New Brazen Pump-and-Dump Scheme Uncovered
Social Media Influencers Were Charged For $100 Million Securities Fraud
The US Securities and Exchange Commission (SEC) and federal prosecutors have charged eight social media influencers with $100 million in securities fraud for their involvement in a pump-and-dump scheme.
The influencers, who had a combined following of over 1.5 million on Twitter and operated multiple chat rooms on Discord and a podcast called "Pennies: Going in Raw", as well as an online community called Atlas Trading, portrayed themselves as successful financial experts and stock traders. They would purchase cheap stocks, encourage their followers to do the same through their social media presence, and then sell the securities after the price went up, without disclosing this information to their followers. This particular variant of pump-and-dump is known as scalping.
Pump-and-dump schemes are a type of financial fraud that is difficult to detect, but they have been particularly prevalent on social media. Influencers posing as financial experts often provide stock recommendations in short TikTok or Twitter formats, while showing off an inflated image of their successful lifestyle. Many financial influencers target penny stocks because these companies are small, have limited information available for analysis, and it is easy to manipulate their stock prices. Cryptocurrencies are also vulnerable to this type of fraud due to a lack of regulation and technological complexity. In many cases, the inflated stock price eventually falls back to its original value, leading to losses for new investors.
A study published in 2018, titled "Cryptocurrency Pump-and-Dump Schemes," identified 80 Telegram channels that were committing pump-and-dump fraud on exchange platforms including Binance, Bittrex, Yobit, Cryptopia, HitBTC, Poloniex, and CoinExchange.
The prevalence of cryptocurrency pump-and-dump schemes has led the US Commodity Futures Trading Commission to offer rewards for whistleblowers who provide information leading to successful enforcement actions with monetary sanctions of $1 million or more.
The Wolf of Wall Street is a famous movie portraying a pump-and-dump scheme
The SEC has listed three red flags that may indicate a pump-and-dump scheme:
If it seems too good to be true, it probably is. Be wary of bold headlines promising huge gains with no risk.
Avoid financial products that guarantee returns of 100% or more. Only low-risk products can guarantee results close to complete safety.
Be cautious of "once-in-a-lifetime" opportunities and pressure to buy immediately. These tactics are often used by fraudsters to convince people to make purchases they will later regret.