Beware of Pump-and-Dump Schemes

By Bill Jackson February 20, 2024 15 mins read 93 Views

By Dr. Jim Dahle, WCI Founder

A white coat investor was recently scammed, and they wished for the story to serve as a cautionary tale. This is not a made-up story. It's a real-life story of a real doctor. So, be kind in the comments section or your comments will be deleted. I'll start with the verbatim statement (typos and misspellings are all original) of what happened and the lessons the doc learned. Then, I'll discuss some additional things that I think all investors should know. The scam the doc was involved in is simply a variation of the classic “pump-and-dump” scheme.

“I was involved in this scam starting November 2023. I came across a post in Facebook physicians group White coat investers when somebody was asking about investing questions. The post was about a WhatsApp group created for physicians to guide them in investing. It was posted by a lady named Cathy whose profile shows that she is a physician and a member of White coat investors physician group. After I clicked the link it took me to the WhatsApp chat group “US Stock Financial Report” where I see many people entering into the chat group. She stated that she will be directing me to a different chat group as she has a lot of bots in the group who are asking for cryptocurrency trading and she wanted to protect the physician group and directed me into another chat group “Stock Strategies for Billionaires.” I was enrolled into this stock trading investment group and it was headed by a person named Mike and his assistant Julie. They stated that they are well versed with stock market and has about 20 years experience. Mike also stated that he works for hedge fund and also guidance investors in trading. Every day I used to get latest stock market information and tips about trading stocks. Initially I was a little skeptical but they were never pushy or asked for any personal information. They also stated that Mike is a promoter of interactive brokers brokerage firm and requested all the team members to open brokerage account at interactive brokers as he will be getting commission from them. He also told about his investment Plan about investing in US and Hong Kong Stocks, stating that its the best strategy to balance risk.

Initially I invested about thousand dollars and that slowly increased to about $10,000. I was shown good results on 3 different Stocks 2 of them were Hong Kong and 1 is US stock. I was able to increase my returns to US$16,000. Then I started getting a little more confidence. He posted in the group stating that if people wants to be following his investment strategy he will be creating a separate group based on our investment threshold and closely guide us to invest. He promised that the investment should provide good returns and he has about 90% success rate in the Stocks. I was again skeptical at the second time looking at the returns he promissed and was willing to watch for few more trades.

As he stated before he continued to show good results on the trades in the coming days. Then at the end of 2023 he released his long-term cooperative group where he suggested that he divided people into different groups with amount of cash they are willing to invest. AA group is a Elite group with about $500,000-$1 million, A group with investment potential $300,000-$500,000, B-plus $100,000-$200,000, B $20,000-$100,000. I requested to join the lowest group with about $20,000. But he stated that to get at least a reasonable returns I need to join A group with at least $200,000. I stated that I cannot join that group but can put an extra to make up at least $75,000. So he allowed me to join the B-plus group and stated that I need to put extra $25,000 to meet the minimum requirement within few weeks.

I agreed for the same and moved $75,000 to my interactive broker's account. He stated that he will suggest a stock between January 15 to 20, 2024 which has very high success rate and he is 95% confident that he will make at least 50% returns on this trade. Some of the members in the group were a little skeptical and asked him the risk of losing the money since its a single stock investment. To calm them down he stated that he will also suggest to stop loss price so that our principal will be protected even though chance of it dropping is pretty low. On January 19 he suggested a Hong Kong stock 2439 and suggested a buy price of HK$2.61. He suggested that the price will rise up to HK$3.6 in 1 week time. He recommended to put a stop loss order at HK$1.85. I placed the order as suggested. The stock sale was executed at around 3 AM US Eastern time and within 1 hour the stock collapsed and my stop loss was not executed and the price my Stocks old was at HK$0.49. I lost about $60,000 in this transaction.

