The Pump and Dump
Is it a new dance craze? Like the Bend and Snap ?* A song from the 70’s?
Nope but it sure sounds better than telling you the Pump and Dump is a stock manipulation scheme.
There is a reason I do not make stock recommendations. I’m sure if I did my readership would improve. I do not make stock recommendations because legally I can’t.
Selling or recommending stock through social media platforms falls under the same big book of rules established by the SEC.
I felt somewhat vindicated recently when I read that eight “Finfluencers” were charged with stock manipulation.
“SEC Charges Eight Social Media Influencers in $100 Million Stock Manipulation Scheme Promoted on Discord and Twitter”
SEC Charges Eight Social Media Influencers is $100 million Stock Manipulation Scheme
Social media Finfluencers appear to be ignorant of basic SEC regulations. Perhaps that is because they have no real experience in the financial markets.
Finfluencers are not registered brokers. They do not work for a brokerage firm. They have not had to take any licensing exams or suffer through the hours of continuing education that is required to keep a brokerage license.
Finfluencers do not have to fill out endless forms attesting to things like political donations, felonies, and other assorted legal troubles. Every attestation starts with “ Have you ever…?”.
Finfluencers do not have to take drug tests or be fingerprinted.
Given the amount of time and education it takes to become and remain a registered, licensed broker, self-promotion and stock manipulation on a social media platform is career suicide in the financial markets.
If the Finfluencers had any basic training in the real investment world they would know two rules:
Rule Number One: The SEC is very specific about what an individual can and cannot say to the public about investing in equities.
Rule Number Two: Individuals working at broker dealers are not allowed to create their own marketing platforms to draw in customers.
Personal trading experience is not the same as professional trading experience. If an individual uses a social media platform to heavily promote a stock, the Sec has a Big Red Flag system that works.
In this recent stock manipulation case they found eight people who were using social media platforms to “pump and dump”, one of the oldest stock manipulation schemes around.
What the Pump and Dump-sters do is buy stock. Then heavily promote the stock so other investors will buy the stock. They “pump it up”. As the price goes up, they “dump” (sell) the stock. Making a nice profit.
Then the cycle starts again.
Millions of people use social media for investment ideas. How many Finfluencers are there promoting investment ideas? Hard to know exactly but catching eight is hardly a blow to Finfluencers.
When I was in the industry several SEC investigations were underway within my firm. For large investment management firms it isn’t unusual. The SEC regularly performs audits and can be “on site” for weeks.
But when I tell you I received an email asking for every bit of information I had on an individual at another firm, my heart started pumping.
The SEC knew this other individual was an institutional client, and they knew I had regular communication with him. What they were looking for I had no idea.
It was just plain scary. The CEO is not joking around when he says to cooperate fully and immediately. Drop everything you are doing and focus on providing the SEC with everything they ask for.
I did. There were some follow up questions and clarifications but nothing after that.
Although, I never heard from that individual again.
Finfluencers and other social media influencers live in an alternate reality. A reality that says it is okay to say anything that brings more people to their site. A reality that says it is okay to make stuff up and not think about the harm you may be causing. That there are no consequences .
Websites like mine are full of legal disclaimers.
“TheModestEconomist.com provides information only. It is not meant to be a recommendation to buy or to sell securities nor an offer to buy or sell securities. The publishers of TheModestEconomist.com are not brokers, dealers or registered investment advisors and do not attempt or intend to influence the purchase or sale of any security. TheModestEconomist.com does not guarantee the accuracy or completeness of the information displayed in any section of the web site.“
Writing about investing and making videos about investing must be done thoughtfully. Once information is published, like Finfluencers and brokerage firms can be held accountable.
Having tangled with the SEC one time was enough. In my 32 years of experience (and with three licenses) I learned the following:
It’s okay to talk about a company in general and informative ways and to refer to published research and data. But whatever you do, or say, do not promote the stock.
*The Bend and Snap from the movie Legally Blonde 2001
This website is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by The Modest Economist LLC.
