Pump and dump schemes are frequent occurrences in penny stock trading. The prices of penny stocks are falsely doubled or tripled in a few days and sold. This type of securities fraud is well known among investors in Florida but continues to be widespread.
Pump and dump fraud
The pump and dump scam is the act of inflating a stock’s price by making false statements of its value and benefits. The scammer pumps up the price as high as possible and then dumps the stock on a buyer. The goal is to invest little in the stock and dump it by selling it at the highest price. Soon after the purchase, the buyer realizes that the stock’s value is lower than expected and ends up losing money.
Preventing securities fraud
Fraud that involves making false and misleading statements is not as widespread as pyramid schemes, but it is still a form of market manipulation. The U.S. Securities and Exchange Commission (SEC) sets options for investors to file complaints about the fraudulent activities of brokers and brokerage firms. Law enforcement is focusing on the purchases and sales of penny stocks that are bought at extremely cheap prices. In addition, manipulation occurs less often to securities that appear on the stock exchange. Overall, each state, including Florida, writes its own securities laws, which are separate from federal laws set by the SEC and the FINRA.
Pump and dump schemers trick investors into believing in an overpriced value of a stock through false and misleading statements. The fraudsters engage in pumping, or inflating, the prices and finish by dumping, or selling, the stock that has little or no value. The pump and dump scheme is a violation of securities fraud under state and federal laws.