In the classic "pump and dump" stock scam, a company whose officers own
large numbers of shares in its stock issues thousands or millions of
shares at below-market prices, or even for free, to a promoter and
affiliated brokers. The market is then artificially inflated through
demand created by the brokers, using pushy, high-pressure sales tactics
to lure unsuspecting investors. After a substantial boost in the share
price, the insiders take their profits and the stock plummets. Novices
often don't realize what is happening and cannot sell in time.
The stock price may spiral back to its original levels, or even nosedive
to zero. Meanwhile, the insiders line their pockets with the stock
proceeds. The promoter perhaps will move on to the next deal but the
company, after a reasonable interval, may recruit a new promoter to pump
and dump the stock again. Some companies are merely stock churning
vehicles, whose top officers have little interest in creating a real
business with viable products or services.
As investors become more educated and sophisticated, many have grown
wise to the old penny-stock "boiler room" operations. Unfortunately,
this does not mean that stock scams have dried up. The scammers simply
have become more sophisticated as well, perhaps utilizing Internet or
professional direct mail resources to target new suckers. |
