You are an investigator working on what you have identified as a "pump and dump" scam

Question

There are many reasons why you believe this to be true, and you are required to tell your supervisor the factors involved and/or the steps involved with this process in order for him to have a better understanding. Discuss the steps in this process.

Answer 1

Penny stocks (those selling for less than $5.00 per share) sold to the public as investments in unknown or little-known companies. False press releases are sent to the media that hype the development of "hot" innovations or products soon to be marketed by the company and draw huge, fast profits. Stock brokerage firms, Internet investment sites, and financial advisement networks add legitimacy to false media reports by spreading information to investors about the company's potential earnings. Large quantities of the company's stock are purchased by offending "insiders" to increase the volume of stocks sold, which in turn increases the price of the stock shares to new investors. New investors purchase the company's stock after it has risen in value (i.e., the pump), causing it to rise even more in value. The offending "insiders" sell off their stocks at the peak artificially inflated value (i.e., the dump), gaining huge profits and driving down the price of the remaining stocks still held by the legitimate investors. In some cases, the offenders file for bankruptcy, causing unsuspecting investors to lose their entire stock investment.