When I reached out to him he stated that he will provide more guidance the following day and will compensate for our losses. But since then all the phone numbers are closed and nobody ever contacted from them. I was in a shock for couple of days then I tried to understand how I lost the money. When I reviewed from the beginning what happened I came to realize that he bought the stocks in very small companies in Hong Kong and sold to different people on the WhatsApp group and once all the stock are sold he guided everybody to put a final buy order and he shorted the entire stock at that price dropping the stock price drastically and benefiting out of that. It is basically a pump-and-dump scheme. He benefitted twice by selling the stock to all the members and again by shorting the stock.

After I realized that I was scammed I tried to reach out to people in that group and most of them are fake numbers. I was able to contact 2 people in that group one of them has lost about $15,000 and other lost about $120,000 both of them stated their stop loss exicuted at 0.49 honkong dollars. And I also googled for similar activities on Reditt and realized that some of them has lost at list $400,000 to similar scam. And I also realize that there are multiple parallel scams running similarly recruiting multiple people in different WhatsApp groups. It seems to be a big syndicate running out of Hong Kong or other Asian countries involving multimillion dollars. I tried to reach out to my brokerage and they stated that they received multiple calls about the Hong Kong Stocks recently. If that is the case the brokerage should have alerted when they received buy order for this Hong Kong Stocks instead brokerage never alerted anybody and let stock execute and make multiple people loose. I think brokerage benefited out of commission from this international trades along with forex exchange. Brokerage sent an email few days later after everybody lost the money stating that there is a Hong Kong Stocks scam going on and wanted us to be alert about that.

I think people needs to be aware about this scam and protect themselves from future things like this happening. Unfortunateley during the whole process i was confident because he never asked any of my personal information or my bank account details and i was think i am just following his guidance. The whole process was a legal transaction executed by me in my own brokerage. I think it is illegal to do pump-and-dump in USA so he choose to use Honkong stocks and made all of us invest in them.

The lesson I learned is

Never follow any online stock guidance

Never invest without talking to a person face to face

Never believe anyone posting that they will be give you more than 10-15% profit on any trades whether stock or realestate or anything else

Never trust anyone blindly and always check back where to started trusting him.”

What Is a Pump-and Dump-Scheme?

OK, let's talk about all of this.

To execute a pump and dump, you first buy some thinly traded penny stock at a very low price. Then you “pump it up” in every way you can. You run articles about it on your blog. You talk about it in stock forums and on Reddit. Apparently, some people pretend to give stock advice about those stocks in newsletters or special online chat groups or forums. Once the stock price rises from all this demand for the thinly traded stock, you cash out. Maybe you even short the stock to benefit twice from your stock price manipulation.

Is Pump-and-Dump Illegal?

Pump-and-dump schemes (deliberate market manipulation) are illegal under both federal and state law. Involvement is fraud, and it can result in financial penalties and jail time. Here are some of the laws that are involved:

Securities Act of 1933 (Section 17(A): If you're involved in selling or offering securities, it is criminal to make material misstatements, omit material facts, or defraud security purchasers.

Securities Exchange Act of 1934 (Rule 10b-5): Similar to the Act of 1933, this Act also contains anti-fraud laws with various penalties.

18 U.S. Code (Section 1343): Deals with communications. Basically, if you use wire fraud, radio, television, or the internet for your scheme, you can be charged under this section of the code. Section 1341 of the same code adds postal fraud to the list.

Pump-and-dump schemes are also illegal in most other countries with regulated markets, including Hong Kong. In 2022, 13 people were charged there for a pump-and-dump scheme. Singapore has also put out warnings specific to the Hong Kong stock exchange. Obviously, it's harder for a US investor to catch and prosecute scammers in other countries, so it's best to prevent rather than treat this illness.

Lessons to Learn from This Pump-and-Dump Scheme

I'm not sure this investor learned the lessons that I think should have been learned and that would have prevented this from happening. Here are my tips—not just for avoiding pump-and-dump schemes, but for becoming a more intelligent, successful investor in general.

