Tips for Avoiding “Pump and Dump” Scams

A “pump and dump” scam is an all-too-common stock fraud made even more common by Internet trading. In essence, pump and dump schemes involve the inflation of a stock’s price through false and/or misleading statements designed to generate demand — this allows whoever owns the stock to sell it at a higher price. When the scheme’s operators “dump” the overpriced stock by selling it to their defrauded investors, the stock’s price falls, and the investors lose their money.

Pump and dump fraudsters might use their website to post positive press releases about a product; perhaps they’ll send you an email newsletter, purportedly from some outside expert, featuring radiant reviews of the stock. Perhaps television personalities and analysts will even mention the product, giving it an even greater atmosphere of legitimacy.

In the past, pump and dump scams typically involved operators cold-calling investors — think The Wolf of Wall Street. The Internet has made it even easier for brokers to defraud investors by artificially inflating demand. Here are a few tips to avoid falling for the illusion:

Scrutinize the Source

In general, it is probably safe to assume that offers found on the Internet are scams, especially if they are emailed to you by unknown third parties. Let “scam” be your default assumption until you conduct your own research to determine the offer’s legitimacy. In many cases, a simple “[product name] scam” Google search will turn up plenty of results if the product is in fact a pump and dump.

Determine Where the Stock Trades

Does the stock trade on the Nasdaq Stock Market? The New York Stock Exchange? Any other national exchange? If so, it’s probably not a pump and dump. Flimsier investments typically don’t meet the requirements to trade on a national exchange or the Nasdaq, and can instead be found on over-the-counter markets — the OTC Bulletin Board or the Pink Sheets, for instance.

Independently Verify the Stock

Any company can claim its stock is the best investment; any fraudster can pay promoters to give glowing reviews. Before you make an investment, try to verify claims made about the stock — whether it’s through Internet research, or simply calling around a number of different financial professionals, or your state securities regulator.

Avoid Red Flags

If a stock’s promoter is using high pressure sales tactics to make a sale, odds are they stand to gain much, much more than you. Before you buy, ask for (and read!) the investment’s prospectus or the company’s current financial statements. You can also look at the Securities and Exchange Commission’s EDGAR database to see if the product is registered

Contact an Attorney

If you think you might be the victim of a pump and dump scheme, call the securities and investment fraud law firm Fitapelli Kurta at (877) 238-4175 for a free consultation. You may be entitled to recoup your losses. We accept all cases on contingency: Fitapelli Kurta only gets paid if and when you collect money. Time to file your claim may be limited, so we recommend you avoid delay. Call (877) 238-4175 now to speak to an attorney for free.