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SPIA

The Pump and Dump Fraud (P&D)

15 February 2021

The Pump and Dump fraud or scheme has returned to anti-fraud investigators’ attention due to the controversy generated around Game Stop, the American company whose shares grew overnight, at a rapid pace.

But first, let’s start with some info about this type of fraud and then we will return to our Game Stop example, in order to better understand the context of this unique situation.

 

How does Pump and Dump fraud work?

Generally, the perpetrators attract investors with the promise that they will strike and earn good money from investing in shares that now are low in price, but which will surely increase in the future.

Basically, scammers create a false urgency to buy shares, in order to artificially increase their value. As soon as several investors are fooled and the sales volume reached a critical mass, the perpetrators sell their shares and leave the company on the ground, with the shares at a tiny value. Since the share price has fallen below the sale price, investors lose money because they fail to sell their shares on time.

This is the mechanism by which Pump and Dump fraud works. Anti-fraud investigators know well the mechanisms of these schemes and can easily identify such a scam.

 

What happened to Game Stop?

The Game Stop situation is not (yet) a case of a Pump and Dump fraud, but many have compared what happened to the gaming retailer with a fraudulent scheme.

Game Stop, a company that sells computer games, consoles and gaming accessories, has been in decline for several years now. The main reason is the development of electronic commerce, respectively the emergence of numerous digital game distribution platforms. Many investors have tried to take advantage of falling stock prices through a practice called short selling, a speculation tactic that benefit from the shares of declining companies. Against this background, a group of investors on Reddit decided to buy Game Stop shares in bulk, which caused the value of the shares to explode.

The purpose of Reddit was clear: on one hand, they wanted to combat the speculation of the big brokerage companies on Wall Street. But on the other, there was also a financial interest of the small players that bought shares whose value appreciated overnight.

This is the short story, with the mention that, at the time of writing this article, the facts are in progress. Over time, we will find out the truth.

 

Pump and Dump and cryptocurrencies

Pump and Dump schemes often take place in the world of cryptocurrencies, the cryptocurrency market, because this field is not regulated.

An anti-fraud analysis could include a mention of the risks of working with certain businesses, depending on their business history, whether they trade on the stock exchange and accept or trade cryptocurrencies, such as Bitcoin or Ethereum. Generally, such fraud is carried out by a group of people who buy a cryptocurrency in large quantities – a way to artificially increase its price – and then promote the fact that the currency is on an upward trend, on social media, in the communities of crypto and blockchain enthusiasts.

The result is an emergency and FOMO (Fear Of Missing Out) effect: “Buy cryptocurrencies now, before the price goes up even more!” After attracting a large number of investors, fraudsters sell large quantities of purchased cryptocurrencies and thus lower their market price. Investors are fooled and the losses resulting from this scheme are quite high.

 

How do we recognize fraudulent messages?

In general, unsolicited messages that sound too good to be true can be a scam, a Ponzi scheme or another type of fraud in deployment.

SPIA Romania offers fraud risk investigation services, useful to detect in advance various types of fraud, from Pump and Dump (P&D), to fraud in Merger and Aquisitions (M&A) or preventing and combating money laundering . In parallel, the fraud risk analysis prevents the company from getting into fraudulent situations, with financial, operational and reputational repercussions.

Pump and Dump schemes are just one of the weapons in the arsenal of criminals. Therefore, SPIA Romania specialists are up to date with the latest fraud techniques, in order to provide efficient anti-fraud and anti-fraud services for its partners.