Stock Fraud "Pump and Dump" Schemes Don't Just Happen in the Movies

The critically acclaimed movie, "The Wolf of Wall Street," directed by Martin Scosese and released in 2013, recounted the story of a former stockbroker convicted of fraud crimes related to stock market manipulation as part of a penny stock scam. Leonardo DiCaprio played the lead character, based on a real person named Jordan Ross Belfort. Belfort's story had previously inspired the movie "The Boiler Room," starting Giovanni Ribisi and Ben Affleck, among others.

It seems art imitated life... which imitated art again. Eight people were recently indicted on charges of defrauding thousands of investors in penny stocks, through a $290 million dollar "pump and dump" scheme.

In a "pump and dump" scheme, a small group of speculators accumulate a large number of shares in a stock. Once their positions are in place, they will release positive news reports about the stock in order to drastically affect people's perception. The intent is to get investors to start trading irrationally and increase the price of the stock. Before the news is discovered to be false, the original speculators exit with large profits.

In this recent case, three stock promoters in New York are accused of working with five others to drive up the prices of penny stocks to induce investors to buy shares. The promoters allegedly used websites they controlled to send emails promoting the stocks to thousands of investors. Then, they and the five others gained control of the public shell companies with available shares and merged them with new, private entities. Thereafter, the corporate insiders issued millions of shares to themselves, associates, family and friends to pump up prices. When the S.E.C. began investigating the companies, the promoters had the shares issued in the name of foreign corporations. To read more about these allegations, click here. For more information, contact Corporate & Business Law Attorney Sally McDonald at 401.824.5100 or email smcdonald@pldolaw.com. We welcome your comments, questions and suggestions.

Source: Eight Charged by N.Y. in $290 Million Pump-and-Dump Plot

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