“Pump and Dump” is Back – and on Social Media

One of the classic investment scams is the “pump and dump.”

While this scam has declined somewhat in recent years, it’s starting to make a comeback, at least according to FINRA.

FINRA warns that pump and dump is on the rise in emails. On top of that, it appears that other social media outlets offer the chance for pump and dump to really take hold. What’s old is new again, and you need to be on your guard.

What is Pump and Dump?

Pump and dump is a classic investment scam in which paid promoters try to get people to buy large amounts of stock. This technique used to be carried out through phones. Promoters in “boiler rooms” would call prospects and offer “inside” access to the “next big stock.”

With the pump and dump, investors are told they can get in on the ground floor with a small investment. Indeed, the investment is reasonably small. Many of these scammers push penny stocks that aren’t well known. The investor buys hundreds, or even thousands, of shares, sure that they have the inside track.

As the promoters sell shares of the stock, the price goes higher. For the investors watching the price, it seems like they have made a great move. The price is rising, and fast – and as an investor you’ve got in on the ground floor. You’ve made a great deal! Right? Perhaps not . . . .

The problem is that once the price is inflated to a certain point, the brokers and original shareholders and others who perpetrated the scheme, all sell their own shares. They sell while the price is nice and high, inflated by sudden interest in the shares.

Once all of those shares are sold and the scammers have their profits, there is no longer a push to promote the stock. The price plummets as the stock is unloaded, and the unwitting investors find themselves with shares of a practically worthless stock, or even losses.

Pump and Dump Moves to Social Media

The use of the telephone to perpetuate these scams is no longer as viable an option. With people screening their calls and asking to be removed from marketing lists, it’s difficult to reach people via phone.

But now it’s all about social media. FINRA’s alert says that there has been a huge increase in emails associated with pump and dump schemes. These emails come with subject lines like “Investment Alert” or “Buying Opportunity” or some other phrase that makes it sound like you are getting a good deal. You click over, make a purchase, and then watch the roller coaster ride as it goes to highs – and then comes crashing down.

One of the things about these email pump and dump schemes is that it is easier in some ways for scammers to get you to listen to the pitch. Instead of trying to get you to stay on the phone, everything is right there: company information, bogus performance projections, and other information. These emails are crafted with marketing principles in mind, and designed to entice you to action.

But it’s not just email. Pump and dump has the potential to show up in other media as well. I received a “stock tip” via Twitter a few weeks ago. Someone sent me a message claiming to have information that I, as a financial writer, might be interested in. It’s also becoming increasingly common to see these types of communications on Facebook. What’s to stop a boiler room style promoter from making a post on Facebook and then paying $15 to promote it? If enough people take the bait, that $15 can turn into hundreds of dollars for the scammer.

Protect Yourself from Pump and Dump Investment Scams

As always, you need to be on the lookout for investment scams. Pump and dump scams are increasingly common, and the fraudsters are looking for new ways to reach an ever-wider audience. Social media and email provide a way for scammers to reach people on an unprecedented scale.

If you want to protect yourself, you need to be on guard. Don’t act on “hot tips” offered to you via email or other social media channels, especially if they come from strangers. Even recommendations made by friends have to be vetted, since they might be inadvertently spreading the scam. Stick with the more boring investments that you are familiar with through your more traditional online broker.

What are some other scams people should be aware of? Have you almost fallen victim to a scam? Leave a comment!

Miranda writes about personal finance almost every day. An experienced freelance writer, she's covered your money online and in print from every angle and is always looking for new ones.

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