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An overview of “pump and dump” scams

On Behalf of | Jun 1, 2021 | White Collar Crimes |

White-collar crimes in Michigan encompass several nonviolent financial schemes intended to benefit the scammer. These crimes are commonly committed by business people in financial sectors, which gave the term its name. One type of white-collar crime involving stocks is the “pump and dump” scam.

Pump and dump overview

A pump and dump is a securities fraud crime that involves the scammers hyping a stock to make it attractive to buyers. Statistics show that pump and dump scams make up about 15% of spam emails. In the past, scammers used cold calling, radio and direct mail to lure buyers, but it is now easier to use the internet to find stock buyers.

Scammers spread false information through emails, social media and online forums to lure more buyers. As the stocks sell, the scammer “dumps” them at an inflated price. The dump of the stock causes investors to lose money because prices usually decrease. Scammers commonly use microcaps or penny stocks because not much information is known about the companies, which makes them easy to manipulate.

Securities fraud penalties

The penalties for white-collar offenses in Michigan can vary based on whether a person gets charged with a misdemeanor or felony, but most are charged as felonies. A defendant could face up to 20 years in prison under a Class C felony charge and be ordered to pay up to $5 million in fines.

If the crime involves two or more scammers, they may get charged with conspiracy to commit securities fraud. Sometimes, the defendant gets probation if the fraud didn’t cause significant loss or only occurred one time. A buyer in a pump and dump scam or other securities fraud might be awarded damages plus interest at 6% per year after purchase date.

White-collar crimes can cost investors losses in the millions, which is the reason for harsh penalties. However, a person accused of securities fraud can’t be convicted unless prosecutors prove guilt beyond a reasonable doubt.