What is a pump and dump scheme?

On Behalf of | Jul 8, 2019 | Firm News, White Collar Crimes

When you work in the financial markets, you quickly become familiar with just how volatile they can be. Communicating that to investors in New York can be a challenge, as they are often not acquainted with the subtle nuances that can lead to market fluctuations. Often all they understand is that you have invested their money for them based on what they may view as “a promise” of strong returns, when in actuality, while informing them of the potential benefits, you did indeed explain to them the risks. 

It is often this misinterpreting of “promises” and “potential” that leads to accusations of fraudulent activity. Take a “pump and dump” scheme. Per the U.S. Securities and Exchange Commission, such a scheme involves people pumping up the value of a stock to drive new investment. As new investments are made, the price of the stock rises. When that happens, the schemers then sell their own shares at a profit, knowing that doing so will drive the value of the stock down and cause new investors to lose money. 

As is the case with other white collar crimes, you have to have intended to defraud investors in a pump and dump scheme in order to be charged with a crime. Investors may view your endorsement of a particular security as a promise that it will make them money; in reality, without attaching any written guarantees to an investment, your endorsement of it is just that. Plus, your motives for selling your shares of a stock that you have encouraged others to invest in need not necessarily be nefarious. Ultimately, it is up those accusing you to produce evidence that you knew that selling would drive the stock’s price down, and yet you did it anyway.