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Definition
A pump-and-dump scheme involves spreading false information to inflate a stock’s price for illicit profit.

Key Takeaways
Pump-and-dump schemes are illegal, manipulative tactics used to artificially inflate the price of a stock or security, then sell it for a profit.
These schemes historically targeted micro- and small-cap stocks due to their low regulation, but have increasingly infiltrated the cryptocurrency market.
The advent of the internet and social media has made it easier for fraudsters to spread false information rapidly and target investors with unsolicited pitches.
To avoid falling victim, investors should be wary of unsolicited offers and conduct thorough research and due diligence before making any investment decisions.
The SEC and CFTC offer guidance and incentives to protect against these scams, including financial rewards for whistleblowers revealing pump-and-dump activities.

What Is Pump-and-Dump?
Pump-and-dump schemes manipulate stock prices through false hype and are illegal under securities law. Historically conducted via cold calling, these schemes now thrive online, targeting micro- and small-cap stocks. With the rise of cryptocurrencies, pump-and-dump tactics have expanded into this unregulated space, making it crucial for investors to recognize the signs and protect their investments.
When looking for pump-and-dump activity, securities regulators focus on misleading messages, unusual trading patterns, and the intent behind trades. These schemes usually target stocks that don’t trade much, such as micro- and small-cap stocks on over-the-counter exchanges, since low trading volume can cause prices to swing wildly and increase losses for investors.
Understanding Pump-and-Dump Schemes
Pump-and-dump schemes occur when people work together to trick investors into believing a security is worth more than it is, often by spreading false or exaggerated claims. This creates fake demand, pushes prices up, and harms investors who trust the wrong information.
When looking for pump-and-dump activity, securities regulators focus on misleading messages, unusual trading patterns, and the intent behind trades. These schemes usually target stocks that don’t trade much, such as micro- and small-cap stocks on over-the-counter exchanges, since low trading volume can cause prices to swing wildly and increase losses for investors.

How Modern Technology Fuels Pump-and-Dump Schemes
Digital platforms have increased the speed and reach of misleading investment claims, allowing false information to spread rapidly among large audiences. Social media, online forums, and messaging apps can create the illusion of widespread interest in a security, even when that interest is manufactured.

Regulators monitor unusual trading activity and coordinated promotional efforts as potential indicators of manipulation. Investors should be especially cautious when price movements appear disconnected from publicly available company information or fundamental performance.

Portrayal of Pump-and-Dump Schemes in Popular Media
Pump-and-dump schemes are frequently portrayed in popular films such as Boiler Room and The Wolf of Wall Street. These movies depict aggressive sales environments in which brokers promote highly speculative stocks, such as penny stocks, through misleading claims and financial incentives.

These portrayals highlight how coordinated sales practices and misleading promotions can artificially inflate demand. In such scenarios, firms profit while unsuspecting investors are left holding securities that rapidly lose value once promotional activity stops.

Strategies to Safeguard Against Pump-and-Dump Schemes
The Securities and Exchange Commission (SEC) has some tips to help avoid becoming a victim of a pump-and-dump scheme. Here are some points to keep in mind:
Be Extremely Wary of Unsolicited Investment Offers
Exercise extreme caution if you receive an unsolicited communication regarding an "investment opportunity." Dubious investment pitches can reach you through email, social media, messages, calls, or voicemail. Ignore such messages; acting on them may result in significant losses rather than the massive gains promised by the scammers.

Watch for Clear Warning Signs
Does the purported investment sound too good to be true? Does it promise huge "guaranteed" returns? Are you pressured to buy right now, before the stock takes off? These are all common tactics used by stock touts and unscrupulous promoters and should be viewed as red flags by investors.

Look Out for Affinity Fraud
Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, aging adults, or professional groups. An investment pitch from a member of a group that you are affiliated with may lead you to believe in its credibility; the problem is that the member may have been unwittingly fooled into believing that an investment is legitimate (when in reality, it is just a scam).
Conduct Your Own Research and Due Diligence
Before you invest your hard-earned money, conduct your own research and due diligence. It is fairly easy to obtain a wealth of information online about legitimate companies—from their business prospects and management to their financial statements. The lack of such information can often be a red flag in itself.

Pump-and-Dump Schemes in the Cryptocurrency Market
The cryptocurrency market has become the newest arena for pump-and-dump schemes. The massive gains made by Bitcoin and Ethereum have kindled tremendous interest in cryptocurrencies of every stripe. Unfortunately, cryptocurrencies are particularly well-suited for pump-and-dump schemes because of the lack of regulation in the cryptocurrency market, its opaqueness, and the technical complexity of cryptocurrencies.
A study conducted in 2018 examined the prevalence of pump-and-dump schemes in the cryptocurrency market. Researchers identified more than 3,400 such schemes over the course of just six months, observing two group-messaging platforms popular with cryptocurrency investors.

In March 2021, the U.S. Commodity Futures Trading Commission (CFTC) advised customers to avoid pump-and-dump schemes that can occur in thinly traded or new cryptocurrencies. The CFTC also unveiled a program that would make any whistleblower eligible for a monetary reward of between 10% and 30%, as long as they reveal original enforcement action that leads to monetary sanctions of $1 million or more against a pump-and-dump scheme.
Commodity Futures Trading Commission. "Customer Advisory: Beware Virtual Currency Pump-and-Dump Schemes."

The Bottom Line
The pump-and-dump scheme remains a significant threat in the financial markets, particularly for micro- and small-cap stocks and cryptocurrency. This illegal practice involves artificially inflating the price of an asset through false or misleading statements to sell once prices rise, leaving uninformed investors with significant losses when the bubble bursts.
Investors can protect themselves by being wary of unsolicited investment offers, recognizing red flags such as guaranteed high returns, understanding affinity fraud risks, and conducting thorough research and due diligence. The rise of pump-and-dump schemes in the cryptocurrency market demonstrates the importance of vigilance and informed decision-making in any investment strategy.

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