What is a pump and dump scheme?

A pump and dump scheme is a form of manipulation in which someone buys a thinly traded stock or token cheaply, inflates its price with recommendations, calls or social media posts, and sells when other buyers come in. When the buying stops, the price collapses and the losses belong to whoever arrived late. It's the fraud that made Jordan Belfort famous: in 2003 he was sentenced to four years in prison and ordered to pay $110.4 million to 1,513 victims of the stocks his firm, Stratton Oakmont, pumped over the phone. The SEC explains the two phases in its investor alert on pump and dump schemes.

What is a pump and dump, and why is it called that?

The name describes the two phases. In the pump, the promoters create artificial demand for a small asset: they recommend it to thousands of people, publish exaggerated or false news, and their own buying pushes the price up. In the dump, they sell everything they had accumulated at that inflated price. Neither the company nor the token has to be fake: all it takes is a price that has nothing to do with its value and someone who controls when to sell.

It works best with small, illiquid assets: penny stocks on lightly policed markets or newly created tokens. Moving their price costs very little money.

How does a pump and dump scheme work, step by step?

1. The accumulation. The promoters quietly buy large amounts of a cheap, thinly traded asset, sometimes before it reaches the market.
2. The story. They invent or exaggerate a piece of news: a contract, a patent, a partnership, “the next big coin.”
3. The spread. Scripted calls from brokers, “independent” newsletters, forums, Telegram or Discord groups, influencers. The message is always in a hurry: “today,” “before the market finds out.”
4. The rise. The victims' buying drives the price up. Each rise seems to confirm the story and draws in more buyers.
5. The sale. The promoters sell at the top, often while they keep recommending people buy.
6. The crash. With no new buyers, the price falls within hours or days. Anyone who tries to sell discovers that almost nobody is buying.

How do you spot pump and dump stocks or coins today?

• Unsolicited contact to recommend a specific stock or token.
• Extreme urgency: “it's going to explode today,” “this is your last chance.”
• A small, unknown asset with low trading volume.
• Vertical price spikes with no verifiable news to explain them.
• The person recommending it won't say what they get out of it, or presents themselves as “independent.”
• Closed groups that promise buy signals in exchange for a fee.
• Offers to buy off-market shares in a company that's “about to go public.”

Before you buy anything on a stranger's recommendation, use the scam checker and check whether whoever's offering it is registered.

What real cases prove it?

Stratton Oakmont (Long Island, 1989–1996). Jordan Belfort's firm had hundreds of young brokers reading scripts to small investors all over the United States. It placed shares of tiny companies in friendly hands, pushed the price up with aggressive selling, and the insiders sold at the top. The SEC fined him in 1994 and barred him from the industry, but he kept running things from outside; the brokers' regulator expelled Stratton in December 1996. Prosecutors put investors' losses at about $200 million. We tell the story in the case of Jordan Belfort, with its Law of Deception No. 8: “Whoever is in the biggest hurry for you to buy is the one already selling.”

The Twitter and Discord influencers (US, 2022). In December 2022, the SEC and the Justice Department charged eight people with a combined following of more than 1.5 million on Twitter with recommending stocks to their followers, on Discord as well, and selling their own positions after the price rose, making about $100 million in profit according to the SEC. These are charges, not convictions: they show how the same mechanism moved from the telephone to social media.

The one-day tokens. In crypto, the technique repeats itself with newly created coins, meme coins among them: the creators keep a large share of the supply, promote it on social media and sell it when the public comes in. We explain it in crypto scams.

What does it have to do with boiler rooms?

Stratton Oakmont was a boiler room: a room full of salespeople cold-calling strangers to push shares. The model is still alive. Many pump and dump campaigns arrive through firms offering investment services without authorization: fake brokers calling from abroad, trading “academies” or messaging groups that charge for signals. In the UK, the FCA keeps a Warning List of unauthorized firms and, through its ScamSmart campaign, warns against unsolicited investment offers. In the US, a broker who calls you should show up on FINRA BrokerCheck.

Why does it work?

Because it combines greed with fear of missing out: seeing a price that keeps rising and other people who say they've made money. And because it relies on the authority of the caller who sounds like a professional, or of the account with thousands of followers. The Laws of Deception boil it down to one question: who's selling while you're buying?

What should you do if you're offered a stock, or have already bought?

1. Don't buy because of a call or message you didn't ask for. Hang up and check.
2. Check that whoever's offering it is authorized. In the US, look up the broker or firm on FINRA BrokerCheck; in the UK, on the FCA Register, and look at the FCA Warning List.
3. If you've already bought, keep the conversations, the names and the receipts. Don't pay any new fees to be able to “sell.”
4. Report it. In the US, to the SEC, which can investigate the manipulation of listed securities, and, if it happened online, to the FBI's IC3; in the UK, to Report Fraud, the service that replaced Action Fraud, and to the FCA.
5. Be wary of anyone who calls offering to help you get back what you lost: that's a recovery scam.