Pump and dump
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 (pump), in order to sell the cheaply purchased stock at a higher price (dump). 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[1] and very small corporations/companies, i.e. "microcaps".[2]
For other uses, see Pump and dump (disambiguation).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, investment research websites, social media, and misinformation.[2][3]
Regulation[edit]
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,[37] since it is thought that exchange traded securities are less vulnerable to manipulation.[38] 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.[39] Secretary of State Max Cleland, whose office enforced state securities laws,[40] was a principal proponent of the legislation. Representative Chesley V. Morton, the only stockbroker in the Georgia General Assembly at the time, was a principal sponsor of the bill in the Georgia House of Representatives. Georgia's penny stock law was subsequently challenged in court. However, the law was eventually upheld in U.S. District Court,[41] 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 shuttering 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.[42] However, sanctions under these specific regulations lack an effective means to address pump-and-dump schemes perpetrated by unregistered groups and individuals.