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Analysis of a Pump & Dump

Always ruthless and usually within the penny or microcap market, pump & dumps are performed to artificially raise the trading volume and often the price of a stock ("pumping") through a campaign of hype which may include misinformation and/or misrepresentation. This enables insiders or other large shareholders to sell their stock ("dumping"). Naïve investors purchase the stock and unwittingly create a façade of legitimacy. This can entice even more people to believe the hype and buy even more shares. Once the schemers have sold their shares, the pumping ends and the share price plummets.

There is only one reason that penny stock insiders spend money to promote their stock. It is so that they can sell their own stock. Often, deceived investors will buy into the story that, "We're just trying to increase shareholder value.” Well we challenge anybody to find a penny stock that has been the subject of an aggressive stock promotion scheme and has been able to maintain its increased share price for more than just a few days. The share price of a promoted stock will obey the law of gravity 100% of the time. There is only one way to permanently increase shareholder value and that is through hard work and legitimate results.

There is this perception that the purpose of a stock promotion is to increase the share price. On the contrary, the purpose of a stock promotion is to increase trading volume. An increase in share price is purely a bonus to the insiders selling. In order for the pump and dump to be successful, bids must come into the market. While bidding up the stock is preferable, the insiders are more concerned about getting buyers to take their stock at any price. Insiders are always free to issue themselves new stock whether in lieu of payment for services rendered, by exercising stock options or warrants, or through employee bonus programs. Therefore, the price that the insiders get for their stock is of secondary importance.

 

Ways To Recognize A Pump & Dump

1. SPAM EMAIL

A legitimate company will never send you spam email. First of all, spam is illegal. Secondly, all the information that they would need to get out to the public is disseminated though press releases. If they need to make themselves aware to the public, they do it through a number of legitimate campaigns such as advertising, technology fairs and the like.

2. STOCK TOUTS

Sometimes emails received are from a free subscription-based touting service. Sign-ups are how these touts get around spam laws. However, the intent is the same: to con you out of your money. These touts are paid by the people intending to dump their stock on you and usually say so in the fine print of their promotions. These sites often tout the same stock for good reason. Stock promoters usually own many touting sites and promote under various names in order to give the perception of a wide following for the particular stock they are touting.

3. THE BACKGROUND OF THE OFFICERS

There's an old saying, "Once a crook, always a crook," and that's why it's always a good idea to see who is running the show at the company. Verify his resume. Most companies will offer up the qualifications of the President, CEO and other officers. Check their past involvement with public companies and the past performance of those stocks. Chances are that if they’ve been involved with past pump and dumps or other schemes, you're now looking at a company that is heading in that direction. Also, it is a good idea to look into court records of the individual(s) involved and their previous companies to see if anyone has been involved in civil or criminal proceedings, especially for fraud.

4. MESSAGE BOARD CONTENT

Yes, forums such as investorshub.com, siliconinvestor.com and the Yahoo Finance Message Boards usually contain contributions from child-like posters who are there for no other reason than to try and convince themselves that they made a good investment. But you can often find paid promoters posting anonymously to keep the pom poms shaking while downplaying the naysayers. They know that people who are apt to follow spam email or stock touts probably consider these message boards to be research so they want to bluster about their great investment and brag about all the money they are supposedly making. These are the guys who call anybody negative or questioning the company a "paid basher" and claim they have done their "DD" (due diligence) when there is really none to be done. When you ask what DD they did, the touts will be vague with their answer or give a non-answer, with a "because I said so" kind of response. They are also the ones who offer up lame excuses for down days such as naked short selling (does not occur in the penny stock market) or MM (market maker) manipulation. They are also the ones who make bold and baseless predictions like, "This is an easy ten-bagger" (a stock that sees its share price increase by a multiple of ten).

5. PRESSURE TO BUY IMMEDIATELY

Stock touts will do anything to keep you from thinking, using words like, "you'll miss the boat" or everyone in the know is getting in right now" or "the entire street is talking about this stock." They'll even call you a fool if you "don't buy right now." Sometimes, you'll get the same high pressure email over and over again, a clear sign that they need more volume in order to complete all the planned insider sales. If you're being given the "now or never" option, pick never and you'll save money every time. Otherwise you'll be conned into participating in a pump and dump scheme.

