# How are pump-and-dump schemes illegal? **URL:** \ **Category:** Factual Questions\ **Created:** [November 27, 2017, 12:03am UTC](https://boards.straightdope.com/t/how-are-pump-and-dump-schemes-illegal/802821 "2017-11-27T00:03:04Z")\ **Posts on this page:** 13\ **Page:** 1
**Author:** ![Mrdeals](https://avatars.discourse-cdn.com/v4/letter/m/ea666f/32.png) [@Mrdeals](https://boards.straightdope.com/u/Mrdeals)\ **Post date:** [November 27, 2017, 12:03am UTC](https://boards.straightdope.com/t/how-are-pump-and-dump-schemes-illegal/802821/1 "2017-11-27T00:03:04Z")
I’m not advocating pump-and-dump schemes, and i do understand, from a moral perspective why this sort of action shouldn’t be tolerated, but what exactly makes it illegal? Let’s say i own a penny stock, and feel really good about it. I post all over various message boards, Facebook, Youtube, Twitter, telling my friends, and the rest of the world what an awesome stock pick i made. This advertisement creates a buying frenzy, causing a price increase and i decide to take my profits and run. My intent was never to deceive anyone, just being a loud mouth about what stock i bought. What this be considered running a pump and dump? If not, what would have to happen to turn it into one? ---
**Author:** ![glowacks](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/glowacks/32/5548_2.png) [@glowacks](https://boards.straightdope.com/u/glowacks)\ **Post date:** [November 27, 2017, 12:45am UTC](https://boards.straightdope.com/t/how-are-pump-and-dump-schemes-illegal/802821/2 "2017-11-27T00:45:25Z")
What you’re describing I don’t think would be illegal. If you were to make claims about the stock that were untrue with the intent of profiting from people believing your lies, ie, fraud, then it would be illegal. ---
**Author:** ![Chronos](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/chronos/32/134_2.png) [@Chronos](https://boards.straightdope.com/u/Chronos)\ **Post date:** [November 27, 2017, 12:55am UTC](https://boards.straightdope.com/t/how-are-pump-and-dump-schemes-illegal/802821/3 "2017-11-27T00:55:50Z")
I think that usually in a pump-and-dump scheme, the pumper falsely presents himself as an expert on stocks, and uses that false expertise to convince the victims that the stock will do well. ---
**Author:** ![Twoflower](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/twoflower/32/22_2.png) [@Twoflower](https://boards.straightdope.com/u/Twoflower)\ **Post date:** [November 27, 2017, 1:00am UTC](https://boards.straightdope.com/t/how-are-pump-and-dump-schemes-illegal/802821/4 "2017-11-27T01:00:20Z")
> [@Mrdeals](#): > > … > My intent was never to deceive anyone, just being a loud mouth about what stock i bought. … I think that by definition, if it’s a “scheme”, this disclaimer does not apply. ---
**Author:** ![watchwolf49](https://avatars.discourse-cdn.com/v4/letter/w/e9c0ed/32.png) [@watchwolf49](https://boards.straightdope.com/u/watchwolf49)\ **Post date:** [November 27, 2017, 1:06am UTC](https://boards.straightdope.com/t/how-are-pump-and-dump-schemes-illegal/802821/5 "2017-11-27T01:06:52Z")
Great username / thread title combination … why yes, I am interested in buying land in Florida … ---
**Author:** ![gazpacho](https://avatars.discourse-cdn.com/v4/letter/g/6f9a4e/32.png) [@gazpacho](https://boards.straightdope.com/u/gazpacho)\ **Post date:** [November 27, 2017, 3:34am UTC](https://boards.straightdope.com/t/how-are-pump-and-dump-schemes-illegal/802821/6 "2017-11-27T03:34:59Z")
As long as your statements about the security is not false or misleading you are probably OK. The problem for you comes from the prosecutor’s and juries’ interpretation about what is false or misleading. ---
