Shams, Scams, and Frauds: Pump and Dump

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The best protection against any investment scam is to remember that if an investment looks too good to be true, it almost certainly is.  Most investment frauds lure their victims by promising returns that are simply unbelievable. A good investment track record is attractive.  A fabulous one is suspect.  When offered something that seems extremely desirable, always ask yourself:

  1. Why would someone who can secure such returns want to share them?
  2. Why would that person want to share them with me in particular?

An effective shyster will have plausible answers to these questions and others, but a little thought should revel the danger in what the scammer is proposing.

It is simply impossible to itemize all the scams set to trap the unwary.  They are as broad and varied as human imagination.  Here I outline one of the most common and so most destructive:

How Pump and Dump Works 

This is an old game.  The swindler is frequently a broker who begins by buying a thinly traded stock with the firm’s own funds.  Because the stock is thinly traded, his or her buying pushes the price up smartly.  At the same time, the broker’s sales force promotes the stock as a great buy. Frequently, the con involves glowing reports placed on the broker’s website.  The unsuspecting — day traders and others — read the glowing reports or hear the sales pitch over the phone, see how the price is rising, and put in their orders.  This additional buying pushes the price up even faster, giving the promoter an ample profit on his or her earlier buying, at which time the con artist sells and ends the sales promotion.  Those sales and the sudden end to the hype reverses the upward momentum of the stock, and the price falls, leaving the people who succumbed to the con with losses.

Hollywood has produced several films about pump and dump artists. They typically glamorize what is in reality a grubby business, but behind the slick veneer Hollywood does show the fundamental nature of the abuses, the deceit, and the complete disregard of others and for common decency.  These films also show more sex and better-looking people than exists in the real world, especially in such ugly operations.

Targeting the Most Vulnerable

The saddest part of these swindles is how they target those least able to cope with the losses — financially unsophisticated people, especially the elderly who may have substantial savings but not much financial experience or expertise.  Court cases show the lengths to which some of these con artists go to target their promotions:

  • They will read obituaries to identify surviving spouses who might have received a large insurance check and at the same time face emotional strains that make the person easier to confuse. (See an earlier blog on coming into money.)
  • These swindlers are well aware that retirees often get substantial sums from retirement plans or from the sale of a family home, larger amounts than these people have ever handled. (See an earlier blog on coming into money.)
  • The con artists are also well aware that the elderly often live alone and have no one to help them think twice about an impulse planted by an Internet notice or an enthusiastic phone call.

How to Protect Yourself

Whether dealing with this particular game or one of hundreds of other scams, people can protect themselves.  Here are half a dozen tips:

  1. Remember again that any investment that looks too good to be true almost surely is.
  2. Collect names and addresses. Visit the promoter’s office. If the person on the other end of the phone refuses or makes excuses, take that as a bad sign.
  3. Insist on getting details in writing. Ignore claims about too much urgency for such things.
  4. Never give information about yourself, your bank account or your finances to anyone who has solicited you whether on the phone, via email, or any other way.
  5. Check on the firm soliciting you. The Internet makes this easier than it once was.
  6. Check with the authorities:  
    • See if the broker soliciting your is registered in the state where you live.  The North American Securities Administrators Association can help with this.
    • The SEC requires securities firms to register.  It’s website can provide information.
    • The SEC also provides information on brokers that have run into trouble with the authorities in the past. You can check this out at
    • The SEC also offers guides on what questions to ask and how to file a complaint.
    • If you think you have been swindled, the Consumer’s Action Handbook from the Federal Citizen Information Center can guide you through the steps to take at


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