6. CLAIMS OF BREAKTHROUGHS

Beware if the company claims to be an industry leader or has made a breakthrough discovery. A company with legitimate breakthrough technology is unlikely to be promoting itself with stock touts and will most likely have funding readily available through a variety of partnerships with major companies. Question the likelihood of a fairly new company being the leader in anything other than schemes.

7. PRICE AND VOLUME UPSWING ON NO NEWS

If a stock's trading volume and price per share show a recent and sudden increase, there is a good chance that the stock is being set up for a pump and dump. This is even more likely if it has been involved in one in the past.

8. FINANCIALS (or lack thereof)

A legitimate company will always make recent financials available, even if it is a penny stock that is not required to file financials with the SEC. If there are financials, question if they could be fabricated. Would a billion dollar company be found within a penny stock? Also, compare the assets of the company to the market cap of its stock. Is a company with a few thousand dollars in the bank really worth $100 million?

9. ISSUED AND OUTSTANDING

If nobody will tell you how many shares are out on the street or if that number is disproportionate to the stock price (a billion shares of a stock trading at one-tenth of a penny for example), stay away. Chances are a reverse split is coming and you will be left with only a few shares worth a fraction of what you spent.

10. LOOK AT THE HISTORY

Look at the history of trading on the company over the last year or so. If you see sudden big jumps in share price and volume over a few days followed by just as quick drops in price and volume, chances are that the stock has been the subject of past pump and dump programs.

11. CLAIMS OF SHORT POSITIONS

Sometimes you'll hear that a particular penny stock will rise because of a tremendous short position in the stock and an upcoming short squeeze. Large short positions in penny stocks don't occur because it is almost impossible for anybody outside of a market maker to take a significant short position in a penny stock. Very few brokerage firms will allow you to short penny stocks and those that will encounter so many restrictions that it is impossible for a significant short position to exist.

12. CANCELLATION OF SHARES AND BUYBACK PROGRAMS

Naïve investors consider the announcement of a cancellation of shares or share buyback programs to be signs of authenticity of the insiders' intentions. Insiders will announce these programs to further the success of a pump and dump scheme.

The cancellation of shares, usually involving an insider's return of some of his common stock to the company treasury, is usually meaningless because the insider(s) will never give back enough stock to relinquish control of the company. And as along as the insider(s) have control, they are free to reissue themselves stock under a number of schemes, once they have sold enough to put their control in peril. They also probably hold enough preferred shares, options and warrants to give themselves all the future shares they want.

Share buyback programs are usually announced with caveats such, "at the discretion of the board" and "from time to time," meaning they might buy stock when they want, at the price they want and as many shares as they feel like. There has yet to be a significant buyback program carried out on the penny stock market.

13. RASH OF NEWS RELEASES

If a previously quiet penny stock suddenly has a rash of news releases within a few days, chances are it is the subject of, or about to undergo, a pump and dump program.

14. RELENTLESS TOUTING

If you are receiving email after email about the same stock, you can be sure that the insiders have not sold enough shares yet. If a tout feels the need to send you more than one email, never mind several emails per day, then he is desperately trying to convince you to buy the stock. If there are several touts who have suddenly come up with the same "idea," then you know that the insiders are pulling out all the stops. The more touts they hire, the more money they've spent in order to sell more stock to you.

15. PROMOTIONS AHEAD OF AN SEC FILING

If the company is a reporting company, take a look at the SEC filings. Is a quarterly (10-Q) or annual (10-K) report about due, or worse overdue? If the promotions are beating SEC filings to the punch, chances are they are trying to get you to buy the stock before bad news is revealed. Bad news may include a significant increase in the number of shares outstanding or liabilities, and/or a significant decrease in cash or other assets.

16. ANNOUNCEMENTS CONTAINING CAVEATS

Look for the caveats in press releases and SEC filings, which will may lead to an easy out of the announcement. For example, “financing of up to x dollars,” “an option to acquire,” and “will buy back up to x dollars of stock from time to time at the discretion of the Board of Directors.” Our favorite term is "best efforts." If the announcement contains an easy out, chances are it will be exercised.