**Author:** ![friedo](https://avatars.discourse-cdn.com/v4/letter/f/8edcca/32.png) [@friedo](https://boards.straightdope.com/u/friedo)\ **Post date:** [November 27, 2017, 3:48am UTC](https://boards.straightdope.com/t/how-are-pump-and-dump-schemes-illegal/802821/7 "2017-11-27T03:48:37Z")
> [@Mrdeals](#): > > I’m not advocating pump-and-dump schemes, and i do understand, from a moral perspective why this sort of action shouldn’t be tolerated, but what exactly makes it illegal? > > Let’s say i own a penny stock, and feel really good about it. > > I post all over various message boards, Facebook, Youtube, Twitter, telling my friends, and the rest of the world what an awesome stock pick i made. > > This advertisement creates a buying frenzy, causing a price increase and i decide to take my profits and run. > > My intent was never to deceive anyone, just being a loud mouth about what stock i bought. > > What this be considered running a pump and dump? In general, that would be perfectly legal, as long as what you were saying is true. Historically, pump and dump schemes were usually not run by third-party traders such as yourself in this scenario; they were run by unscrupulous brokers who convince their clients to buy a crappy stock, pumping up demand. Then the brokerage dumps all their house shares and leaves their clients in the dirt. Nowadays, a lot of them are run by offshore operators who spam the shit out of harvested email lists and forums to attempt to drive up demand. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [November 27, 2017, 3:54am UTC](https://boards.straightdope.com/t/how-are-pump-and-dump-schemes-illegal/802821/8 "2017-11-27T03:54:52Z")
[These pump-dumpers may have crossed the line.](https://youtu.be/YLnmagiYVIk?t=50s) ---
**Author:** ![edwardcoast](https://avatars.discourse-cdn.com/v4/letter/e/cab0a1/32.png) [@edwardcoast](https://boards.straightdope.com/u/edwardcoast)\ **Post date:** [November 27, 2017, 4:22am UTC](https://boards.straightdope.com/t/how-are-pump-and-dump-schemes-illegal/802821/9 "2017-11-27T04:22:16Z")
> [@Mrdeals](#): > > I’m not advocating pump-and-dump schemes, and i do understand, from a moral perspective why this sort of action shouldn’t be tolerated, but what exactly makes it illegal? > > Let’s say i own a penny stock, and feel really good about it. > > I post all over various message boards, Facebook, Youtube, Twitter, telling my friends, and the rest of the world what an awesome stock pick i made. > > This advertisement creates a buying frenzy, causing a price increase and i decide to take my profits and run. > > My intent was never to deceive anyone, just being a loud mouth about what stock i bought. > > What this be considered running a pump and dump? > > If not, what would have to happen to turn it into one? It is a pump-and-dump scheme by your actions. You own the stock and then made a considerable effort to promote how great you think the company is, and then sell it when it spikes due to your promotional efforts. The question is, why would you do this in the first place, because millions of stocks are bought and sold every day, but not everyone makes a huge promotional effort like that. Unless they have a stake in the outcome of the stock. It is the same reason why stock held by the officers of a company have to make it known they are selling the stock and have to do it way in advance, and offer a reason for the sale of the stock. Otherwise, they could do a pump-and-dump of their own, or the opposite short the stock. In financial news, people disclose if they own stock in the company they are talking about. ---
**Author:** ![Blakeyrat](https://avatars.discourse-cdn.com/v4/letter/b/ecd19e/32.png) [@Blakeyrat](https://boards.straightdope.com/u/Blakeyrat)\ **Post date:** [November 27, 2017, 11:04pm UTC](https://boards.straightdope.com/t/how-are-pump-and-dump-schemes-illegal/802821/10 "2017-11-27T23:04:30Z")
If you genuinely liked the company, didn’t lie about your own qualifications, had no ill-intentions, and didn’t sell 100% of the stock during the “dump”, I doubt you’d be able to be prosecuted for that. If you sold 100% of this “great” stock you’ve been talking up for awhile, that’d look pretty suspicious. It’s hard to say whether that’d be considered proof positive of a pump-and-dump on its own, though. ---
**Author:** ![John\_Bredin](https://avatars.discourse-cdn.com/v4/letter/j/96bed5/32.png) [@John\_Bredin](https://boards.straightdope.com/u/John_Bredin)\ **Post date:** [November 28, 2017, 12:27am UTC](https://boards.straightdope.com/t/how-are-pump-and-dump-schemes-illegal/802821/11 "2017-11-28T00:27:07Z")
> [@Blakeyrat](#): > > If you genuinely liked the company, didn’t lie about your own qualifications, had no ill-intentions, and didn’t sell 100% of the stock during the “dump”, I doubt you’d be able to be prosecuted for that. Samuel Insull might very well disagree with that, if he could be reached by Ouija board for comment. ---
