commission today announced charges against 16 defendants, located in the Bahamas, the British Virgin Islands, Bulgaria, Canada, the Cayman Islands, Monaco, Spain, Turkey, and the United Kingdom, for participating in multi-year fraudulent penny stock schemes that generated more than $194 million in illicit proceeds. The SEC investigations leading to these charges involved assistance from securities regulators and other law enforcement authorities in more than 20 countries and are associated, in part, with parallel criminal actions announced by the United States Attorney’s Office for the Southern District of New York.

"We allege that the defendants in these actions orchestrated some of the most complex microcap stock fraud schemes ever charged by the SEC," said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. "By locating their operations overseas, using encrypted messaging and operating through a convoluted network of offshore accounts, the defendants hoped to avoid detection of the massive frauds we allege they perpetrated on US markets and investors. However, investigative teams from three SEC offices doggedly kept on their trail, working across borders, and ended this alleged global scheme."

The SEC’s complaints, filed in the United States District Court for the Southern District of New York, charge all of the defendants with violating the antifraud and registration provisions of the federal securities laws. The charges, contained in three separate complaints, allege that several defendants played a variety of roles to accumulate the majority of shares in penny stocks via difficult to unveil, offshore nominee companies. It is also alleged that some of the defendants frequently used encrypted text and phone applications to avoid detection by regulators, and arranged to buy and sell penny stocks from multiple offshore accounts, in furtherance of the fraud.

According to the complaints, once some of the defendants had amassed a significant majority of the shares of the stocks, certain defendants secretly funded promotional campaigns to promote the stocks to unsuspecting investors in the United States and elsewhere. As alleged, when those campaigns triggered increases in the demand for and price of the stocks, some of the defendants sold the stocks via trading platforms in Asia, Europe and the Caribbean for significant profits.

The SEC is seeking permanent injunctions, disgorgement of allegedly ill-gotten gains plus interest, and civil penalties against all the defendants; penny stock bars against all the individual defendants; conduct-based injunctions against 11 of the 15 individual defendants; and officer and director bars against eight of the individual defendants. On the emergency applications, the Court issued orders on April 12 and April 15 freezing and directing repatriation of the assets of six defendants.

The SEC’s investigations were conducted by Trevor Donelan, Alicia Reed, Michael Moran, David D’Addio, and Amy Gwiazda in the SEC’s Boston Regional Office; Benjamin D. Brutlag, Shipra G. Wells, Karaz S. Zaki, and J. Lee Buck II in the SEC’s Headquarters, with the assistance of Yongping Zheng of the Enforcement Division’s Office of Investigative & Market Analytics; and by Kristine Zaleskas, Michael Paley, and Judith Weinstock in the New York Regional Office. All of the investigations received assistance from the SEC’s Office of International Affairs, including Owen Granke, Matthew Greiner, Andrew Lewczyk, and Marlee Miller. The litigations will be led, respectively, by David London and Martin Healey; Kenneth W. Donnelly, David Nasse, and Frederick L. Block; and Paul Gizzi and Ms. Zaleskas.

The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority. The investigations also involved assistance from the following securities regulators and other government authorities: the Alberta Securities Commission, the Securities Commission of the Bahamas, the British Columbia Securities Commission, the Cayman Islands Monetary Authority, the Curaçao Korps Landelijke Politiediensten, the Cyprus Securities and Exchange Commission, the Financial Supervisory Authority of Denmark, the Guernsey Financial Services Commission, the Hong Kong Securities and Futures Commission, the Italian Commissione Nazionale per le Società e la Borsa, the Japan Financial Services Agency, the Jersey Financial Services Commission, the Latvia Financial and Capital Market Commission, the Liechtenstein Financial Market Authority, the Malta Financial Services Authority, the Mauritius Financial Services Commission, the Mexican Comisión Nacional Bancaria y de Valores, the New Zealand Financial Markets Authority, the Ontario Securities Commission, the Panamanian Superintendencia del Mercado de Valores, the Securities Commission of Serbia, the Québec Autorité des Marchés Financiers, the Royal Canadian Mounted Police, the Monetary Authority of Singapore, the Swiss Financial Market Supervisory Authority, the United Arab Emirates Securities and Commodities Authority, the Dubai Financial Services Authority, and the United Kingdom Financial Conduct Authority.

Also see:An illustration of the alleged schemes’ global reach.

Defendants (in alphabetical order)

Antevorta Capital Partners, Ltd.

Craig James Auringer

Ronald Bauer

Domenic Calabrigo

Henry Clarke

Julius Csurgo

Daniel Mark Ferris

Alon Friedlander

Adam Christopher Kambeitz

Curtis Lehner

Petar Dmitrov Mihaylov

Massimiliano Pozzoni

Hasan Sario

Dean Shah

David Sidoo

Courtney Vasseur

SEC.gov | SEC Uncovers $194 Million Penny Stock Schemes that Spanned Three Continents

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