Wednesday’s Word: Pump and Dump

By: Ryan Corbin, Fall 2014 Student Intern

We have all probably been told about some hot new investment or seen the movie “The Wolf of Wall Street.” What you may not know is that the scams used by Jordan Belfort are still widely used today.

According to FINRA, pump and dump

“is a common scam in which a fraudster deliberately buys shares of a very low-priced stock of a small, thinly traded company and then spreads false information to drum up interest in the stock and increase its stock price. Believing they’re getting a good deal on a promising stock, investors create buying demand at increasingly higher prices. The fraudster then dumps his shares by selling them at the high price and vanishes, leaving many people caught with worthless shares of stock. Pump and dumps traditionally were carried out by cold callers operating out of boiler rooms, or through fax or online newsletters. Now, the most common vehicles are spam emails or text messages.”

A couple of years ago, rapper 50 Cent was accused of this scam when he touted a penny stock over Twitter. Our own Cassandra Bradford explains more here. In 2011, Rudy Ruettiger, the Notre Dame legend, was charged by the SEC for a pump and dump scheme. Rudy settled with the SEC for $382,866. Even as recently as last July, five people were indicted for a massive pump and dump scam. One of these individuals is A.J. Discala, who was once married to actress Jamie-Lynn Sigler of “The Sopranos.”

As you can see, the pump and dump scam is not just a thing of the movies or the past. Beware of anyone who tries to sell you a cheap stock that is about to be the next big thing.