#1 Don't Pick Stocks at All

If this investor had never engaged in stock-picking to start with, he or she would not have been caught up in a pump-and-dump scheme. I've been warning about individual stock investing for 13 years. Sometimes I think I spend too much time on the blog, newsletter, podcast, etc., talking about it. Then, something like this happens that reminds me of how important it is. A mutual fund—particularly a popular and liquid broadly diversified, low-cost index mutual fund with thousands of securities in it—is just too hard to manipulate in a way that would result in this sort of a loss. Sure, some conspiracy theorists will come up with some idea that the Fed and the political parties are in cahoots to manipulate the market, but it's certainly not going to happen by some chump on his mother's old computer in a Hong Kong basement sliding into your DMs in the WCI Facebook group.

Here's some more reading about that.

Picking Individual Stocks Is a Loser's Game
Why Talking About Individual Stocks Makes You Look Dumb
Uncompensated Risk
People Still Believe in Active Management?

#2 Know What Normal Investment Returns Are

Investment returns are generally single-digit affairs. If you're investing in cash, maybe you'll make 2%-5% depending on interest rates. Bond returns tend to be in the upper end of that range, perhaps 3%-6% long term, although there can be some variation year to year. Long-term US stock market returns are in the 10% range. Real estate returns are in a similar range, perhaps a bit higher with a reasonable amount of leverage—10%-15% is where they live. Maybe if you put a whole bunch of effort in yourself and are particularly talented (or lucky), you can get into the upper teens.

But if you expect long-term returns of 25%, 30%, 50%, or more, you're just ignorant about how these things work. I mean, imagine you could earn 50% returns reliably. Let's say you start with $1 million and earn 50% on it each year. How long would it take to own the entire $46 trillion US stock market? Answer: 26 years. Less than a full career. It's just not going to happen. Give me a break. It's not realistic.

pump and dump scam

#3 If It Seems Too Good to Be True . . .

Anyone promoting returns of 30%, 40%, or 50% is offering something too good to be true. High returns come with high risk. Extremely high returns not only come with extremely high risk, but the return/risk correlation ratio no longer exists. You just get risk. It doesn't make any sense that someone with a functional crystal ball who can earn 50% returns would share that information with you rather than simply borrowing all the money they can get and buying up all of those shares themselves. They'll own the entire stock market in just 26 years; why do they need your $75,000? There are no called strikes in investing. It's OK just to watch from the sidelines.

#4 Beware Your Own Greed

Sometimes it's not just ignorance that leads people to get involved in something promising super high returns. Sometimes it's greed. They want to shortcut the process. They want to get rich quick. Managing your own greed (and your own fear while we're at it) is a key part of being a successful investor. Unmanaged, it can lead you to be defrauded or make the classic investor mistake of buying high (when greed runs rampant) and selling low (when fear kicks in).

#5 Beware of Being Led Away from Safety

Somehow this fraudster snuck into the WCI Facebook Group. But they didn't run the scam out of there. Their invitation to join another “investment group” was likely deleted, and they were likely thrown out of the WCI group shortly after making it. However, before the moderators got to that, the fraudster successfully induced the investor to follow them down a “dark alley” into a secluded part of the internet. Another Facebook group. A chat room. A WhatsApp group. Whatever it takes until the group is easily controlled by the fraudster. The group itself may be a farce. It's just you and the fraudster impersonating a dozen other investors. Or maybe there are two or three marks in there reassuring each other.

Imagine if instead of hanging out in that fake group, this WCIer had posted what was going on in the main WCI Facebook group, on the WCI Forum, or on the WCI subreddit. The WCIer would have been immediately warned that something wasn't right, and 95% of the comments would have been something to the effect of “Run, don't walk, away!” Penny stocks? Hong Kong exchange? A stock-picker with a crystal ball giving advice for free? The promise of 50% returns? No, that's not going to fly by even moderately experienced investors without a serious warning.

Beware of anyone asking to take a conversation offline or “sliding into your DMs.” Unsolicited DMs should be reported immediately to moderators.

#6 Beware Exclusivity

As the fraudster suckered the investor into investing larger and larger amounts, they used the promise of exclusivity. Making you feel like you're part of a special group is a classic sales technique. It's OK to pay more for a backstage pass or a premium ticket to a conference, to invest in something that requires accredited investor status, or to fly first class, but recognize that this sales technique is also used by fraudsters.

