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Pump-and-dump: A prevalent securities fraud

| Apr 6, 2020 | White Collar Offenses |

If a deal is advertised as “too good to be true,” it probably is, as is the case in the scheme known as “pump-and-dump” — a type of securities fraud. It’s a white-collar crime that has become more prevalent through the internet and especially in recent years as cryptocurrencies gained popularity.

The term pump-and-dump gets its name from how the scheme works:

  • The “pump”: The perpetrators use false, misleading or exaggerated information and positive hype to persuade investors to buy shares, promising them huge rewards in the market and little or no risk. This artificially boosts the price of the stock and “pumps” up the perceived value. The perpetrators of the scheme typically already have an established position in the company’s stock.
  • The “dump”: Once their shares are significantly overvalued, the perpetrators “dump” by selling their own cheaply gotten shares at the raised price for big profits. After the scammers sell, the stock price plunges and fooled investors are stuck suffering the financial losses.

Pop culture and cryptocurrency

You may be familiar with the scheme from seeing it in the plots of popular films like “The Wolf of Wall Street” or in the news, such as in the 2001 case involving Enron executives reeling in more than $1 billion before the company went bankrupt.

A 2018 study looked at pump-and-dump schemes in the cryptocurrency market. Two popular cryptocurrency messaging boards were found by researchers to have more than 3,700 different pump-and-dump posts advertised on them between January and July 2018. These ads implored investors to buy specific cryptocurrency.

Pumping and dumping is an illegal practice under federal securities laws. Perpetrators found guilty of it are subject to heavy fines. If you or a loved one has been implicated in an alleged pump-and-dump scheme or other white-collar offense, it’s important that you know your legal options and speak to a Tennessee attorney with experience in criminal defense cases.

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