Pumping and dumping
The corporate history is littered with financial frauds; some of them which have been brought to justice while a major chunk of them go unnoticed. These crimes are broadly defined as ‘white collar’ crimes in which more and more wealth is transferred from the lower class to the rich and wealthy, who take advantage of their social, business or insider status and twist things to fulfill their interest or greed.
Pumping and dumping falls into one of the categories of these financial scams threatening the corporate world today. It mostly deals with microcap companies whose stocks trade below $5 and are not listed in Stock exchang...
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...es rather they are small stocks often called penny stocks traded on the Pink Sheets bulletin board or the over the counter capital markets.
A conventional Pump and dump scheme involves some insiders to purchase certain penny stocks and then make optimistic and deceptive statements about the future outlook of the stocks, creating a sense of urgency in most cases persuading investors to buy the stocks (the PUMP) this increase in demand further aggravated the price and at a certain level of profit they sell the load off the shares (the dump), after which the prices go down and the investors are left to bear the burden of the newly bought worthless shares.
Pumping and dumping scams are growing at an alarming rate today, maybe due to the fact that technology has made it easier to reach millions of people in such a short time via email spam, the internet or the telemarketing networks. It is unfair to entirely blame the technological advances for the increase in pumping and dumping scams. One of the reasons these scams go unaccounted for is that the pink sheets or the Alternate investment Markets are informal trading networks which do not fall under the claws of strict regulation as compared to other formal stock exchanges.
The security and exchange commission only regulates companies with assets worth a certain amount, usually $10 million, which is a slab big enough for the small companies to cross, hence they remain unregulated which gives some investors the leeway to abuse or work around the system. These scams are although popular with microcap companies, yet are not isolated from big markets altogether.
There have been cases where the U. S stock markets and investment portfolios have lost millions of dollars, curtsey of some senior executives of big companies who have been involved in pumping and dumping scams and have carved out fortunes for themselves. One of the scams caught by the security and exchange commission in April 2007 was that of Park financial group on the stocks of Spear & Jackson Inc in 2002. Another example is that of a stock promoter by the name of John Shrewder on Oklahoma who was accused of manipulating shares of Artec Inc in 2004, an anti drug company, by sending out approximately 87 million messages.
He was caught by the exchange commission and was liable to pay back the US government an amount of $150,000 for his wrong doing. The financial scams cause more loss today as compared to other industrial or criminal scams. Moreover, since small markets are unregulated, it actually provides people an opportunity to play with the system. These scams are more dangerous than ever, and are now being termed as the financial weapons of destruction.