**Author:** ![md2000](https://avatars.discourse-cdn.com/v4/letter/m/73ab20/32.png) [@md2000](https://boards.straightdope.com/u/md2000)\ **Post date:** [November 28, 2017, 6:48am UTC](https://boards.straightdope.com/t/how-are-pump-and-dump-schemes-illegal/802821/12 "2017-11-28T06:48:51Z")
I guess it depends what you say. It’s hard to truthfully say “this stock is going up because…” unless that promotional hype is more than hype. If the only thing the stock has going for it is your bloviality, then you are promoting it. At that point, actions speak louder than words. Is what you said true? (Or perhaps, phrased in weasel word to appear the stock is great without committing yourself to a lie?) Did you profit from this or attempt to? Did you somehow misrepresent yourself and your expertise to mislead people? etc. In the end, if your actions look, smell and quack like a duck, you will be weighed against a duck. ---
**Author:** ![Tired\_and\_Cranky](https://avatars.discourse-cdn.com/v4/letter/t/a87d85/32.png) [@Tired\_and\_Cranky](https://boards.straightdope.com/u/Tired_and_Cranky)\ **Post date:** [November 28, 2017, 2:30pm UTC](https://boards.straightdope.com/t/how-are-pump-and-dump-schemes-illegal/802821/13 "2017-11-28T14:30:51Z")
> [@Mrdeals](#): > > I’m not advocating pump-and-dump schemes, and i do understand, from a moral perspective why this sort of action shouldn’t be tolerated, but what exactly makes it illegal? The short answer is lots of provisions of the federal securities laws. We’ll start with Exchange Act Rule 10b-5, which I think is cited in every pump and dump scheme. > [@Exchange Act Rule 10b-5](#): > > Employment of manipulative and deceptive devices. > > It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, > > (a) To employ any device, scheme, or artifice to defraud, > > (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or > > (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, > > in connection with the purchase or sale of any security. So the question is generally whether the pump-and-dump schemer in connection with a securities transaction: 1. made an untrue statement about something, 2. said some true things but failed to say other important things that you are obligated to say because they would have made it clear that the limited truthful information you gave was misleading by itself, or 3. did other fraudulent things. In most pump-and-dump schemes, there are many violations. Some of them include: - lying about what the company does, about its financial statements or about its prospects, - saying some true things about the company but failing to disclose other relevant information that they know about the company that makes the true things meaningless (a material omission), - pretending to be an independent analyst, investor, or commentator while taking money or free stock from the company to push the stock (a material omission about conflicts of interest) - telling people to buy the stock and promoting it to high heaven while not telling people the pump-and-dumper is in the market selling its stock (which can be both a material omission and a scheme to defraud). > [@Mrdeals](#): > > Let’s say i own a penny stock, and feel really good about it. > > I post all over various message boards, Facebook, Youtube, Twitter, telling my friends, and the rest of the world what an awesome stock pick i made. Absent other facts, it seems you haven’t done anything wrong so far. > [@Mrdeals](#): > > This advertisement creates a buying frenzy, causing a price increase and i decide to take my profits and run. I’m a little troubled by the term “advertisement” here. Why are you advertising the company’s stock? Most people don’t describe talking with their friends online as “advertisement.” After you started selling, did you continue to tell people to buy the stock? In light of all your promotion, was it a material omission to fail to tell people that you were selling the stock? Or that you would sell the stock if it hit $X? Or that you believed the stock was only worth $X per share when the price is now $X + 100? I’m not saying the conduct you described would rise to the level of a fraudulent transaction under Rule 10b-5 but you can begin to understand the circumstances under which it might.