What Is A Pump and Dump Scheme?

By Henry Jennings

A report this week that ASIC is looking at prosecuting four individuals involved in a Pump and Dump scheme.

I was asked on 2GB to make a comment on it.

My inquisitor asked why it was any different from me( or any fund manager) on TV or radio, talking about a stock that I want to push.

There are several good reasons why it is different.

• Firstly, I have an AFSL licence so in theory I know what I am talking about. In theory. Also, I have to disclose a holding or a position in a stock that I am talking about. Absolutely Adviser 101 is to disclose an interest. CNBC requires it in advance of me flapping my gums. Same applies in the newsletter. We always disclose our personal holdings in a stock.
• The other point is that to be selling at the same time as you are advising others to buy is 'verboten'. Big time 'verboten'.

If you are going to break the law, go to jail and lose your reputation, then you had better go big. Because there is no coming back from that. It takes a lifetime to get a reputation and then it is gone in an instant. I remember the old joke about a goat.

I thought I would ask my friendly Ai large language model to explain Pump and Dump.

It came up with this. Bang on.

A pump and dump scheme is a fraudulent practice in the stock market where the price of a stock is artificially inflated (pumped) through false, misleading, or exaggerated statements. Once the stock price has been pushed up, the fraudsters sell off their shares at the inflated prices (dumping) and make a profit. After they sell their shares, the stock price typically plummets, leaving other investors with significant losses.

Here's a breakdown of how a pump and dump scheme typically works:

1. Acquisition: Fraudsters acquire a large amount of a low-priced, thinly traded stock.
2. Promotion: They heavily promote the stock through various channels, such as social media, email newsletters, online forums, and sometimes even through cold calls. They spread positive rumours, false news, or exaggerated claims about the company's prospects to create hype and attract buyers.
3. Buying Frenzy: As more investors buy into the stock, the price rises due to increased demand.
4. Dumping: Once the stock price reaches a desirable level, the fraudsters sell their shares at the inflated prices.
5. Crash: After the fraudsters exit, the stock price crashes, often because the artificially created demand evaporates, and the true value of the stock becomes apparent.

These schemes are illegal and are considered a form of securities fraud.

Another important thing is that it is a conspiracy. Many frauidsters are involved. That is what makes it a scheme. More than one involved and a intent and purpose to defraud investors,

Market manipulation is a serious offence. The trouble is that if you manipulate on volume, it can just be considered bad trading or an order executed very badly. Market manipulation on low volumes is easy to spot and harshly punished.

When I ran a trading business at a bank, I used to take all the young traders down to the ASX and show them how the exchange monitored trading, and how they could catch them if they did the wrong thing. The fines were huge and career ending! It shows how old I am, as the room where the exchange had the detectives had pictures of past miscreants on the wall. Alan Bond, Christopher Skase. Plenty around. I am showing my age! I think even Rene made the wall of shame. I really am going back.