Pump and dump scams are when fraudsters use an artificial market to drive the price of a stock up. Once you invest, the value will then dramatically fall. Find out more about these scams and how to avoid them.
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What is a pump and dump scam?
In a typical “pump and dump” scam, a fraudster offers you what appears to be an incredible deal on a stock, described as a once-in-a-lifetime investment. In reality, the the price of the stock has been artificially inflated, and the value of the stock will fall dramatically soon after you buy it. You could lose all your money.
At the beginning of the scam, the “brokerage firm” or fraudster will own a large number of the stock, and actively promote it so more people will buy it, pushing the price higher. The fraudsters will try to trick people to invest by telephone or online. Once enough people buy in at a high price, the scammers will sell their shares, causing the price to crash.
The stock is unlikely to be listed on a Canadian exchange, and the stock may be worth pennies.
Once enough investors have overpaid for the stock, the fraudster will sell all their stock at a high price just before the value falls dramatically. The fraudster disappears, and investors are left holding stock worth much less than what they originally paid for it. And often, when investors try to sell the stock, there are few buyers, if any.
What tactics do pump and dump scams use?
Pump and dump scams are often carried out with additional promotions on internet chat rooms, bulletin boards and social media. They are often called “ramp and dump” scams when operating over social media specifically. Ramp and dump scammers use social media platforms or messaging apps to invite people to an investment group. The scammers will try to lure people into the scam through a variety of tactics, such as:
- Inside information – The scammers may say they have non-public information or a special inside connection, to make investors believe the profits are guaranteed. In most cases, the scammers have no special connection. Be aware that trading using inside information would be a breach of insider trading laws.
- Private chats – The scammers may promote “investment clubs” on social media chats or private messaging apps, sometimes focussed on a single stock.
- Fake credentials or impersonation – They may claim to be a professional or someone affiliated with a well-known legitimate company. These are often aliases. Scammers may go as far as to impersonate famous stock advisors, politicians, or celebrities. They may even impersonate clients of legitimate companies.
- High pressure tactics – Scammers will try to convince you to invest quickly based on a supposed market-moving event — such as a company acquisition or promises that a stock will increase soon. They may encourage investors to buy stock independently via their own brokerage account, and direct them to buy on a specific day, with a specific quantity, and then ask for confirmation.
- Small foreign based companies – Scammers will often target unfamiliar stocks from smaller companies. When only a small portion of overall shares are available to the public, it means the shares can be more volatile and harder to sell to investors. This also makes the shares easier to manipulate. These companies are often headquartered abroad.
Be cautious of where you receive information, especially if it is from an unsolicited phone call or online source. Information can be inaccurate, or even fraudulent.
For example, many social media apps allow the use of aliases, so it is difficult to know who someone really is. One person can create the illusion of widespread interest in a small, thinly traded stock by posting several messages under different screen names. It is also possible for an individual to post negative or positive information about a particular stock, in an attempt to affect the price in an unfair way.
You should never make an investment based solely on what you read on social media or based on a phone conversation.
How can you avoid pump and dump scams?
There are a few steps you can take to protect yourself from pump and dump scams:
1. Check before you invest
One of the best ways to avoid investment fraud is to make sure that any person offering you an investment or investing advice is registered to do so. In general, anyone selling securities or offering investment advice must be registered with their local securities regulator. Checking registration is quick and easy, visit CheckBeforeYouInvest.ca for more information.
2. Get a second opinion
Be skeptical of unsolicited investment opportunities that you might receive over the phone, online or from acquaintances. Before you invest, call the Ontario Securities Commission’s Inquiries and Contact Centre or get a second opinion from someone you’ve confirmed is a registered advisor. You may also want to consult a lawyer or an accountant.
3. Take the time you need
Be suspicious of limited-time offers and high-pressure salespeople. You should never feel pressured to buy an investment on the spot. Take the time you need to make an informed decision. High pressure tactics are one of the main signs of investment fraud.
4. Research the investment
Before you make any investment, understand how it works, and the risks and fees associated with it. Don’t be afraid to ask questions and make sure that it fits with your financial goals. Find out where to get information on a company. Learn more about how to research an investment opportunity.
5. Report investment fraud
Victims often don’t report investment fraud for fear of embarrassment. Not reporting what happened, can leave others vulnerable to the same scam.
If you suspect that you have been approached by a fraudster or that you may have been a victim of an investment scam, please contact the OSC’s Inquiries and Contact Centre.
- Local (Toronto): 416-593-8314
- Toll-free (North America): 1-877-785-1555
- Email: inquiries@osc.gov.on.ca
Find out more about what to do if you have been scammed.
Summary
Pump and dump scams, or ramp and dump scams, are when fraudsters use an artificial market to drive the price of a stock up, then once you invest, the value will then dramatically fall. To protect yourself, you should:
- Check before you invest – anyone offering you an investment or investing advice must be registered with their local securities regulator.
- Ask for a second opinion with a registered advisor, the Ontario Securities Commission and consider consulting a lawyer or accountant.
- Take as much time as you need to make an informed decision – you shouldn’t feel pressured to buy investments.
- Research the investment and understand its risks and fees.
- Report investment fraud if you suspect you’ve been approached by a fraudster.
