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Inside Scoop

Fraud Type: 
Pump and Dump Schemes

Note: Below you’ll find a fact pattern, using entirely fictional people, that illustrates a type of securities fraud.

Robert loves the Internet. He belongs to all the social networking sites and his extensive network is a source of pride. He is linked to everyone.

Recently, he began to get messages from a friend of a friend about a new biotech stock. This friend was sharing his insider information that the biotech company was about to get FDA approval for one of its drugs, and its stock was going to skyrocket. According to the friend, the stock, currently selling at $1.50 a share, could go as high as $25 per share. The friend urged everyone to get in quickly, because once the FDA announced its decision the following week, it would be too late.

A buying frenzy began. Robert knew of three other friends who also bought the stock. Robert took out a loan to buy 1,000 shares of the stock and dreamed of what he was going to do with the profits. As the friend predicted, the stock began rising. In two days, it had reached $5 per share. Robert was sure a new car was his.

But just as quickly, the stock fell to $1 per share, resulting in losses for recent investors. What happened? Why wasn’t Robert rich? He was a victim of a “pump and dump” scheme. How does it work?

  • The promoters claim to have “infallible” information about an impending positive development for the company.
  • In reality, it is the stock promoters who stand to gain by selling their shares after the stock price is “pumped” up.
  • Once these fraudsters "dump" their shares and stop hyping the stock, the price typically falls, and investors lose their money.

Lessons Learned:

  • Do your own research. Never buy from a stock tip without thoroughly researching the stock. Use the SEC’s EDGAR database to read the company’s latest filings.
  • If it sounds too good to be true, it probably is.
  • All investments carry risks, no stock is a sure thing.

Note: Below you’ll find fact patterns (using entirely fictional people) that illustrate a number of different types of securities fraud.

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