You hear about an investment opportunity that could “pay off big.” Word of the opportunity spreads, enthusiasm sets in, more and more people buy the investment, the price goes up and up, then…it all comes crashing down! This well-worn pattern plays into the hands of fraudsters who take advantage of the hype they helped create to sell at a high price before vanishing, leaving investors with heavy losses.
What is a pump and dump scheme?
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Pump it up, then dump it
In this type of fraud, scammers buy large quantities of a security that is little known or in low demand, often at a very low price. They then create hype around the security by spreading fake positive news, such as a promise of high returns. The price of the security then becomes artificially inflated.
Once the price is high enough, the scammers sell their shares. When the market realizes that the company or crypto has no value, the price collapses and honest investors like yourself are left holding a worthless investment after paying way too much for a security whose value was pumped up.
The same type of scheme may involve a new crypto
Scammers may also promote a new crypto that is gaining attention by, for example, spreading positive news about it on social media. The hype, created by promising high returns, drives up the price of the crypto. The scammers then sell it at the inflated price. Here again, when the market catches on that the crypto is worthless, the price plummets and investors are left holding crypto that isn’t worth anything.
Trash and cash
Sometimes, the opposite scenario occurs. Fraudsters spread false rumours to make people believe that a little-known security is likely to plunge in value and should be sold. You, along with many others who also saw the information, sell your shares out of fear. The price of the security drops and the scammers swoop in to buy it up at a discount.
Red flags
- You notice unusual trading activity that happens for no apparent reason.
- You don’t know the people who are hyping or trashing a security.
- Some people try to convince you that they possess inside or “exclusive” information.
- You’re pressured to buy or sell a security quickly.
- You’re promised very high returns.
- You find little or no reliable information about the investment.
Tips and tricks to avoid this type of fraud
- Always ask yourself: “Why does this person want me to invest? What do they have to gain by it?”
- Always do additional research, using official sources, on the investments you’re offered.
- Seek the opinion of a representative authorized to practise by the AMF.
- Read the prospectus.
- Don’t rely solely on on-line testimonials from strangers.
- Be careful even if the information comes from a friend. They may have been misled.
- Be wary of promises of quick, high returns.
- Be extra cautious if you are planning to trade on over-the-counter markets (also known as OTC Markets or Pink Sheets). Most companies listed on OTC markets don’t meet the listing criteria of the major stock exchanges. In many cases, a company’s securities are held by a small number of shareholders, making it easier to manipulate them.
What to do in the event of fraud
Anyone can be a victim of fraud, so don’t beat yourself up. Fraudsters are skilled at promising high returns and making you believe that you’ll become rich. They know how to earn your trust.
- Refer to the You’re a victim of fraud? page to find out what to do, and contact the AMF.
- You should also break off all communications with the person or persons involved and stop investing money.
Be careful: Fraudsters often target their victims more than once. They may contact you claiming to be a lawyer, financial institution or firm specializing in financial fraud cases and offer to recover the money you lost.
Protect your savings. Before investing, take the time to fully understand what is being offered to you. Your finances deserve careful consideration.