"Pump and dump" (P&D) is a form of securities 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" sell their overvalued shares, the price falls and investors lose their money. This is most common with small cap cryptocurrencies and very small corporations, i.e. "microcaps".
While fraudsters in the past relied on cold calls, the Internet now offers a cheaper and easier way of reaching large numbers of potential investors through spam email, bad data, social media, and false information.
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" brokerage houses (such as that dramatized in the 2000 film Boiler Room). Often the stock promoter will claim to have "inside" information about impending news. Newsletters may purport to offer unbiased recommendations, then tout a company as a "hot" stock, for their own benefit. Promoters may also post messages in chat rooms or stock message boards such as ADVFN, urging readers to buy the stock quickly.
If a promoter's campaign to "pump" a stock is successful, it will entice unwitting investors to purchase shares of the target company. The increased demand, price, and trading volume of the stock may convince more people to believe the hype, and to buy shares as well. When the promoters behind the scheme sell (dump) their shares and stop promoting the stock, the price plummets, and other investors are left holding a stock that is worth significantly less than they paid for it.
Fraudsters frequently use this ploy with small, thinly traded companies—known as "penny stocks," generally traded 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. The same principle applies in the United Kingdom, where target companies are typically small companies on the AIM or OFEX.
A more modern spin on this attack is known as hack, pump and dump. In this form, a person purchases penny stocks 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 original stockholder then cashes out at a premium.
In the early 1990s the penny-stock brokerage Stratton Oakmont artificially inflated the price of owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price. Firm co-founder Jordan Belfort was criminally convicted for his role in the scheme. He later turned his story into a memoir, The Wolf of Wall Street, which was later adapted into an Academy Award-nominated film of the same name.
During the 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 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. 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.
As late as April 2001, before the company's collapse, Enron executives participated in an elaborate scheme of pump and dump, 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. 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.
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.
Started as Crown Corporation, Langbar was the biggest pump and dump fraud on the Alternative Investment Market, part of the London Stock Exchange. The company was at one point valued greater than $1 billion, based on supposed bank deposits in Brazil which did not exist. None of the chief conspirators were convicted, although their whereabouts are known. A patsy who made a negligent false statement about the assets was convicted and banned from being a director. The investors who lost as much as £100 million sued one of the fraudsters and recovered £30 million.
Pump and dump stock scams are prevalent in 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. A study by Böhme and Holz shows a similar effect. Stocks targeted by spam are almost always penny stocks, selling for less than $5 per share, not traded on major exchanges, are thinly traded, and are difficult or impossible to sell short. Spammers acquire stock before sending the messages, and sell the day the message is sent.
A pump and dump scam is a type of economic bubble, with the main difference between this scheme and most other types of bubbles being that the pump and dump bubble is deliberately perpetrated by unlawful activity. A pump and dump scheme is similar in many ways to a Ponzi scheme (in that both types of scam use misrepresentations in an effort to enrich the promoters and/or initial investors with money from later investors), however, there are a number of differences between the schemes:
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.
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-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 covers their short position when they buy back the stock at a lower price. This tactic is commonly used by institutions and brokers to dupe individual traders in the Korean stock market, as only institutional traders are allowed to shortsell stocks.
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 equity. Securities traded on a national stock exchange, regardless of price, are exempt from regulatory designation as a penny stock, since it is thought that exchange traded securities are less vulnerable to manipulation. 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 rules and regulations 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 codify a comprehensive penny stock securities law. Secretary of State Max Cleland, whose office enforced State securities laws 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, 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. However, sanctions under these specific regulations lack an effective means to address pump and dump schemes perpetrated by unregistered groups and individuals.
