Whistleblowers Crucial in Exposing and Combating Pump and Dump Schemes
The internet has facilitated the proliferation of pump and dump schemes, with social media platforms like Telegram and Discord becoming conduits for hype. While discussing a stock positively on social media is legal, when combined with fraudulent statements or omissions, especially involving insiders, it crosses legal boundaries.
In a pump and dump scheme, fraudsters purchase stocks at a low price and aggressively market them to inflate the stock price. Subsequently, they sell off their stocks at the peak, causing a sudden drop in prices. Often perpetrated by company insiders, victims, unaware of the impending sell-off, end up holding devalued stocks.
Microcap & Crypto Markets Susceptible
Pump and dump schemes are prevalent in microcap or "penny" stocks, typically valued below $300 million and traded over-the-counter. These stocks lack the regulatory scrutiny of major exchanges, enabling fraudsters to manipulate prices easily. The smaller size and limited public information about these companies make it challenging for investors to discern the truth. Fraudsters commonly employ tactics such as hyping up imminent major events, creating time pressure, exploiting shared characteristics with investors ("affinity fraud"), and promising unrealistically high returns.
Cryptocurrency markets are also particularly susceptible, leading the CFTC to issue a Customer Advisory on crypto pump and dump fraud in March 2021. Both the SEC and CFTC have taken enforcement actions against such schemes, and whistleblowers play a crucial role in exposing perpetrators.
As pump and dump schemes become more widespread online, it's crucial to remain vigilant. If you suspect such illegal activities, consult a lawyer knowledgeable in financial fraud whistleblower programs. For over 35 years, Attorney Steve Kardell of The Kardell Law Group has focused his practice on whistleblower law. Our firm can provide quality advice and assistance on your whistleblower claim.