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Avoid Fraud

This On-Ramp Could Lead You to a Dump

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It starts innocuously enough: You receive a message through an encrypted messaging platform asking if your daughter can come to a birthday party. You don’t recognize the number and only have sons, so you write the sender back to let them know the message must have been misdirected. Thus begins an unexpected relationship that eventually reveals itself to be a stock scheme.

After establishing a connection with you, your new friend mentions they have a relative with knowledge of a foreign company that just completed an initial public offering (IPO) on a U.S. exchange. It’s a company with small market capitalization now but, according to the relative, it’s poised to take off. Upon doing your research, you see that the price—and apparently demand—has been going up since the IPO. Your friend suggests that you buy the stock, at a certain price and quantity, directly through your own brokerage account, but that you’ll need to place the order today to get in on the deal. It’s enticing. What’s the harm?

Unfortunately, this social media scenario is already stage two in what regulators are calling a “ramp-and-dump” stock manipulation scheme. FINRA and other securities regulators inside and outside the U.S. are increasingly concerned about this new twist on the classic pump-and-dump scheme.

Pump or Ramp: What’s the Difference?

A ramp-and-dump scheme is a type of pump-and-dump scheme. Traditionally, the price manipulation in pump-and-dump schemes is the result of falsified, heavily promoted news, financial statements or other marketing communications and might include suspicious trading activity.

In this variation, the price manipulation is primarily the result of controlled trading activity conducted by the bad actors behind the scam. Ultimately, the outcome for unsuspecting investors is the same—a catastrophic collapse in share price that leaves investors with unrecoverable losses.

Hallmarks of a Ramp-and-Dump Scheme

FINRA has observed significant, unusual price increases on the day of or shortly after the IPOs of certain small-cap issuers, most of which involve issuers with operations outside the U.S. Regulators suspect some of these IPOs might have been manipulated in a ramp-and-dump scheme. Be alert to these red flags:

  • Social Media or Messaging App Introduction: These schemes often begin with a seemingly misdirected text, a message through a direct messaging application, or contact on social media, leading to a relationship (sometimes romantic in nature) between retail investors and bad actors. The fraudsters sometimes pretend to be financial experts or to know someone with knowledge of the financial industry. They might also invite targets to join investment clubs or other groups on social media or a messaging app (such as WhatsApp, WeChat or Telegram). After a relationship is established, the bad actor lures the investor, often in a scenario that law enforcement call “pig butchering,” into placing trades in newly offered small-cap securities.
  • Small Market Capitalization and Limited Public Float: These schemes have been more commonly found in relation to IPOs raising less than $25 million and issuing fewer than 20 million shares, with issuer valuations under $100 million. Limited public float means that only a small portion of overall shares is available to the public. When a company has limited public float, its shares can be more volatile and harder for investors to sell.
  • Foreign Issuers: Investigations have found that many affected issuers or their operating subsidiaries or affiliates maintain primary operations in China, but some issuers base their operations in other non-U.S. countries.
  • Significant Price Spikes and Drops: Most IPOs suspected of being involved with, or otherwise manipulated by, a ramp-and-dump scheme experience significant share price increases in the opening trade on an exchange and in continuous trading on the day of, or days immediately following, the listing. These price increases don’t appear to be driven by news or material events, but rather by increased trading activity fueled by incoming investors generated through false demand. After the initial spike, however, the price quickly declines to a level at or below the offering price as the bad actors dump shares on the market.

Other hallmarks of a ramp-and-dump scheme that regulators have identified can be difficult, if not impossible, for retail investors to identify. These include the allocation of a significant amount of the shares to foreign broker-dealers or to a small number of investors, or the use of falsified foreign accounts to invest in and influence trading activity of these IPOs.

Take Precautions

If you’re solicited for or interested in investing in a newly issued small-cap stock, take the following precautions:

  • Never engage with unsolicited messages from unknown contacts, especially via text message and encrypted messaging applications. Block the sender, and delete the message.
  • If anyone requests access to your personal identification or your account—or offers you a financial benefit for sharing information or opening an account—consider it a bright red flag. Your information might be used to open an account through which another party can engage in manipulative activity.
  • Do your research to find out who's underwriting the IPO, where the company is based and whether there are any foreign affiliates. Recognize and plan for the increased risk that comes with investing in non-U.S. small-cap companies, especially those underwritten by foreign broker-dealers and with operations exclusively or primarily outside of the U.S.
  • Remember that companies with a lower market capitalization and limited public float tend to experience more price volatility and wider spreads. And when a company is connected with a ramp-and-dump, you might not be able to sell your shares at all.

These schemes continue to evolve as bad actors adapt their approach to evade detection. If you think you’ve been a target or victim of a ramp-and-dump stock manipulation scheme, submit a regulatory tip to FINRA.