Alan "Baldie" Longo (born April 2, 1950) is a convicted Brooklyn mobster and acting caporegime in the New York Genovese crime family who became heavily involved in stock fraud schemes.Alphonse Malangone
Alphonse "Allie Shades" Malangone (born December 2, 1936) is a New York City mobster and caporegime in the Genovese crime family, headed by Vincent Gigante. Malangone controlled the Genovese interests in the Fulton Fish Market, as well as being involved in pump and dump stock scams on Wall Street, and controlling Brooklyn's garbage hauling industry. He was a central figure in the book "Takedown: The Fall of the Last Mafia Empire" an autobiography by NYPD officer Rick Cowan who went undercover for several years in the commercial garbage industry, posing as a family member of Brooklyn garbage company and eventually gaining access to the garbage cartel's organization, he Kings County Trade Waste Association. ISBN 0-425-19299-7 Cowen describes Malangone as the cagiest and most relatable of mobsters he dealt with.
He got his nickname for always wearing aviator style tinted sunglasses, even at night.Artificial demand
Artificial demand constitutes demand for something that, in the absence of exposure to the vehicle of creating demand, would not exist. It has controversial applications in microeconomics (pump and dump strategy) and advertising.A demand is usually seen as artificial when it increases consumer utility very inefficiently; for example, a physician prescribing unnecessary surgeries would create artificial demand. Government spending with the primary purpose of providing jobs (rather than delivering any other end product) has been labelled "artificial demand". Similarly Noam Chomsky has suggested that unchecked militarism is a type of government-created artificial demand, a "system of state planning ... oriented toward military production, in effect, the production of high technology waste", with military Keynesianism or a powerful military industrial complex amounts to the "creation of state-guaranteed markets for high technology waste (armaments)."Vehicles of creating artificial demand can include mass media advertising, which can create demand for goods, services, political policies or platforms, and other entities.
Another example of artificial demand can be seen in penny stock spam. After purchasing a large number of shares of an extremely low-value stock, the spammer attempts to create artificial demand by implementing a spam-based guerrilla marketing strategy.Boiler room (business)
In business, the term boiler room refers to an outbound call center selling questionable investments by telephone. It typically refers to a room where salesmen work using unfair, dishonest sales tactics, sometimes selling penny stocks, private placements or committing outright stock fraud. The term carries a negative connotation, and is often used to imply high-pressure sales tactics and, sometimes, poor working conditions.Danny Porush
Daniel Mark Porush (born February 1957) is an American businessman and former stock broker who ran a "pump and dump" stock fraud scheme in the 1990s. In 1999, he was convicted of securities fraud and money laundering at the Stratton Oakmont brokerage, for which he served 39 months in prison. The character of Donnie Azoff portrayed by Jonah Hill in the 2013 film The Wolf of Wall Street was loosely based on Porush, although Porush described the portrayal as inaccurate. After prison, Porush became involved with a Florida-based medical supply company, Med-Care, which was the subject of federal investigations.Eddie Garafola
Edward "Cousin Eddie" Garafola (born 1939) of New York, is a Gambino crime family captain who controlled the construction industry until the early 2000s. Garafola is believed to have been a made member of La Cosa Nostra since the mid 1970s. He is the brother-in-law of former underboss Sammy "The Bull" Gravano. He is married to Fran, Salvatore Gravano's sister (see Gravano).
In May 1985, Garafola was charged with tax evasion for failing to report income from a New York discotheque that he owned with Gravano. Garafola and Gravano were also suspects to the murder of Frank Fiala outside of the same discotheque, although they were not convicted. On March 2, 2000, Garafola was charged with racketeering in a classic "Pump and dump" stock fraud and money laundering scheme that made him $41 million over a three-year period. Slapped with a 43 count indictment and several RICO's Garafola was prepared to do life in prison. Garafola's son Mario, a reputed Gambino soldier and key player, was also charged and convicted in the plot. Edward copped a plea agreement to do life in prison in order reduce his sons sentence. As of April 2012, Mario Garafola has been released from FCC Allenwood.
It's my brother-in-law Eddie. He's caused me nothing but trouble with his devious ways, always looking for the angle. He was a schemer, he always knew how to make money. But he's got a big edge with me. His wife is my sister and I ain't ever going to hurt her.
