Wake Up and Smell the Pump-and-Dump
Pumping a few squirts of vanilla hazelnut syrup into your latte—nothing wrong with that. Pumping up a coffee stock with hype and false statements? That's illegal, and the Securities and Exchange Commission (SEC) recently announced fraud charges against alleged perpetrators of just such a scheme: a $78 million pump-and-dump stock fraud involving the stock of Jammin' Java, a company that operates as Marley Coffee and uses trademarks of late reggae artist Bob Marley to sell coffee products.
Be skeptical of
materials such as
The SEC alleges that Jammin Java's former CEO Shane Whittle orchestrated the scheme with three others who live abroad and operate entities offshore. Using a reverse merger to secretly gain control of millions of Jammin' Java shares, Whittle spread the stock to the offshore entities controlled by a trio of international fraudsters.
Whittle then used his access and control of Jammin' Java and its stock to coordinate an illegal offering and fraudulent promotion of Jammin' Java's stock. Once the price of Jammin' Java's stock was artificially inflated, the SEC alleges that the defendants and others coordinating with them dumped 45 million shares on the public market without registering the transactions, pocketing at least $78 million in illicit profits.
Jammin' Java's share price and volume began to collapse a few days after the company disclosed on May 9, 2011, that it became aware of an unauthorized and unaffiliated online stock promotion. The stock fell further after the company released disappointing financial results in its annual report.
Don't Be Taken In
These tips can help you avoid being a pump-and-dump victim.
- Consider the source. Be skeptical of press releases, spam emails and promotional materials such as newsletters and blogs from unknown senders. They often come from paid company insiders or promoters, to hype a company and its products. Be wary if you are flooded with information over a short period of time, especially if the communications only focus on a stock's upside with no mention of risk.
- Do some sleuthing. Find out who is at the controls of a company before you invest. A basic Internet search is a good place to start. Proceed with caution if you turn up indictments or convictions of company officials, or news reports that raise red flags. Two of the Jammin' Java promoters charged by the SEC were previously charged in a separate SEC case for touting multiple penny stocks using a fake stock picking robot.
- Check for reverse merger activity. Some pump-and-dump targets have come into existence through reverse mergers, which allow private companies, including those located outside the U.S., to access U.S. investors and markets by merging with an existing U.S. public shell company. The Securities and Exchange Commission (SEC) noted in an Investor Bulletin: "Many companies either fail or struggle to remain viable following a reverse merger. Also, as with other kinds of investments, there have been instances of fraud and other abuses involving reverse merger companies."
- Know where the stock trades. Most stock pump-and-dump schemes involve low-priced, thinly traded stocks that do not trade on The NASDAQ Stock Market, the New York Stock Exchange or other registered national securities exchanges. Instead, these stocks tend to be quoted on an over-the-counter (OTC) quotation platform like the OTC Bulletin Board (OTCBB) or the OTC Link Alternative Trading System (ATS) operated by OTC Markets Group, Inc.
- Read a company's SEC filings. Most public companies file reports with the SEC, but many companies whose stock trades in the over-the-counter market are not required to file periodic reports, including financials, with the SEC because they are too small or have too few shareholders. Check the SEC's EDGAR database to find out whether the company files with the SEC. Verify these reports against promotional information the company or its promoters have sent you and exercise caution if they don't align.
Subscribe to FINRA's Investor News newsletter for more information about saving and investing.