Scam of the day – June 23, 2013 – SEC issues new pump-and-dump warning

Many scams are old and have been with us for many years.  In fact, the origin of the Nigerian email letter of today is found in a scam that began in the 1500s called the Spanish Prisoner Scam.  Many of these old scams have evolved and changed over the years, but unfortunately are still effective ways for scam artists to steal money from unwary victims.  Recently the Securities and Exchange Commission (SEC) issued a warning about one of the scams that is having a resurgence.  The scam is called the Pump and Dump scheme and it works when you are told about a great opportunity to invest in a company that is a microcap company or penny stock company.  Often the communication providin the information about the company purports to be from an “insider.”   Sometimes, the information appears to be intended for another insider, but it somehow is directed to you.  The information will lead you to believe that the company, for various reasons, is about to have a huge surge in the value of its stock so it is important for you to act quickly and buy up shares.  Unfortunately, this is a scam.  The people providing the information lure their victims into buying up the shares of the company which causes a temporary increase in the value of the stock.  However, it is at this point that the scammers sell their shares, knowing that they have artificially inflated the value of the stock by luring many people to buy it.  The scammers make a big profit, but everyone else is left holding stock that drops dramatically in price soon thereafter when it becomes apparent that the sudden surge in the price of the stock was caused by the scammers luring people into buying the stock with fales promises and representations.

TIPS

Years ago, the communication urging you to take advantage of this great opportunity came by way of a fax, but the fax has been replaced as the primary method for spreading this fraud by email, online chat rooms and social media such as Facebook or Twitter.  Whenever you receive such a communication touting a stock opportunity such as this you should immediately be skeptical.  If indeed they are touting that they have inside information, such information, if accurate would most likely run afoul of SEC rules and regulations.  You should also be skeptical as to why you are being so lucky to receive such an offer.  Ultimately, you should never invest in anything that you don’t understand and you should never invest in something that you have not researched thoroughly.  Merely because someone represents that they have critical information about a potential investment is no reason to trust them.  The pump and dump scam is particularly effective with penny stocks or small companies with small capitalization so you should be particularly wary if you receive an offer involving such companies.

If you wish to report a securities fraud or have a question about the legality of investments you can contact the SEC at http://www.sec.gov/complaint/select.shtml