More information here:

Can You Spot the Unbelievably Bad Financial Advice on These TikToks and Tweets?

#7 You Don't Have to Give Up Personal Information to Get Swindled

Most people are smart enough to avoid some types of fraud, but just because you don't get suckered into wiring your money to someone else's bank account doesn't mean you can't get suckered into a pump-and-dump scheme or some other type of fraud. Being generally wary is good and knowing about many different types of fraud is better, but even then, there may be something out there sophisticated enough that even you might fall for it.

#8 Stop-Losses Don't Work in Volatile, Thinly Traded Markets

A stop-loss order does not always protect you from a falling stock price if there is no buyer at that price. It certainly won't protect you from whipsawing market movements. They're not a panacea.

#9 The Less Sophisticated You Are, the More Wary You Need to Be

I'm making a few assumptions about this doc based on the writing. English is probably not this doctor's native language. Therefore, the doctor probably didn't grow up in the US. Therefore, the doctor probably is not as familiar with how personal finance, investing, retirement accounts, and US securities laws as someone who did. This doc is starting in a different place, and they face a steeper learning curve. But they still have the same amount of income as the rest of us, and, thus, they are a prime target for a fraudster. If you are also an immigrant physician, it is even more imperative that you go out of your way to become financially literate than it is for someone who grew up here. There are people out there who are specifically trying to prey on you.

#10 Go Slow with Anything New

One of the things that this doctor did well was to move slowly. The doc started out only investing $1,000 and increased slowly to $10,000. That's less than a month's pay. While it sucks to lose $10,000, it's hardly a financial catastrophe for a doctor. The slower you move, the longer a fraudster has to keep the thing going without you getting suspicious. In the end, the doc lost $60,000. That blows, but it's hardly unrecoverable. Imagine if the doc had jumped in with both feet, a couple of IRAs, a 401(k), the entire taxable account, and a HELOC on the home. It could have been a lot worse.

More information here:

A Neurologist’s Road to Becoming a Bitcoin Maximalist: Why Bitcoin Is Not the Next AOL

#11 It Is Not the Broker's Job to Protect You from Yourself

This doc was disappointed that Interactive Brokers didn't stop them from buying that stock. Yet, when a brokerage takes steps to protect investors from their own foolish behavior (such as Vanguard refusing to let crypto ETFs trade on its platform), all it gets is criticism.

“It's a free country!”
“Censorship!”
“This is ‘Merica!”
“Who are you to tell me what I can and can't invest in?”

No, don't expect protection from your brokerage. It isn't so much that the brokerage wanted the $20 in commissions it made on these trades as that it just isn't the brokerage's job to ask you, “Are you sure you want to invest a huge chunk of your account into two Hong Kong penny stocks? You might want to read an investing book or two.” I was actually impressed it sent out a notice at all, even if it was too late for this investor.

#12 Know How Your Advisor Gets Paid

Whether they charge by the hour, use AUM fees, or use commissions, you need to know how everybody involved is being compensated. Here at WCI, for example, we make money when we sell ads and when you buy our products like online courses and books. That produces certain conflicts of interest. I don't think this WCIer understood how the “advisor” was making money until it was too late. In this case, the “advisor” (fraudster) was being paid by taking the other side of the investor's ill-advised trades. If you think this is prevalent in stocks, it's 10 times worse in the crypto space.

Pump-and-dump schemes have been around for a long time, and they aren't going anywhere any time soon. Know how they work and be careful out there.

What do you think? What scams or frauds have you run into? What do you do to avoid them? Comment below!

The post Beware of Pump-and-Dump Schemes appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.

----------------------------

By: The White Coat Investor
Title: Beware of Pump-and-Dump Schemes
Sourced From: www.whitecoatinvestor.com/pump-and-dump-schemes/
Published Date: Tue, 20 Feb 2024 07:30:40 +0000

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