A “pump and dump” scheme is a two-part investment fraud scam designed to make perpetrators money at the expense of other investors. In the first part, promoters of a stock make false or misleading statements about the company in order to induce investors to buy the stock, which drives the stock price higher.
Once the price has increased sufficiently, the fraudsters will “dump” their stock, i.e., flood the market with their shares, usually for substantial profit. When the large number of share sales hit the market and the promoters stop hyping the stock, the price goes down and the investor who were fraudulently induced to buy the stock suffer losses.
In the past, this type of practice was usually done through cold calling but now it generally occurs online, through the use of blogs and chat rooms on which the fraudsters post bogus positive comments about the stock to entice others to buy the stock. These “promoters” may claim to have access to some sort of inside information that puts the investor at an advantage over everyone else.
Perpetrators often use this scam with “penny stocks” that are traded over the counter (rather than on NYSE or NASDAQ), usually because they are easier to control due to a lack of independent information about the company.
Call a Los Angeles Investment Fraud Attorney Today
If you have suffered losses after investing in what turned out to be a “pump and dump,” you may have certain legal rights that require your immediate attention. Contact an experienced Los Angeles investment fraud attorney today for a consultation today.