Telephone Ripoffs and World wide web “Pump & Dump Scams
New and Seasoned Investors have lost millions of dollars over the phone to domestic and international share cons.
These con-men are persuasive. And persistent.
Typically they say that a company is poised to make an exciting breakthrough with new technology or a medical discovery. Its shares are listed on an American stock exchange but the company is little known and the shares are very cheap. Buy now, before the breakthrough announcement, and you’ll make a huge return.
The callers are persistent, often calling back many times and may become abusive when you do not comply with their offerings.
They target a wide range of people, particularly small business owners.
Many people have fallen victim to these bogus share deals. After they send the money they find that either no shares are bought, or that the shares are worthless and can’t be sold. The “broker” then becomes difficult if not impossible to contact.
Pump & Dump Scams
One of the most common Web frauds involves the classic “pump and dump” scheme. Here’s how it works: A company’s web site may feature a glowing press release about its financial health or some new product or innovation. Newsletters that purport to offer unbiased recommendations may suddenly tout the company as the latest “hot” stock. Messages in chat rooms and bulletin board postings may urge you to buy the stock quickly or to sell before the price goes down. Or you may even hear the company mentioned by a radio or TV analyst.
Unwitting investors then purchase the stock in droves, creating high demand and pumping up the price. But when the fraudsters behind the scheme sell their shares at the peak and stop hyping the stock, the price plummets, and investors lose their money.
Fraudsters frequently use this ploy with small, thinly traded companies because it’s easier to manipulate a stock when there’s little or no information available about the company. To steer clear of potential cons, always investigate before you invest:
Consider the Source
When you see an offer on the Net, assume it is a scam, until you can prove through your own research that it is legitimate. And remember that the people touting the stock may well be insiders of the company or paid promoters who stand to profit handsomely if you trade.
Find Out Where the Stock Trades
Many of the smallest and most thinly traded stocks cannot meet the listing requirements of the Nasdaq Stock Market place or a national exchange, such as the New York Stock Exchange. Instead they trade in the “over-the-counter” marketplace and are quoted on OTC systems, such as the OTC Bulletin Board or the Pink Sheets. Stocks that trade in the OTC industry are generally among the most risky and most susceptible to manipulation.
Independently Verify Claims
It’s easy for a company or its promoters to make grandiose claims about new product developments, lucrative contracts, or the company’s financial health. But before you invest, make sure you’ve independently verified those claims.
Research the Opportunity
Always ask for – and carefully read – the prospectus or current financial statements. Check the SEC’s EDGAR database to see whether the investment is registered. Some smaller companies don’t have to register their securities offerings with the SEC, so always check with your state securities regulator, too.
Watch Out for High-Pressure Pitches
Beware of promoters who pressure you to buy before you have a chance to think about and fully investigate the so-called “opportunity.” Don’t fall for the line that you’ll lose out on a “once-in-a-lifetime” chance to make big money if you don’t act quickly.
Always Be Skeptical
Whenever someone you don’t know offers you a hot stock tip, ask yourself: Why me? Why is this stranger giving me this tip? How might he or she benefit if I trade?