PUMP AND DUMP - A MUST READ
I dont know who pointed me to this, but this is a must for all investors in small(very small) caps.
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Pump and Dump
by Skip Kildore
August 9, 2000
"Pump and Dump" Explained.
Pump and Dump is an expression that describes an underhanded method used by stock manipulators to separate you from your money, to their benefit.
It is usually done with very low cap stocks, "penny stocks", though, less frequently, you see a similar operation conducted on classier stocks. Usually these penny stocks are OTC ("Over The Counter"), but they are often small AMEX, NASDAQ, or even NYSE stocks too.
Essentially, the object of the stock manipulator here is to inflate the price of a stock, develop a public interest in it, which tends to further inflate the stock, and then dump the unwanted shares on the market... after which the share price generally returns to the level it had prior to the manipulation. People actually make a living, and better, doing this. Probably, usually more than one person is involved in the effort, but a single person working on their own can have substantial effects... But even companies themselves may be in on it... stating openly that they have paid a particular promoter with shares.
A typical case would be a mining company stock, it's share price languishing under a dollar... revenue bad, probably losing money... the end is in site. Prior to abandoning ship, the board votes to increase the number of shares... those shares are then given to a stock promoter. He then designs a campaign to arouse public interest. That campaign will include a strategy of Press Releases and Bulletin Board Spam, and possibly also "analyst reviews" of quickly set up websites, or other persons in the business as well. The Mining Company might suddenly have PR (Press releases) coming out to the effect that they are about to close a great deal on a property in South America, full of minable, profitable ore. Or it might declare that it is selling off the mining part of the business, and "Going 'E' "... offering Internet B2B commerce, internet gambling, fiber optics, or wireless... whatever is "hot" at the moment. Then the spam team goes to work, pounding the financial bulletin boards with excited posts, wanting the share the "good news" with the rest of the world. One poster may post under several screen names, giving the impression that the stock has a wider following, interest, and public respect, than it does. The PRs keep coming.... the deal is just about to be closed... a second deal is being looked into, filing to be listed on a major exchange is mentioned, as is frequent reports about how lucrative the future of the particular industry is going to be... and the stock price climbs... a twenty five cent stock is easily pumped to two dollars in this way. More and more public interest is developed, and more news, and the promise of news, keeps coming... but mysteriously... the price stops rising.
The reason that the price stops rising is that whoever wants to unload it is starting to "Dump". Despite a huge increase in volume and interest, the price just stagnates, and all the innocent posters keep wondering why, keep asserting their hopes, while the manipulating posters keep encouraging them to have faith, that in four six eight weeks the stock will "be in the double digits".
But it doesn't get there... the price slowly sinks, over several weeks, back to where it was. The Pumper posters disappear from the boards. Possibly even the stock gets delisted from even the OTC and goes off to the "PinkSheets", where the lack of liquidity makes it worth even much less than it was.
The Pumpers now have lots more money than they would have had, while another crop of fresh, innocent "investors" gets hurt, and mulls over "what happened", and waits, continuing to hope that the stock will at least come back to the level that they bought it at so that they can get out of it.
It happens all the time. An example in process (In my opinion) is CityView Energy (CVCL on the NASDAQ smallcap). It has an added twist in that the shares are evidently traded both in the US and in Australia, and are apparently transferable. This was an oil company, with dealings on the otherside of the world, Malasia and so on. They were up against the wall... so they got going, and "acquired" 10% of Sand's Solutions there in Australia, a supposed 10 year + veteran of B2B, and a subsidiary to yet a third company. To see how it all develops, read the CVCL board at RagingBull.com. It will be worth your time if you really want to understand the group psychology, as it develops over time.
Now, it may be the case that CVCL was not a Pump and Dump, or if it was, it is possible that the company had no intentions itself in that direction. There are also legitamate reasons why a company might pay promoters, for instance, as a stop gap to keep it's value high enough to prevent delisting, until it can meet requirements without support. I simply used CVCL as an example that, in my opinion, fits the pattern.
Higher class stocks (normally above 20 dollars in value) are not typically subject to the Pump n Dump scheme, though it does happen. What seems to be more common is the "Bash and Stash" scheme, which is harder to detect, and which will be the subject of a different article.
Now, there are "investors" on the boards asking for solid references. Good for them: you always should demand independent verification.
See RagingBull's post # 42 for CVCL, where it is openly stated by a stock promoter that they recieved $9,800 for their work. OR, well, You could just go directly to the documentaion yourself!!!
Try
tradingroom.com.au
enter CVI (Austrlia's ticker for Cityview Energy, aka CVCL) and then click on company announcements, and especially, read all the ones from 12-30-99. If you are able to understand the documents, there should be no further questions. If you can't understand the documents, you shouldn't be "investing".
(Disclosure: I do not now own any CVCL, nor do intend to in the near future. When I understood what was happening, I did trade a little, earlier this spring, to a small profit. I don't know anyone in the company, nor do I know of anyone that owns it now, or intends to in the future.
In sum: I have nothing to gain or lose by any share price activity of CVCL. Nor do I expect MY little reference to it to have any effect whatsoever on the price of CVCL. My purpose here is purely educational. There are other examples out there, and I welcome people to post on their experiences. CVCL is simply a recent example that I am familiar with.)
Always talk to a certified financial planner before making any substantial investment decisions. Failing to do so is unsound, and could lead to unwanted results. |
