Investors in California search for opportunities where they expect returns to rise. Unfortunately, the desire to find a good investment can make people vulnerable to fraud. The fraud known as a stock pump-and-dump scheme misleads people about the future returns of an investment. A pump-and-dump plan usually uses small-cap stocks or those traded on lightly regulated over-the-counter exchanges. In recent years, cryptocurrencies have become a common source of pump-and-dump activities.
How a pump-and-dump works
The people or organizations pushing a stock as a good buy use deception or gross exaggeration to entice people to purchase it. They may cold call potential investors or draw in an audience with online videos and investor email newsletters. When these communications contain false or misleading information, government regulators may view the activities as white-collar crimes.
Their communications extol the future of a company or cryptocurrency and urge people to buy in before the value explodes. They usually claim to have foreknowledge of something that will benefit the company and make it more profitable.
At the same time, the people promoting the stock or currency already own quite a bit of it. They want to encourage as many buyers as possible to jump in so that the stock value rises. After creating a strong demand, they sell their shares at the artificially inflated value. This action, however, abruptly drives down the share value, and the investors convinced that it was a good investment lose their money.
Securities law
Driving demand for a stock or cryptocurrency based on fake or altered information breaks the law. Anyone convicted of knowingly misleading people for the purpose of inflating the value of a stock or cryptocurrency could face steep fines.
