Pump and dump schemes are back with a brand new playbook.
What happened: Investors lost a combined US$3.7 billion last month from a handful of obscure U.S.-listed Chinese stocks that suddenly crashed after being hyped up on WhatsApp groups and social media, according to the Financial Times.
- The FBI said last month that it had seen a 300% year-over-year jump in complaints about these scams, which often impersonate analysts and trading firms.
- Crypto pump and dumps are already common, but many of these scams are linked to the record number of Chinese firms that went public on U.S. stock exchanges last year. There’s no evidence that the companies themselves are involved.
Catch-up: The pump and dump is as old as time (or at least the stock market). Promoters who are in on the scheme talk up a thinly traded stock and artificially inflate its price. Eventually, those early insiders cash out and leave everyone else with a virtually worthless stock.
- Just last year, a Vancouver trader was sentenced to three and a half years in jail for helping run a four-year pump and dump scheme that cost investors US$215 million.
Why it matters: These aren’t new tricks. What’s changed is the scale and sophistication. Instead of cold calling random people with penny stock pitches, today’s scams use social media, digital impersonation, and influencer-style endorsements that specifically target first-time investors.—LA