 

Unscrupulous Things Hype Will Do To Gain Your Confidence

Don't ever let go of the notion that stock touts are not working for you, no matter how magnanimous they sound. They are working for their clients, namely the insiders who hired them to them to promote, market and pimp their stock. These touts rely on the success of their current promotion to be able to get them future clients and promotions. Their success is gauged by their ability to separate you from your money. As a result, they will say anything to make you believe that they are credible and their clients are the real deal.

Here are some of the common lies a tout will spout in order to gain credibility for himself and his client:

1. AS SEEN ON TV

Touts often like to make themselves sound important and credible, concocting lies about their connections and visibility. One of the more common lies they post on their website is the "As Seen On" boast where they'll post the logos of television networks and important websites to give you the impression that they've been relied on as a source of information by journalists. This is an obvious lie as no legitimate media is going to rely on these hustlers for any information. In fact, we're pretty sure that any of these news organizations would have attorneys issue a cease and desist letter if they got wind of their trademarked logos being used for these devious schemes.

2. CLAIMS OF RESEARCH

"We are working hard and researching companies so that we can bring you our next pick" is a common statement made by stock promoters. The only research these guys are conducting is focused on finding the next insider who will write them a check. Then the "exhaustive" research they've done on their client company will consist of parroting the company's press releases within the tout's own mailings. They are not "discovering" undervalued plays or finding "unique opportunities" or presenting you a "revolutionary" company.

3. PREDICTIONS OF ASTRONOMICAL GAINS

"Easy 3 bagger!" - "Is this stock going to double tomorrow?" - "This could soar 300% tomorrow!". Not only are these kinds of price predictions an absolute indicator of a pump and dump, they are 100% illegal. It is fine to set a price target based on solid research, but making outrageous prognostications of ridiculous increases in a short period of time is fraud. Many have gone to prison for it.

4. PREPOSTEROUS NOTIONS

"Is GOOGLE about to buy out this company?" You get this kind of rhetorical question a lot from touts trying to put a bug in your ear. You can be sure that whatever con job the tout is trying to make you believe, it is never going to happen.

5. FANTASY RESULTS

Touts always like to use the highest attained share price from previous stock alerts to emphasize that "they were right." Often they will give only partial reports on the day's trading of their promoted stock. For example, they'll boast that, "the stock gained as much as 700% today," without mentioning that the stock closed down 50%. Or they'll broadcast the stocks gains without mentioning that only a few shares traded. And they'll always forget to talk about the stock tomorrow, when it has given back all of its gains and then some. Our favorite boast is when they'll reissue an alert on a past tout. "We've been right before on this stock and now we think it's ready for another run." What they forgot to tell you is that the stock is now trading at a lower price than it was when they issued their first alert. In other words, they forgot to tell you that a ton of people lost money on the stock directly because of their last recommendation! They bought it at higher prices and could only sell at lower prices when the promotion ended.

6. BLAME IT ON THE SHORTS

If a stock promotion hasn't been successful, then it must be the fault of the naysayers and the shorts. It couldn't possibly be that nobody was buying the story or that insiders were selling into the promotion. Comments in follow-up emails like, "We were battling with the shorts," are a sure sign that a pump and dump program was on. The battle was not with the shorts but with the insiders who were filling all the bids they could. After all, if the so-called shorts were willing to sell stock at lower prices, then why wouldn't they have hit bids prior to the promotion?

7. COMPENSATION DISPENSATION

Touts are required to disclose their compensation and name their benefactors within their promotional materials. Many refuse to do so, thereby blatantly breaking the law. Others will outright lie and claim that they were not compensated for their work. Still others will overstate their compensation in order to give the appearance of a massive promotional effort thereby lending hope to an extended campaign. This type of ruse has proven very effective in the past with claims of $2 million dollar promotional campaigns. One would have to question how a company with a few hundred dollars in the bank would expect to pay for a $2 million dollar promotion if it was not by selling stock. Furthermore, a reasonable person would question whether that two million dollars would not have been better spent on executing the company's purported line of business.

The most common form of compensation disclosure fraud is the "Third Party" con. Insiders hide their intent to sell stock by having some third party hire the tout, thus leaving the insiders free to claim innocence and lack of knowledge of any pump and dump scheme. They will sometimes even take the step of deflecting responsibility by issuing a press release refuting the promotion, deeming it "unauthorized" and claiming that it has no knowledge as to who the perpetrators of the campaign might be. This often occurs after an inquiry by the SEC or other regulatory body.

