Home » Types of Stock Broker Fraud » Pump and Dump Schemes
By: Jonathan Kurta Author
November 4, 2021 at 3:20pm
Pump and Dump Schemes: Don’t Fall for the Hype
Pump-and-dump schemes artificially inflate the price of a stock so that stock pumpers can sell at a profit. When the stock pumpers sell, the stock price collapses, leaving duped investors with worthless stocks. This scheme constitutes securities fraud according to The Securities Act of 1933, which prohibits manipulation or deception in the sale of securities.
Are Pump-and-Dump Schemes Illegal?
Pump-and-dump schemes are illegal, and fraudsters can face jail time, felony charges, and huge fines. Despite these harsh penalties, people still participate in these scams for the sake of a big payday.
How Does a Pump and Dump Work?
On October 26, 2021, Steven Gallagher was arrested following allegations that he ran a pump-and-dump scheme that earned him approximately $1 million. Gallagher used the handle @AlexDelarge6553 on Twitter, where he had a following of around 70,000. Damian Williams, the United States Attorney for the Southern District of New York, stated, “As alleged, Steven Gallagher brought old school boiler room tactics to the Twitter age, and operated a social media pump-and-dump scam that defrauded ordinary investors, all so that he could make over $1 million in profits.”
In a boiler room, brokers cold-call potential investors and use high-pressure sales tactics to get them to purchase penny stocks, earning themselves high commissions in the process. Penny stocks are stocks issued by smaller companies and trade for less than $5 per share. Boiler rooms have fallen out of favor now that platforms like Twitter make it easy for scammers to find large, unsuspecting audiences from the comfort of their laptops.
According to the complaint, Gallagher purchased over-the-counter penny stocks and hyped them up to his audience. For instance, the complaint alleged he purchased two million shares of Tesoro Enterprises ($TSNP) for $0.0017 per share and then took to Twitter to encourage his followers to do the same:
- “Strong buy $tsnp!! Alert”
- “If you sell $tsnp short your a fool!!! Hold long!!”
- “1 dollar makes me a million!! $tsnp buy and hold! I am!!”
One suspicious Twitter user posted, “Tell us when you are dumping,” to which Gallagher responded, “I’LL POST MY MILLION SHARES AFTER CLOSE NOT SELLING $TSNP GREAT NEWS COMING TUESDAY AND THURSDAY!!” Despite this response, Gallagher entered orders to sell his one million shares of TSNP for 1.355% more than his purchase price.
Social Media and Pump and Dump Schemes
Anonymous Twitter users could easily be paid stock pumpers. Stock pumpers are paid to cultivate social media followings, specifically to pump up certain stocks. In addition to social media pump-and-dump schemes, investors should also be wary of pump-and-dump schemes that are perpetuated through investment newsletters and online advertisem*nts.
Cryptocurrency Pump and Dump Schemes
Pump-and-dump schemes often hype up investments that are poorly understood by the public. Cryptocurrency has a reputation as the hot new ticket, but the average investor may not have the necessary tools to evaluate the merit of cryptocurrency investments. The FTC reports that since October 2020, approximately 7,000 people have lost a combined total of $80 million on cryptocurrency pump-and-dump scams.
While Bitcoin and Ethereum use a blockchain to record each digital transaction, coders can create their own tokens using a more established cryptocurrency’s blockchain. It is a difficult process to mine for Bitcoin, but creating a crypto token is considerably more accessible, making it easier for scammers to create useless coins to serve as Trojan horses for their deception.
Recently, members of a popular eSports league called FaZe Clan suspended members who participated in a pump-and-dump scheme for a cryptocurrency called Save the Children. Promoters of Save the Children promised that part of the proceeds from the sale of the digital token would go toward children’s charities. Many of the influencers who promoted this currency had huge followings, and some made as much as $30,000 for their scam. Unfortunately, there aren’t yet rules in place to punish pump-and-dump schemers in the cryptocurrency space. Some promoters have simply pleaded ignorance, claiming they did not know they were participating in a pump-and-dump scheme. For now, people behind these types of schemes will not face consequences from the FTC.
Investors Should Watch out for Fraudulent Brokers
In July 2010, the SEC alleged that a formerly registered broker named Roy Sahachaisere used clients in his pump and dump scheme. Sahachaisere wrote a newsletter to promote certain penny stocks. He received compensation from the issuers for his promotions, which he did not disclose. The broker also allegedly encouraged investors to buy stocks that he was selling. As a result of these civil allegations, Sahachaisere has been barred from participating in a penny stock offering.
If you believe you lost money after working with a fraudulent broker who recommended penny stocks, potentially as part of a pump-and-dump scheme, contact the experienced securities attorneys of Kurta Law.