In September 1996, Peter Gotti visited his brother, Gambino boss John Gotti, in prison. Gotti reportedly told Peter, then acting boss, to have Thomas "Huck" Carbonara and Garafola kill Gravano. Carbonara and Garafola reportedly made several trips to Arizona, where the media had revealed Gravano was hiding, to set up a hit. Gravano's arrest on drug charges in 2000 ended this venture. On May 22, 2003, Garafola was indicted in New York for plotting to murder Gravano.Suspected of being involved in nearly two dozen murders dating back to the 1970s, Garafola pleaded guilty to the murder of his cousin in 2004, Edward "The Chink" Garofalo (Garofalo, not Garafola) although he claims in court documents that he was not present the night of the shooting. On September 6, 2007, Garafola was sentenced to life in prison.In 2015, Garafola was denied compassionate release. A law enforcement source said Edward Garafola has not been "put on the shelf," or retired by the Gambinos, and he could theoretically give orders to mob associates if he came home.
As of June 2015, Garafola is imprisoned at the Rochester Federal Correctional Institution (FCI) in Minnesota .Jordan Belfort
Jordan Ross Belfort (; born July 9, 1962) is an American author, motivational speaker, and former stockbroker. In 1999, he pleaded guilty to fraud and related crimes in connection with stock-market manipulation and running a boiler room as part of a penny-stock scam. Belfort spent 22 months in prison as part of an agreement under which he gave testimony against numerous partners and subordinates in his fraud scheme. He published the memoir The Wolf of Wall Street in 2007, which was adapted into a film with the same name and released in 2013.Langbar International
Langbar International is a limited company that was listed on the Alternative Investment Market of the London Stock Exchange as Crown Corporation Limited in 2003 and was the biggest share fraud on the Exchange to date. It was investigated by the Serious Fraud Office, the City of London Police, the Accountancy Investigation and Disciplinary Board and the subject of many civil legal actions in the High Court.Crown Corporation, which changed its name to Langbar International Limited in 2005, was a pump and dump fraud, in that the company did not possess the assets that it declared at listing.MEDL Mobile
MEDL Mobile Inc. is an American mobile application developer and mobile marketing firm based in Fountain Valley, California. The company designs, develops and markets mobile apps for iPhone/iPod Touch, iPad and Android.Market manipulation
Market manipulation is a type of market abuse where there is a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a product, security, commodity or currency.Market manipulation is prohibited in most countries, in particular, it is prohibited in the United States under Section 9(a)(2) of the Securities Exchange Act of 1934, in the European Union under Article 12 of the Market Abuse Regulation, in Australia under Section 1041A of the Corporations Act 2001, and in Israel under Section 54(a) of the securities act of 1968. Market manipulation is also prohibited for wholesale electricity markets under Section 222 of the Federal Power Act and wholesale natural gas markets under Section 4A of the Natural Gas Act.The US Securities Exchange Act defines market manipulation as "transactions which create an artificial price or maintain an artificial price for a tradable security".Microcap stock fraud
Microcap stock fraud is a form of securities fraud involving stocks of "microcap" companies, generally defined in the United States as those with a market capitalization of under $250 million. Its prevalence has been estimated to run into the billions of dollars a year. Many microcap stocks are penny stocks, which the SEC defines as a security that trades at less than $5 per share, is not listed on a national exchange, and fails to meet other specific criteria.Microcap stock fraud generally takes place among stocks traded on the OTC Bulletin Board and the Pink Sheets Electronic Quotation Service, stocks which usually do not meet the requirements to be listed on the stock exchanges. Some fraud occurs among stocks traded on the NASDAQ Small Cap Market, now called the NASDAQ Capital Market.Microcap fraud encompasses several types of investor fraud:
Pump and dump schemes, involving use of false or misleading statements to hype stocks, which are "dumped" on the public at inflated prices. Such schemes involve telemarketing and Internet fraud.
Chop stocks, which are stocks purchased for pennies and sold for dollars, providing both brokers and stock promoters massive profits. Brokers are often paid "under the table" undisclosed payoffs to sell such stocks.