8. SHELL GAME

Occasionally, a tout will take the good news from one company and "accidentally" apply it to another, dormant penny stock with a similar name. He'll buy up a bunch of the dormant company's cheap stock and then tout the real company's news as if it belonged to the dormant company. Although this "error" is usually recognized in fairly short order by investors, it still often enables the tout to cash in from those who did not immediately see that they were being conned.

9. BAIT & SWITCH

To make their pick seem more legitimate, a tout will often pick a real company to tout along with the scam company. In this way, he is trying to get you to lump the two companies together and believe that they have similar legitimacy. You'll see a story about a $100 stock and a 5 cent stock designed to get you to think, "Hey maybe the 5 cent stock is a better buy." Sometimes, the tout will even make the scam company’s inclusion look like an afterthought. For example: "We really like gold stocks right now, which is why you should look at our favorites: ABX and GOLD. We think that GGRI could be an up-and-coming player too." While ABX and GOLD are legitimate and actual gold producers, GGRI was and is a pink sheet scam.

 

Signs That You Are A Victim Of A Pump & Dump

1. INCREASED VOLUME AND A TEMPORARY UPSIDE

A quietly trading stock has a sudden increase in trading volume following a promotion, which continues even after the increase in share price has been eradicated and the stock falls into negative territory. This is a sign that the insiders had offers at the asking price all the way up and once profit taking started, the insiders continued to sell, this time by hitting the bids.

2. INCREASED VOLUME AND STRAIGHT DOWN

A quietly trading stock has a sudden increase in trading volume following a promotion, but in this case the price went straight down. How could this be if there were no sellers when the stock was quiet? This is a sign that the insiders are dumping, providing stock to bidders no matter what the price. Insiders are probably competing with each other to get rid of stock.

3. INCREASED VOLUME BUT STOCK MOVING SIDEWAYS

A quietly trading stock suddenly shows trading volume, but the share price is stuck in a tight range. This is a sign that the insiders are not whacking bids but have plenty of stock for sale at the offer. This is the smartest tactic when dumping stock because in this way unsuspicious investors appreciate that there seems to be support for the stock, and yet it hasn't been run up to high share prices, giving them the perception that they are not too late to join the party. Always and inevitably, the share price will fall out of bed once the bids stop coming in and the insiders have no choice but to lower their offer. At that point, other investors will also attempt to cut their losses and join the selling.

4. THE TOUT STOPS TOUTING

Touts who have been pounding the table for days or weeks, sending email after email, suddenly go quiet. This is an indication that they are no longer being paid to tout the stock and have moved on.

5. EVEN WORSE, THE TOUT DISASSOCIATES HIMSELF

Touts rely on the insiders to sell in an orderly fashion rather than just dump all of their stock in one load. A stock whose price drops immediately after an aggressive alert is sent out looks bad on the promoter, who has to be able to show at least a brief increase in share price in order to maintain the confidence of the subscribers he relies on to participate in his next pump. If the insiders sell in a rush, no investors make money and the scheme becomes more obvious. In this situation, the tout will often issue an apologetic email to his subscribers feigning ignorance and retracting his recommendation, albeit too late.

6. THE BIG DEAL FALLS THROUGH

Pump and dumps are often executed in conjunction with the concocted announcement of pending merger, acquisition or contract that is purportedly in some due diligence stage. The insiders and touts will use this period to continually pump the benefits of the coming transaction, giving a chance for the insiders to divest themselves of their holdings until the inevitable announcement of the failure to consummate the merger, acquisition or contract.

7. THE COMPANY GOES QUIET

Following a period of sudden and frequent press releases disseminated in conjunction with a slew of touts promoting the company, news from the company is hard to come by.

8. NOBODY HOME

During the promotion of the company, there is a facade of transparency and investors are encouraged to contact the company and even talk to or email the CEO/President. Suddenly, nobody returns phone calls or answers emails. This usually happens at the same time as the company goes quiet.

9. ISSUED AND OUTSTANDING STOCK INCREASES DRAMATICALLY

If a double digit percentage increase in the number of issued and outstanding shares occurs following a promotion, chances are that the insiders have issued themselves stock to replace the shares they sold into the pump and dump campaign.

