Pump and Dump Scams
If you suspect that your investment losses happened because of a pump and dump broker fraud, it is important that you explore your legal options immediately. Unfortunately, pump and dump schemes are not uncommon and they can cause huge financial harm to their victims.
At Shepherd Smith Edwards and Kantas (SSEK Law Firm at investorlawyers.com) our investor loss lawyers represent investors who have lost money in this type of scam, which is very deliberate and methodical. It is also illegal.
Unfortunately, there are brokers and broker-dealers who will get involved in a pump and dump fraud to make money to the detriment of customers and other investors. Call (800) 259-9010 today to explore your legal options with our investor loss lawyers.What is a Pump and Dump Scheme?
In a pump and dump scheme, the price of a stock is artificially raised. The fraudsters will usually do this by making misleading, false, or exaggerated statements that cause more people to buy the investment, pumping up its value.
Once the demand for the pump stock reaches critical mass, the scammers will sell their shares of this stock, dumping them into the stock market while they make a significant profit at this higher price. They will then cease promoting the stock, which starts to drop in value and may go back to its original price or even lower. It is at this point that the other investors who purchased the stock at the higher prices end up suffering significant losses.
Usually, it is a small-cap stock, a microstock, or a penny stock that a scammer will try to pump and dump. A fraudster may do this by touting the stock of a small, little-known company that they will claim investors won’t want to miss out on.
The promoter of the scheme may be the owner of the company or some other opportunist. And, as we mentioned earlier, broker-dealers and their brokers have been known to get involved in pump and dump scams. Or, in a failure to conduct proper due diligence, a financial advisor may recommend a stock without knowing they are promoting a financial scheme.
Pump and dump scams violate a number of laws, such as:
- The Securities Exchange Act of 1934’s Rule 10b-5, which prohibits the use of misstatements and omissions related to the buying and selling of securities.
- The Securities Act of 1933’s Section 17(a), which bars anyone from selling or offering securities as part of a scam to defraud others. Under this law, it also is illegal to make misstatements and omissions to defraud potential buyers of a security.
There are steps that investors can take to ensure that they won’t become victims of a pump and dump scam. While it may not always be possible to detect fraudulent behavior on behalf of your broker, these signs are red flags you need to be aware of:
- Be wary of hot stock tips that you hear about through social media, emails, newsletters, chat rooms, direct mail, radio/TV ads, or other marketing collateral.
- Ask yourself, does this stock promoter have anything to gain from you buying this stock? Even if your broker is the one recommending the stock, are they getting paid anything extra for your purchase?
- Research the stock. Does the stock trade on a major market or an over-the-counter (OTC) platform, which is where micro stocks can be found? Trading in the OTC market tends to be riskier. Is the investment registered with the US Securities and Exchange Commission (SEC)?
- Research the company. Who are its owners? Has the company submitted SEC filings before?
- Stay away from stock promoters who use high-pressure, “buy now or you’ll miss out” sales tactics.
- If the investment sounds too good to be true, there is a good chance you are right. Be concerned about investments that promise no risk or guarantee returns.
SSEK Law Firm has represented investors throughout the US, as well as those who live abroad with claims against US-based firms, for over 30 years. We have recovered many millions of dollars for our clients.
Contact our skilled pump and dump litigation attorneys so that we can investigate the stock, as well as your broker-dealer, to help you determine whether you have grounds for a claim. Reach out to us online or call (800) 259-9010 today.