PUMP AND DUMP STOCK SCHEMES

Microcap stock fraud http://en.wikipedia.org/wiki/Microcap_stock_fraud

Microcap stock fraud, also known as penny stock fraud, is a form of
securities fraud involving stocks of "microcap" companies, generally
defined in the United States as those with a market capitalization of under
$250 million. Its prevalence has been estimated to run into the billions of
dollars a year.[1] [2] [3]

Microcap stock fraud generally takes place among stocks traded on the OTC
Bulletin Board and the Pink Sheets Electronic Quotation Service, and
usually do not meet the requirements to be listed on the stock exchanges.
Some fraud occurs among stocks traded on the NASDAQ Small Cap Market, now
called the NASDAQ Capital Market.[4]

Microcap fraud encompasses several types of investor fraud:

* Pump and dump schemes, involving use of false or misleading
statements to hype stocks, which are "dumped" on the public at inflated
prices. Such schemes involve telemarketing and Internet fraud. [5]

* Chop stocks, which are stocks purchased for pennies and sold for
dollars, providing both brokers and stock promoters massive profits.
Brokers are often paid "under the table" undisclosed payoffs to sell such
stocks.[6][7]

* Other unscrupulous brokerage practices, including "bait and switch,"
unauthorized trading, and "no net sales" policies in which customers are
prohibited or discouraged from selling stocks.[8]

Contents
"Pump and dump" is a form of microcap fraud that involves artificially
inflating the price of a stock through false and misleading positive
statements, in order to sell the cheaply purchased stock at a higher price.
Once the operators of the scheme "dump" their grossly overvalued shares,
the price falls and investors lose their money. Stocks that are the subject
of pump-and-dump schemes are sometimes "chop stocks."[9] [10]

While fraudsters in the past relied on cold calls, the Internet now offers
a cheaper and easier way of reaching large numbers of potential
investors.[11]

typical pump and dump scenario

Pump and dump schemes tend to take place either on the Internet including
e-mail spam campaigns or through telemarketing from "boiler room" brokerage
houses (for example, see Boiler Room). Often the stock promoter will claim
to have "inside" information about impending news. Newsletters that purport
to offer unbiased recommendations then tout the company as a "hot" stock.
Messages in chat rooms and email spam urge readers to buy the stock
quickly.[12]

Unwitting investors then purchase the stock, creating high demand and
raising the price. When the people behind the scheme sell their shares and
stop promoting the stock, the price plummets, and other investors are left
holding stock that is worth significantly less than what they paid for it.

Pump and dump markets
Fraudsters frequently use this ploy with small, thinly traded
companies—known as "penny stocks," generally traded over-the-counter (in
the United States, this would mean markets such as the OTC Bulletin Board
or the Pink Sheets), rather than markets such as the New York Stock
Exchange or NASDAQ—because it is easier to manipulate a stock when there is
little or no information available about the company.[13] The same
principle applies in the United Kingdom, where target companies are
typically small companies quoted on AIM or OFEX.

Some stocks that are the subject of pump-and-dump schemes are referred to
as "chop stocks." The term "chop," also called "rip," describes the massive
and often illegal profits realized by stock swindlers in their schemes. In
chop stocks, stocks are obtained at lower than market prices, sometimes
under Regulation S of the securities laws. That scenario applies in some
but not all pump and dump scams. [14]

Specific examples

See also Robert E. Brennan

During the dot-com era, when stock market fever was at its height and many
people spent significant amounts of time on stock Internet message boards.
A 15-year-old named Jonathan Lebed showed how easy it was to use the
Internet to run a successful pump-and-dump. Lebed bought penny stocks and
then promoted them on message boards, pointing at the price increase. When
other investors bought the stock, Lebed sold his for a profit, leaving the
other investors holding the bag. He came to the attention of the U.S.
Securities and Exchange Commission (SEC), which filed a civil suit against
him alleging security manipulation. As is commonly the case in SEC actions,
Lebed settled the charges by paying a fraction of his total gains. He
neither admitted nor denied wrongdoing, but promised not to manipulate
securities in the future. [15]

In April 2007, the SEC brought charges against Park Financial Group as a
result of an investigation into a pump and dump scheme during 2002-2003 of
the Pink Sheet listed stock of Spear & Jackson Inc. [16]