Dump and dilute schemes, where companies repeatedly issue shares for no reason other than taking investors' money away. Companies using this kind of scheme tend to periodically reverse-split the stock.
Other unscrupulous brokerage practices, including "bait-and-switch", unauthorized trading, and "no net sales" policies in which customers are prohibited or discouraged from selling stocks.Necurs botnet
The Necurs botnet is a distributor of many pieces of malware, most notably Locky.Penny stock
Penny stocks, also known as cent stocks in some countries, are common shares of small public companies that trade at low prices per share.
In the United States, the U.S. Securities and Exchange Commission (SEC) defines a penny stock as a security that trades below $5-per-share, is not listed on a national exchange, and fails to meet other specific criteria. In the United Kingdom, stocks priced under £1 are called penny shares.
Prosecutors and the Federal Bureau of Investigation say that fraud is widespread in the penny stock market. Even though the penny stock companies are small, the scams that involve them can be for tens of millions of dollars.In the case of many penny stocks, low market price inevitably leads to low market capitalization. Such stocks can be highly volatile and subject to manipulation by stock promoters and pump and dump schemes. Such stocks present a high risk for investors, who are often lured by the hope of large and quick profits. Penny stocks in the US are often traded over-the-counter on the OTC Bulletin Board, or Pink Sheets.Another problem with the penny stock market is that it has little liquidity, so holders of shares in penny stock companies often find it difficult for them to cash out of positions.In the United States, the SEC and the Financial Industry Regulatory Authority (FINRA) have specific rules to define and regulate the sale of penny stocks.Ponzi scheme
A Ponzi scheme (, Italian: [ˈpontsi]; also a Ponzi game) is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. The scheme leads victims to believe that profits are coming from product sales or other means, and they remain unaware that other investors are the source of funds. A Ponzi scheme can maintain the illusion of a sustainable business as long as new investors contribute new funds, and as long as most of the investors do not demand full repayment and still believe in the non-existent assets they are purported to own.
The scheme is named after Charles Ponzi who became notorious for using the technique in the 1920s.The idea had already been carried out by Sarah Howe in Boston in the 1880s through the "Ladies Deposit". Howe offered a solely female clientele an eight-percent monthly interest rate, and then stole the money that the women had invested. She was eventually discovered and served three years in prison. The Ponzi scheme was also previously described in novels; Charles Dickens' 1844 novel Martin Chuzzlewit and his 1857 novel Little Dorrit both feature such a scheme. Ponzi carried out this scheme and became well known throughout the United States because of the huge amount of money that he took in. His original scheme was based on the legitimate arbitrage of international reply coupons for postage stamps, but he soon began diverting new investors' money to make payments to earlier investors and to himself.Robert E. Brennan
Robert Emmet Brennan (born 1944) is an American businessman who built the infamous penny stock brokerage firm, First Jersey Securities. The firm specialized in promoting "Pump and dump" penny stocks to unsuspecting investors, many of them elderly, who lost their entire investments when the stocks inevitably crashed.Securities fraud
Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of securities laws.Securities fraud can also include outright theft from investors (embezzlement by stockbrokers), stock manipulation, misstatements on a public company's financial reports, and lying to corporate auditors. The term encompasses a wide range of other actions, including insider trading, front running and other illegal acts on the trading floor of a stock or commodity exchange.Trevor Baines
John Trevor Roche Baines (born 19 December 1939), is a British convicted criminal, formerly a businessman, who claimed to have amassed an estimated fortune of over £130 million, through banking, financial trading, and investment in the Miss World competition. This claim was later described by a Manx Judge (Acting Deemster Turner) as "based on a lie".
