Pump-and-Dump Schemes: From Cold Calling to Chat Rooms

By Taylor Bandy

Historically, pump-and-dump schemes occurred when brokerage firms holding a large volume of stocks in a company would incentivize brokers to cold-call customers and pitch penny stocks in the company. The large number of stock sales would greatly increase the share price, then the brokerage firm would dump the stock. As a result, the firm would profit while the investors were left with low priced stock they could not sell.

Unfortunately, the Internet has allowed these scams to expand in scope and occur at a faster pace. Last week the Securities and Exchange Commission (SEC) issued a press release charging ten individuals, including Phillip Frost, a University of Miami Trustee, and ten entities for unlawfully generating $27 million from pump-and-dump schemes. The SEC alleges the individuals purchased large portions of small companies’ microcap stock. Then, they spread false or misleading information while participating in manipulative trading to pump up the share price before dumping the stock.

Now, pump-and-dump schemes are spreading to cryptocurrency markets. These scams are growing in popularity as a result of groups where anonymous members pay from $50 to $250 a month for access to chat room groups. The group monitor decides the date, time, exchange, and coin to be purchased. The coin will be pumped up and sold minutes later. Even the participants of the pump can fall victim to the scam if they do not sell their tokens quickly before the token price plummets. The SEC and the Commodity Futures Trading Commission (CFTC) have issued warnings, even though they do not regulate cryptocurrencies. The SEC warns crypto investors to not purchase tokens or coins based on sudden price increases or information gained from social media.

The Financial Industry Regulatory Authority (FINRA) has issued tips for investors on how to avoid falling victims to pump-and-dump scams:

  1. Examine the source of your information. Investors should be wary of press releases, newsletters, blogs, and spam emails, as they could contain false information. Use caution if these materials mention the benefits but not the risks of the investment. 
  1. Research the company and its officers. Exercise caution if there are indictments, convictions, or previous charges filed by the SEC against any officials. 
  1. Determine if it involves a reverse merger. The SEC has warned many of these companies fail. 
  1. Learn where the stock trades. The majority of these schemes occur with penny or microcap stocks that are not traded on the NASDAQ or New York Stock Exchange. Instead, they are listed on an over-the-counter quotation platform. 
  1. Check the SEC’s EDGAR database to determine if the company files with the SEC. If so, compare the report information with the company’s newsletter, blog posts, and website to ensure the information is accurate.

As the debate over whether the SEC can regulate cryptocurrencies continues, the increase in pump-and-dump scams in crytpocurrencies markets may spur regulatory enforcement. Until then, investors should exercise caution when purchasing penny stocks, microcap stocks, or cryptocurrencies, as these risky investments are subject to pump-and-dump schemes.

Fifth Circuit Vacates DOL’s Fiduciary Rule – Repercussion for Seniors

By Daniela Pessoa Valdes

On March 15, 2018 the U.S. Court of Appeals for the Fifth Circuit issued its mandate to vacate the Department of Labor’s (“DOL’s”) fiduciary rule for advisors working with retirement accounts. (Chamber of Com. of the United States v. United States DOL) This decision dealt a massive blow to the protections in place for senior investors and their retirement accounts.

The DOL’s fiduciary rule attempted to make two major changes to regulations pertaining to retirement accounts. First, the rule broadened the definition of a fiduciary to include an individual who, in the Fifth Circuit’s interpretation, “‘renders investment advice for a fee’ whenever he is compensated in connection with a ‘recommendation as to the advisability of’ buying, selling, or managing ‘investment property.’” Second, the rule created a Best Interest Contract Exemption (BICE) which required providers of financial and insurance services for retirement accounts to affirm their fiduciary status with clients, incorporate the duties of loyalty and prudence into their policies, avoid misleading statements to clients, and charge no more than “reasonable compensation” in account fees.

While the DOL conceded that these changes presented a potential for increased liability against financial advisors, it argued that the changes also served to protect investors from engaging in transactions that were not in their best interest, simply because their adviser recommended the transaction. Nevertheless, the Fifth Circuit found that the BICE came at too high of a price.

The opinion, which was the result of a 2-1 split, reasoned that if Congress intended to encompass any financial services provider who managed retirement accounts in its definition of a fiduciary, then Congress would have simply written ERISA to cover all persons giving any investment advice for compensation.  In response, the DOL warned the Court of the need for the fiduciary rule, arguing that if it were revoked “many investment advisers would be able to play a central role in shaping retirement investments without the fiduciary safeguards [in place] for persons having such influence and responsibility.” Nevertheless, the Court held that a “perceived need” did not empower the DOL to craft de facto statutory amendments or to act beyond its expressly defined authority under ERISA.

As a result, senior investors now have less safeguards in place to protect them from taking investment advice that may be fraudulent or not in their best interest. As Judge Stewart warned in his dissent, the dramatic shift in the retirement-investment market has created monetary incentives for investment advisers to offer conflicted advice, which is a problem that “the controlling regulatory framework was not enacted to address.” Thus, the Fifth Circuit’s decision to vacate the fiduciary rule has essentially left senior investors with little to no remedy for holding their retirement account advisers liable for recommendations and advice that are not in the investor’s best interest. Advisors in retirement accounts must only comply with a duty to recommend suitable investments.

Where to Park Money and Save on Taxes

By Gray Crow

Should you buy municipal bonds or permanent life insurance? The answer may depend on who you talk to and how he or she gets paid. These two products have unique tax benefits that an investor or policyholder can enjoy. They are compared below:

Municipal Bond


  • According to FINRA’s website, a municipal bond, commonly referred to as a “muni,” is a loan to a state, city, county or other government entity to raise money and finance projects that promote the public good (such as roads and schools).



  • Liquidity may vary between bonds, and depending on the maturity date of a given bond, it may be difficult or impossible to get money out when it is needed.
  • Investors should also be mindful of interest rates, as these will have an indirect effect on the value of bonds in the secondary market.

Permanent Life Insurance


  • Insurance policies provide coverage for the life of an insured person and build cash value which can be treated as a savings vehicle.
  • Typically offered in two forms: whole life and variable life.
  • Whole life offers more stability because there are more guarantees associated with the dividends paid to policyholders, as these dividends are based on the financial stability of the life insurance company.
  • Variable life is considered a securities product, because a certain percentage of the premium payment made by the policyholder is invested in securities.


  • Gains in the cash value of the policy, seen from investment returns or dividend payments, are tax-free.
  • The death benefit of the policy is paid to beneficiaries tax-free.


  • The “cash surrender value” and any amount over the total premium amount paid over the life of the policy (your cost basis) will be taxed as income.
  • Most of the variable policies provide minimal investment options when compared to a free choice of different munis in the market.
  • Insurance products carry many different charges and fees beyond what an investment in bonds may bring, which can complicate things.

The Verdict:

A municipal bond can be a smart choice for an individual with a high income tax burden, while life insurance may be optimal for those who seek a return as more of an ancillary benefit built into a plan. Insurance policies tend to have a variety of charges while liquidity is important to consider when investing in munis. Prior to purchasing either of these products, research should be conducted to make an informed decision. When consulting with a professional, one should not only make sure that the professional has experience, but relevant experience to assist with his or her specific needs and goals.