 Pump and dump spam

Pump and dump stock scams are prevalent in spam, accounting for about 15%
of spam e-mail messages. A survey of 75,000 unsolicited emails sent between
January 2004 and July 2005 concluded that spammers could make a return of
6% by using this method, while recipients who act on the spam message
typically lose 5% of their investment within two days. [17] A study by
Böhme and Holz[18] shows a similar effect. Stocks targeted by spam are
almost always "penny stocks", selling for less than $5 per share, not
traded on major exchanges, are thinly traded, and are difficult or
impossible to sell short. Spammers acquire stock before sending the
messages, and sell the day the message is sent.[19]

Pump and dump spam differs from many other forms of spam (such as advance
fee fraud emails and lottery scam messages) in that it does not require the
recipient to contact the spammer to collect supposed "winnings," or to
transfer money from supposed bank accounts. This makes tracking the source
of pump and dump spam difficult, and has also given rise to "minimalist"
spam consisting of a small untraceable image file containing a picture of a
stock symbol.[citation needed]

Chop stocks

A chop stock is an equity, usually trading on the Nasdaq Stock Market, OTC
Bulletin Board or Pink Sheets listing services, is purchased at pennies per
share and sold by unscrupulous stock brokers to unsuspecting retail
customers at several dollars per share.[20][21]

This practice differs from a pump and dump in that the brokerages make
money, in addition to hyping the stock, by marketing a security they
purchase at a deep discount. In this practice, the brokerage firm generally
acquires the block of stock by purchasing a large block of the securities
(usually from a large shareholder who is not affiliated with the underlying
company) at a negotiated price that is well below the current market price
(generally 40% to 50% below the then-current quoted offer/ask price) or it
acquires the stock as payment for a consulting agreement. [22]

The subject stocks usually have little or no liquidity prior to the block
purchase. After the block is purchased, the firm's participating brokers
will sell the stock to their brokerage customers at the then-current quoted
offer/ask price, to the often victimized investors who are generally
unaware of this practice. This large difference, or "spread" between the
then-current quoted offer/ask price and the deeply discounted price the
block of stock was purchased is almost always shared with the stockbroker
at the firm who solicited the trade. For this reason, there is a large
benefit and an inherent conflict of interest for the firm and the broker to
sell these "proprietary products".

Because the firm is technically "at risk" on the block of stock (if the
price of the stock drops below the price at which the block was purchased,
the firm will be at a loss on the stock) and stock is usually sold at or
even slightly below the then-current prevailing market price offer/ask, the
practice is still legal in the United States. In fact, it is not required
that this profit spread be disclosed to the client, since it is not
technically a "commission". Only the amount of fees charged over and above
the offer/ask are commissions, and must be disclosed. But even though it is
still legal, it is frowned upon by the Securities Exchange Commission, and
they are using other laws and methods of attack to indirectly thwart the
practice.

Organized crime involvement

Microcap fraud has been a major source of income for organized crime.[23]
Mob figures from each of the Five Families of the New York mafia, as well
as the New Jersey mob, have become involved in stock scams.

Mafia involvement in 1990s stock swindles was first explored by
investigative reporter Gary Weiss in a December 1996 Business Week
article.[24] Weiss later explored the Mafia's Wall Street scams in a book.
[25]

Organized crime elements were believed to have been short-selling chop
stocks in the late 1990s.[26]

Microcap stock fraud in popular culture

Microcap stock fraud has been explored in several books and movies.

A book that explored microcap fraud was the 2003 book Born to Steal by Gary
Weiss. It described the microcap underworld of the 1990s through the eyes
of a young broker named Louis Pasciuto. Although the book focuses on Mafia
infiltration of brokerages, it also describes in detail the operation of
microcap fraud.

Microcap fraud was explored in the anonymously written books License to
Steal and in The Scorpion and the Frog. Both books explore pump and dump
schemes in some detail but, unlike Born to Steal, do not provide the real
names of the specific firms and people described.

This kind of fraud has also provided the title for a book by Robert H.
Tillman and Michael L. Indergaard called Pump and Dump: The Rancid Rules of
the New Economy.

A fictional account of pump and dump schemes can be seen in the movie
Boiler Room. According to press accounts, the director and writer of the
film worked briefly as a cold-caller for the Stratton Oakmont brokerage
house, which was shut down by regulators in the late 1990s.

Another movie exploring brokerage chicanery is Wall Street, starring
Michael Douglas and Charlie Sheen.

A pump and dump scam was also the subject of several episodes of the
popular HBO series, The Sopranos, pulled off by Matthew Bevilaqua and Sean
Gismonte.

On an episode of the legal drama Law & Order, entitled "Trade This," the
murder of a young stockbroker at a prestigious firm is found to be related
to his boss's involvement in several pump and dump scams financed by
members of a Mafia crime family. But don't worry. Vince D'onofrio
caught the killers. He always does.

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