Toby Pustovit, a 21 year old Oregon stock manipulator was sentenced recently to four years and three months for operating a pump and dump stock scam. Pump and dump stock scams have been with us for many years, but they have become easier to perpetrate through the Internet. The essence of a pump and dump scam involves the scammer buying shares in small companies, often referred to as “penny stocks” where it does not take large amounts of trades to influence the price of the companies’ stock. They then tout the stock online through chat rooms, emails, social media and other venues making it appear that the stock is much more valuable than it is. The increased interest in the stock based upon these misrepresentations temporarily will inflate the price of the stock as the demand for the stock soars. Once the price has gone up, the scammers sell their shares at a profit. Soon thereafter, the price of the stock returns to its true worth and the people who were lured into purchasing it find the value of their investment has dramatically fallen.
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, trading on 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.
Always consider the sources of any investment advice that you receive. How reliable is the source? What are their credentials? What do they stand to gain? Is it inside information that they are offering in violation of securities trading laws?