10. GOING IN REVERSE

Shortly after a campaign of press releases and stock promotions, the company will announce a reverse split of its stock. In spite of whatever reasoning is proffered, the real reason to reverse split the stock is to eliminate the number of shares being held by investors as part of an effort to set up for the next pump and dump campaign.

11. THE SEC COMES A CALLING

A temporary or permanent trading halt can be ordered by the SEC because of a concern of a lack of accurate or verifiable filings. This is often the result of a heavy and prolonged stock promotion executed in conjunction with grandiose claims and heavy trading volume. These conditions will sometimes, but not always, trigger the interest of the SEC.

 

Sure Signs That You Should Not Be Playing The Stock Market (at least not the penny markets anyway)

1. You Believe That The Share Price of Your Penny Stock Is Down Because of Shorting

No, no, no! Impossible! We'll say it again. It is impossible for a significant short position to exist in any penny stock. Anybody who tells you otherwise is conning you. Any tout who tells you that his "pick" went down because of shorting is a liar. There is only one reason for a penny stock to go down in price when there is heavy stock promotion. The reason is that sellers are flooding the market with stock.

2. You Believe That There Is Such A Thing As A "Paid Basher"

The fact of the matter is that most penny stocks are scams. The regulators have made it far too easy for con artists to infiltrate the stock market with ridiculous schemes, most of which are designed to dump worthless stock onto an unsuspecting public. In order for these cons to get you to buy their stock, their company has to be "talked up" through paid promoters who have developed email or snail mail lists by advertising their own feigned success in the penny markets. Some of these promoters are so good at conning their audience that they even convince subscribers to pay for their membership. Most, but not all, will specify some sort of compensation for their promotion, as required by law.

When a penny stock goes down, touts and company insiders will often invoke the idea of shorting as the cause. As discussed previously, shorting penny stocks is extremely prohibitive. Still, people will try and convince you that anybody speaking negatively about the prospects of a penny stock is a "paid basher" out to aid the shorts. If you believe that the share price of a penny stock can go down because of a paid basher, GET OUT OF THE MARKET NOW!

3. You Think That A Stock Can Have More Buyers Than Sellers or Vice Versa

Every trade requires a buy and a seller. Period. There is no such thing as more buys than sells or more sells than buys. Think of a stock as a car. If you are looking to buy, you know how much you are willing to spend. Same with a stock. You make a bid, and if the seller is willing to sell it to you at that price, then you have a deal. But there is still a buyer and a seller. Same if you are selling a car. You know what price you want, and if the buyer meets your price, then you have a deal. Once again, you still have a seller and a buyer. It takes two to tango and two to complete a transaction. A stock, like a car, boat or house, is only worth what somebody will pay for it.

4. You Believe That If The Company Makes A Statement, It Is Guaranteed to Be Truthful

There is still the perception out there that regulators like the SEC check out every statement a company makes for legitimacy, or that the regulators will catch and prosecute a stock schemer every time. None of these notions are remotely true. Most securities fraud artists, especially in the penny markets, get away scot-free. Even those that are eventually prosecuted can spend years spinning their cons before they are stopped.

A press release or SEC filing issued by a company involved in a pump and dump scheme rarely speaks the absolute truth, if at all. At a minimum, the truth is distorted with a positive bent to make the announcement seem better than it is. Many are just outright fabrications. It bears repeating that you should look for the caveats in announcements, which will eventually lead to an easy out for the announcer. For example, “financing of up to x dollars.”

5. You Believe That Paying A Tout For Penny Stock Picks Makes the Pick More Legitimate

It is unfathomable that some touts garner fees from their subscribers. These are promoters getting paid from both sides. Almost always, they are promoting the same stock that the "free" touts are promoting.

6. You Believe That Trading In Penny Stocks Is Indicative of The Major Markets

We laugh when we hear someone claim that their penny stock was down because the DOW was also down on the day. How preposterous. Except perhaps in the event of a horrendous day on the major markets (like a crash), when everyone is jittery, penny stocks are absolutely not indicative of the major markets. Most penny stocks go up because of independent promotions and most go down when the promotion ends or insider selling weighs on the share price. The performance of the DOW or any other major index generally has no relevance to the performance of penny stocks.

PumpsandDumps credited for the content of this page.

 

 

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