Pump and Dump Schemes
“Pump-and-dump” (“P&D”) schemes are schemes that involve artificially inflating the price of a stock by publicly touting false and misleading statements to the market place, and then selling the stock in order to make a profit. These schemes typically involve so-called “microcap” companies, which are generally defined as those companies with a market capitalization of under $250 million. The false and misleading statements can be issued in a variety of ways, but the internet and social media, such as Facebook, Twitter, and online bulletin boards and chat rooms are common ways through which “stock promoters” disseminate such statements to the public. The stock promoter will often claim to have “inside” information about the particular stock and will encourage investors to buy a stock quickly. If successful, the false and misleading statements will seduce investors into purchasing shares of the target company, increasing demand, and thus the price of the stock. The beneficiaries behind the scheme, who are often company insiders or paid promoters, will then sell their stock to the market, and once the hype around the stock dies down, the price will inevitably fall leaving the seduced investors at a loss.
Participating in any part of a P&D scheme can violate a number of federal securities laws including Section 10b-5 of the Securities Exchange Act of 1934, which broadly prohibits any fraud, material misstatements, or material omissions in connection with the purchase or sale of securities, and the Securities Act of 1933. However, P&D schemes can also give rise to a variety of other federal and common law violations. Navigating the various federal statutes, common law claims, and regulatory rules surrounding securities requires a competent and experienced securities lawyer who can understand the interaction of the facts and the law, as well as navigate any regulatory actions on the part of the SEC that might have arisen as a result of the alleged P&D scheme.
Although it is hard to identify a P&D scheme with complete certainty, there are a number of warning signs to look for that might signal you have been defrauded by a P&D scheme. One of these signs is if a private company acquires a publicly traded company in a “reverse merger.” This is often a first step in P&D schemes because it allows insiders to take a venture public without filing the usual registration statement that might divulge information to the public they would rather keep secret. A second sign is the promise of big profits and strong encouragement to purchase stocks quickly. A third sign to look out for is a trading surge—if the share volume of a stock rapidly increases compared to earlier periods, it might be a sign of a P&D scheme. If you believe you have been the victim of a P&D scheme, please contact our experienced securities class action lawyers at Glancy Prongay & Murray.