Pump and dump schemes are an example of a fraudulent and manipulative scheme which creates a false or misleading market, which benefits the fraudster. A key to their success is their ability to reach, and in turn manipulate, as many people as possible in as short a time as possible.

The explosion of social media and the public’s hunger for information has given a new lease of life to these schemes. Fraudsters now have access to the general public in ways they never dreamed of. Have you ever received an e-mail offering you an investment opportunity that seems too good to be true? Well, if it sounds too good to be true, it probably is.

Usually a pump and dump scheme will rely heavily on an advertising campaign (often with a distinct lack of available information to support the promotional activity) aimed at generating interest in a unique ‘investment opportunity’. Stock prices are inflated or ‘pumped’ as a result of the subsequent demand for the stock and the fraudsters then dump their stock at the height of the market, cashing in on the profits.

The ‘dumping’ of stock causes the price to fall, leaving investors holding stock worth significantly less than they paid for it.

If you know what to look for, it is relatively easy to spot these schemes. One example is feverish excitement around a small/unknown company in the financial pages of national newspapers. Another is a company involved in a reverse merger, which means that a formerly private company gains access to the stock market by being acquired by a firm whose shares already trade publicly. These situations have proven to be a popular first stage in penny stock scams.

One way of avoiding falling victim to these scams is by ensuring that you analyse the source of any investment information carefully, taking steps to verify that any claims are accurate. It also pays to research any opportunity in depth, or get independent financial advice.

Be wary of any high pressure sales pitches, which encourage you to part with your money ‘before you miss the opportunity’, as this is a common tactic used by fraudsters.

If you suspect that you may have been a victim of such a scheme it is important to report it to your local regulatory authority or a Certified Fraud Examiner who can investigate the company in question and the people involved.

KRyS Global, a fraud investigation and asset recovery firm based in Bermuda, wrote this article as a way to increase community awareness about fraud. For more information contact Mathew Clingerman, managing director, KRyS Global at Mathew.Clingerman@krys-global.com