101-07 Stock Market Scams & How to Avoid Them

Pump and dump, short and distort, Ponzi schemes, and insider trading are all scams you must understand to avoid losing money in stocks.

The stock market can be a place of great opportunity, but it can also be a breeding ground for scams. There are many types of stock market scams, and it is important to be aware of them to protect yourself and your investment portfolio.

Course 101: Introduction to Investing
Stock Market Scams & How to Avoid Them

One common type of stock market scam is “pump and dump.” This happens when unscrupulous traders buy up a large volume of shares in a particular stock and artificially inflate the price by promoting it heavily. Once the price has been pumped up, they sell off their shares at a profit, leaving unsuspecting investors holding the bag.

Another type of stock scam is called “short and distort.” This involves short-selling a stock and spreading false or misleading information about the company to drive down the price. The trader then buys the stock at a lower price and pockets the difference.

Still, other scams involve insider trading, where someone with non-public information about a company trades on that information to make a profit. This is illegal and can result in heavy fines and even jail time if caught.

The bottom line is that there are many types of stock market scams, and it pays to be aware of them. If you’re considering investing in the stock market, do your homework and ensure you understand what you’re doing. And if something sounds too good to be true, it probably is.

Pump & Dump Scam

If you are new to trading or even if you have been trading for a while, there is something important you need to know. Many businesses peddle “Hot Stocks Newsletters” or “Penny Stock Newsletters.” While, in theory, there is nothing wrong with this as a service, quite a number of these publications operate under an apparent conflict of interest.

For example, go to Google and type the following.

“HOT Stocks Newsletters”

You will see Google adverts from companies promising 100% + returns from buying the stocks they recommend.   However, if you visit any of these sites and navigate to the disclaimer, you will find an important piece of text that explains their business model. Here are a few examples.

“Since (Company Name Deleted) receives compensation and its employees or members of their families may hold stock in the profiled companies, there is an inherent conflict of interest in (Company Name Deleted) statements and opinions, and such statements and opinions cannot be considered independent. (Company Name Deleted) and its management may benefit from any increase in the share prices of the profiled companies. (Company Name Deleted) services are often paid for using free-trading shares. (Company Name Deleted) may be selling shares of stock at the same time the profile is being disseminated to potential investors; this should be viewed as a definite conflict of interest, and as such, the reader should consider this.”

“Investing in micro-cap and growth securities is highly speculative and carries an extremely high degree of risk. It is possible that an investor’s investment may be lost or impaired due to the speculative nature of the company profiled. (Company Name Deleted) its operators, owners, employees, and affiliates may have interests or positions in equity securities of the companies profiled on this website, some or all of which may have been acquired prior to the dissemination of this report. They may increase or decrease these positions at any time.”

So, let’s decipher this.

  1. “Company A” wants to boost its share price.
  2. It speaks to a purveyor of HOT STOCKS NEWSLETTERS, preferably one with a vast email contact list.
  3. “Company A” may agree to give the newsletter publisher a payment in the form of “Company A’s” stock to convince its clients to buy those stocks.
  4. The Newsletter publishers receive these stocks; they recommend buying “Company A” in their newsletter.
  5. As the people receiving the email start to buy the stock, the stock naturally rises.
  6. As the stock rises, the newsletter publisher and perhaps even people inside “Company A” can sell the shares to make a profit. This is called selling into strength.
  7. The people receiving the emails see the stock rise temporarily and then fall. Of course, they cannot complain because they will be advised they should have sold sooner and that they should read the disclaimer.

That is how it works. Beware!

Short and Distort Scams

Short and distort scams are a type of securities fraud that involves artificially manipulating the price of a stock by spreading false or misleading information about the company. This can be done through various means, such as creating fake news articles, issuing bogus research reports, or posting negative comments on social media. These scams aim to drive down the stock price so that the perpetrators can profit by short-selling the shares.

How to Spot a Short and Distort Scam

While short and distort scams can be difficult to spot, there are a few red flags that may indicate that something is not quite right. These include:

  • The sudden appearance of negative information about the company
  • An increase in short interest in the stock
  • The stock price declined sharply after reaching new highs

If you suspect a short and distort scam is taking place, it is important to avoid panic selling and seek professional financial advice instead.

Examples of Short and Distort Scams?

In 2018, Reddit user DeepFakes created fake videos of celebrities showing them saying and doing things they had never actually said or done. This created significant negative publicity for the celebrities involved and the companies they were associated with. The stock prices of these companies then fell sharply, allowing DeepFakes to profit by short-selling their shares.

In 2019, a false report circulated on social media that food delivery company DoorDash was planning to go public at a valuation of $12 billion. This caused the stock prices of other food delivery companies, such as GrubHub and UberEats, to fall sharply. It is believed that the person behind this scam made a profit of $100,000 by short-selling these stocks.

How can I avoid being scammed?

There are a few things you can do to protect yourself from becoming a victim of a short and distort scam:

  • Educate yourself about how these scams work and what to look out for
  • Be skeptical of any negative information you see about a company, especially if it comes from an anonymous source
  • Avoid impulsive selling decisions and instead seek professional financial advice before making any trades
  • Monitor your investment portfolios closely so that you can quickly identify any suspicious activity

If you believe you have been the victim of a short and distort scam, you should report it to the SEC. You can also file a complaint with the Financial Industry Regulatory Authority (FINRA).

Video: Penny Stocks Newsletter Scams

Examples of High Profile Stock Market Scams

The Enron Scandal and How It Happened.

The Enron scandal was a shocking event in the early 2000s. Enron was once one of the world’s most powerful and successful companies, but it all came crashing down when it was revealed that it had been involved in massive amounts of fraud. The scandal bankrupted Enron and led to the imprisonment of several of its executives. It also shook the business world and raised important questions about corporate governance and accountability.

The WorldCom Accounting Scandal

The WorldCom accounting scandal was one of the biggest corporate scandals in history. It occurred in the early 2000s and involved the fraudulent manipulation of WorldCom’s accounts. This led to the company overstating its earnings by billions of dollars. As a result, WorldCom filed for bankruptcy, and many of its executives were convicted of fraud. The scandal also had a major impact on the business world, leading to stricter regulation of accounting practices.

The Tyco International Corruption Scandal

The Tyco International scandal was a major corporate scandal that came to light in 2002. It involved the illegal activities of then-CEO Dennis Kozlowski, who was accused of looting the company of billions of dollars. Kozlowski was convicted and sentenced to prison, and the scandal led to significant reforms in corporate governance. Tyco International has since rebounded and is once again a successful company.

The Martha Stewart Insider Trading Case

The Martha Stewart insider trading case was a major scandal that erupted in 2002. It involved the accusations that Stewart had sold ImClone Systems stock based on inside information. Stewart was convicted of lying to investigators and served a short prison sentence. The case resulted in significant changes to securities laws and heightened scrutiny of insider trading.

The Bernard Madoff Ponzi Scheme

The Bernard Madoff Ponzi scheme was a massive fraud uncovered in 2008. A successful investor and businessman, Madoff defrauded thousands of people out of billions of dollars by running a Ponzi scheme. Madoff is currently serving a prison sentence, and the scandal has led to increased regulation of the financial industry.