He was sentenced to six years imprisonment in November 2009 by a Manx Court, after it was determined that he was guilty of money laundering and false accounting. The laundering - the far more serious charge - alleged was that he and two others had administered a trust fund in excess of $100m which was acquired by others and independently of Baines as a result of a share push scam or a pump and dump fraud known as the AremisSoft fraud. The prosecution alleged that once the funds came to be managed by or through him he knew of the provenance of the fund and administered it with that knowledge (the level of knowledge required for criminal liability is suspicicion, though that suspicion has to be proven beyond reasonable doubt). He did not benefit directly from the fund itself but did receive payment by the fund for his administration of it. One of the two individuals responsible for the original scam was subsequently sentenced to a non-custodial term. The other remains at large.
In order to fund his legal expenses and shortly before his money laundering trial in late 2009 he was alleged to have expropriated funds from another trust which he was responsible, through one of his companies or personally, for administering (said to be theft) in order to pay counsel's fees. It was alleged that his local Manx advocate suspected this theft but nevertheless went on and received the money and thence paid counsel's fees anyway. She was also charged with money laundering along with Baines and his alleged accomplice, his wife. All three were convicted in February 2011, though Baines' advocate only of money laundering (without personal benefit); and both Mr and Mrs Baines having pleaded guilty shortly before their trial. Baines was sentenced to an additional 30 months imprisonment. The advocate was convicted but her conviction was quashed on appeal to the Privy Council in February 2014 on the grounds that the trial judge failed to direct the jury properly as to the advocate's state of mind. Under Isle of Man parole rules Baines was due to be released sometime in July or August 2015. His current whereabouts is unknown.Virtual currency
Virtual currency, or virtual money, is a type of unregulated, digital money, which is issued and usually controlled by its developers and used and accepted among the members of a specific virtual community. The U.S. Commodity Futures Trading Commission has warned investors against pump and dump schemes that use virtual currencies. The Financial Crimes Enforcement Network (FinCEN), a bureau of the US Treasury, defined virtual currency in its guidance published in 2013. In 2014, the European Banking Authority defined virtual currency as "a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically". By contrast, a digital currency that is issued by a central bank is defined as "central bank digital currency".Woody Erdman
Ellis E. "Woody" Erdman (April 16, 1926, Ashland, Pennsylvania – February 10, 1997, Greensboro, North Carolina) was an American sportscaster, television producer, and businessman who served as chairman of Trans-National Communications, International Trade & Commerce Corporation and Boston Celtics.
Ellis Erdman was a combat veteran of World War II, having served with the US Army Air Corps from 1944 to the V-J Day. He was a crew member on several B-29s based on the island of Tinian, and received the Air Medal with Oak Leaf Cluster. He remained in the Air Force Reserve until after the birth of his third child, and received an Honorable Discharge at the rank of 1st Lieutenant.
Erdman's career in broadcasting began while he was a student at Penn State University in the late 1940s, and worked at several radio stations in central Pennsylvania, where he met his future wife, Phebe Mae Weeks, and they were married in 1948. In 1952 they moved to Elmira, NY where Erdman worked for WELM, a Gannett radio station. In 1956, he co-founded WTKO radio in Ithaca, New York with Thomas Cassell and a group of investors, and the family moved to Ithaca. On February 1, 1960 Erdman purchased the Rural Radio Network, an interconnected group of six commercial FM radio stations spread across upstate New York. In addition to owning radio stations, Erdman was also a radio play-by-play announcer for the New York Giants football team.
Erdman was also involved in the ownership of sports teams. Erdman's Trans-National Communications were the majority owners of the Boston Celtics of the National Basketball Association from 1969–71 and the Oakland Seals of the National Hockey League during the 1969-70 NHL season. Erdman was also the owner of the Carolina Cardinals of the United States Basketball League.
A 1996 investigation of Ellis Erdman and his International Trade & Commerce Corporation by the Securities and Exchange Commission accused Erdman of being a "confidence man." As chairman of ITC, Erdman was believed to have "orchestrated a classic "pump and dump" scheme," but died in 1997 before ever tried in court.Erdman was married to Phebe Weeks Erdman from 1949 until their divorce in 1985. The couple was reunited in 1992 and were together until his death. They had three children. The Erdmans were residents of Ithaca, New York.
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