The New Pump-and-Dump: Same Scam, Different Technology

By Dillon McColgan

On September 2, 2015, the Financial Industry Regulatory Authority (FINRA) issued an Investor Alert to warn investors of the new approach fraudsters are using to conduct a classic market manipulation scam — the pump-and-dump. Essentially, a pump-and-dump scam involves the relentless promotion of a particular stock to create an artificial interest, which in turn increases or “pumps” the value of the share price. Then, once the fraudsters believe the price has peaked, they sell or “dump” their positions at this artificially high price, while leaving conned investors with worthless or near worthless stocks.

As demonstrated by the real “Wolf of Wall Street,” Jordan Belfort, pump-and-dump schemes have the potential to generate millions of dollars for fraudsters. Typically, these scams utilize low-value microcap or penny stocks because they are not traded on an open exchange, are more easily manipulated, and draw less attention. Over the years, scammers have used telemarketers, spam emails, online chatrooms, and social media sites to defraud investors. Now FINRA warns that fraudsters have embraced a new technology to conduct these pump-and-dump scams.

FINRA indicates this new approach has fraudsters targeting investors through popular messaging apps, such as WhatsApp. Scammers are using these messaging apps to transmit spam messages that promote cheap penny stocks. FINRA reported that in recent weeks, WhatsApp users were “flooded” with messages touting the over-the-counter stock Avra, Inc. (OTC: AVRN). The messages appeared to be sent from individuals from well-known brokerage firms and promote AVRN. For example, this message from “ed at goldmansachs” states that AVRN is going up to a dollar and “u shud” buy it now. Similar messages claimed ARVN was “going to double in the next few days” or that it was “going up 300% next week.”

Although most people easily avoid these scams, some investors were undoubtedly conned by these WhatsApp spam messages. CNBC reported that AVRN saw an “incredible” rise and fall in a span of less than two hours on August 21, 2015. The share price at 10:20 a.m. was 17 cents. Then by 11 a.m. the price spiked to 94 cents before plummeting back down to 30 cents at 11:20 a.m. It is assumed that once the fraudsters “dumped” their positions shortly after 11 a.m., the share price simply collapsed.

FINRA recommends that users of messaging apps should treat these spam messages with “extreme caution.” To avoid falling victim to similar pump-and-dump scams, Gerri Walsh, FINRA’s Senior Vice President for Investor Education, provides this simple and effective advice: “Scammers keep up with the times. If you are using a messaging app and receive a tout claiming that a stock is poised for explosive growth, don’t respond—just delete.”