Pump-and-Dump Dangers: Investing in Current Events & Crises
by James MacTavish | Senior Advisor, Investor & Industry Education, Alberta Securities Commission
Now more than ever, Albertans are feeling vulnerable. With growing economic uncertainty stemming from a highly volatile stock market and the ongoing global crisis impacting jobs, retirements savings and daily life, Albertans of all ages are looking for a solution to their financial strain. Unfortunately, fraudsters utilize this fear along with emerging industries, global events and major crises to profit from victims. To further their agenda, they may play upon those most vulnerable, including Albertans suffering from isolation, loneliness or fear.
One particular scam that fraudsters use to capitalize on these types of events or crises is a pump-and-dump scheme. This investment scheme works by the fraudster taking advantage of a global event or breaking news to lure in investors with overwhelmingly positive – and usually false – claims about a company or product and the guarantees of high returns. This company is usually a small publicly traded “shell” company with limited or untrue publicly available information that the fraudster already has many shares in. As more investors purchase stock in the company, the more inflated, or “pumped up,” the price of the stock becomes. Before the hype around the company fades, the fraudster will sell or “dump” all their stock for a substantial payout and, by doing so, rapidly deflate the price of the stock resulting in the remaining investors losing all their money.
While it may seem hard to recognize a pump-and-dump scheme, the following are key red flags to watch for:
The facts surrounding the investment
Fraudsters will often pump up the price of company stocks with incorrect or false information through hyped-up news releases, social media or paid promotional campaigns. Remember to do your research and don’t rely solely on the information provided by the company as it could be untrue. Always read the fine print for any email promotion or online ad, as it will state that it is a paid promotion and that the third party promoter is not responsible if it is a scam. And during any global health crisis be cautious of claims that focus on vaccines and health-related products and services that are not coming from reputable health organizations.
Exclusive opportunities in-person
Has a new friend or acquaintance come to you with the promise of an investment opportunity too good to pass up? Fraudsters target everyone including those in social groups, community associations and seniors groups. While it may seem like your new acquaintance is looking to help you out, that shouldn’t stop you from researching the investment before giving your money away. You may also want to call the Alberta Securities Commission and explain the investment to them. While they cannot tell you what to invest in, they can identify red flags related to your investment.
The history of the company
There are legitimate companies out there, but you need to look past what they are currently promoting and understand their history to make sure the opportunity is real. For instance, you may find a small pharmaceutical company that is creating buzz around its up and coming vaccine, but only six months ago was in the cannabis industry. Or the company has no visible history, which is a key red flag that it may be a shell company used for pump-and-dump schemes.
It’s easy to get carried away with the newest opportunity, especially when concerned about your financial future. But remember: when investing in any company, always research the investment and keep in mind that fraudsters often exploit the latest crisis and people’s vulnerability to promote pump-and-dump schemes. During this time of uncertainty, stay safe – and that includes watching out for your financial health.