Market Manipulation: The ‘Pump and Dump’

Written By Savanna Tobias

Imagine getting a hot stock tip — an IPO “about to explode,” and the price is rising fast. The consumer buys, dreaming of a plentiful return… but within days, the stock crashes, the investment vanishes, and the people who sold it to you? They’ve already cashed out their return before the stock value drops. This is the pump and dump — a Wall Street tactic and a version of market manipulation where the value of the stock is just as fake as the brokers selling it to you.

Let’s break down how the scam works, who’s fallen victim, and why, despite consumer awareness, the pump and dump is still successful.

The Pump

This is the setup. The "pump" part of the scheme begins with someone (or a group) buying up large amounts of a low-value asset — usually a penny stock or obscure crypto token — while it’s still cheap and unnoticed.

The goal? Make the stock look like it’s on the verge of exploding. New investors rush in, and because the demand for the stock increases, so too does the stock price, not because the asset is particularly valuable, but because people are being misled into thinking it is.

Brokers would use a mix of manipulation, false confidence, and information control to trick people into thinking a stock was “on the rise.” Here’s a couple of tactics they may employ:

1. Broker Cold Calls

Think: “Boiler Room”
These brokers would cold-call investors and deliver high-pressure pitches that sounded super confident and with “Insider information”:

They’d speak fast, restate exclusivity, and then employ urgency to make you buy now.

2. Manipulating Supply

The firm that is releasing the IPO(Initial Public Offering) may only release a small amount of shares into the market at first. That limited float means when people start buying, the price goes up quickly — making it look like real demand is behind the stock price rise.

3. Baseless Claims

Brokers and pumpers would publish:

  • Fake press releases (i.e., ‘XYZ’ company is about to secure a patent for its exclusive technology, even when there is no patent on the horizon)

  • Paid articles that looked like objective news

  • “Analyst reports” predicting huge growth
    All of it was designed to make the company seem legit and on the verge of a breakthrough.

4. Manipulating Trade Volume

Some Brokers may utilize a tactic called wash trading, where they buy and sell the stock between their own accounts to masquerade that trading volume and consumer interest were high. More trades produce FOMO between consumers and thus perpetuate a high volume of new buyers.

The Dump

Once the price has been “pumped” high enough using the aforementioned tactics, the brokers quietly begin selling their shares for profit — often to capitalize on the highest stock price. This mass sell causes the stock price to plummet fast, leaving the market, which once appeared to soar with a high stock price, now full of overhyped stock that know one wants to buy. The Supply without demand leads to an immediate collapse; The Dump.

And, the original “pumpers” get to walk away with major profits, indicative of when the stock was at its high.

Infamous Victims

Steve Madden

One of the most renowned cases of the pump and dump, cemented in cinema, was the Steve Madden 1993 IPO, led by 1990s fraudster Jordan Belfort and his firm Stratton Oakmont. The firm underwrote the IPO through its boiler room brokerage tactics and maintained control over a significant portion of Steve Madden Ltd.'s shares. Instead of letting the market naturally determine demand, they manipulated it. Stratton brokers aggressively cold-called retail investors, using high-pressure sales tactics to convince them the Steve Madden stock was a once-in-a-lifetime opportunity. They created the illusion of rising demand by restricting the supply of available shares and coordinating fake buying interest.

As the price of the stock rose from manufactured enthusiasm, insiders at Stratton Oakmont sold their large holdings at artificially inflated prices. This left regular investors — the ones who bought in based on lies — holding grossly overvalued shares. When the hype wore off and the dumping began, the stock crashed. Though Steve Madden as a brand survived and ultimately thrived, (I guess they made pretty good women’s shoes), the IPO was used as a tool in a broader scheme of fraud that defrauded countless investors in the companies founding years.

In the year 2000, Mr. Steve Madden was convicted for securities fraud and money laundering, serving time in prison due to his involvement with Stratton Oakmont and knowldege of the pump-and-dump. His success as a designer and entrepreneur is proof that a pump and dump can hurt investors even when the underlying company ends up being legitimate.

Enron

Enron used complex accounting tricks — like off-balance-sheet special purpose entities (second complementary account where business could hide less favorable asset performances) — to hide its debt and inflate profits. Executives projected massive growth and success through carefully crafted earnings calls, media appearances, and analyst manipulation.

As the stock soared, top executives, including CEO Jeffrey Skilling and Chairman Ken Lay, sold off large quantities of their personal shares, earning millions while publicly telling investors the company was healthy. Employees and shareholders, however, were encouraged to keep investing their pensions and savings in Enron stock. When the deception unraveled in late 2001, Enron’s stock plummeted from over $90 to under $1, wiping out over $74 billion in shareholder value and devastating thousands of employees’ retirement savings.

While Enron wasn't a textbook pump and dump — it wasn’t about a small stock hyped quickly — the scheme bears a striking resemblance in the sense that insiders created false value and sold before the collapse, leaving everyday investors holding the bag.

Final Takeaways

In Conclusion, pump and dump scams often appear during bull markets, when everyone is afraid of missing out. Victims are strung along with the empty threat that they shouldn’t be “the person who sold Amazon in 1999.” It’s a cocktail of urgency, overconfidence, and just enough plausibility to be dangerous. Pump and Dump stocks, usually show up with sudden volume spikes and no real news. They often rely on unsolicited tips, overly aggressive marketing, vague promises, or stories that sound more like legends than business plans. If a stock feels like a secret shortcut to wealth, it’s probably Straton Oakmont 2.0.

Smart investments, on the other hand, tend to have strong fundamentals: real revenue, solid products or services, and institutional interest from big firms. They grow steadily, not overnight, and are backed by analysts and public data.

Sources & Further Reading

  • SEC v. BitConnect, Civil Action No. 1:21-cv-07349 (S.D.N.Y. 2021)
    https://www.sec.gov/news/press-release/2021-172

  • “BitConnect: How it became the biggest crypto scam,” Forbes, 2021
    https://www.forbes.com/sites/digital-assets/2021/09/01/bitconnect-how-it-became-the-biggest-crypto-scam

Savanna Tobias
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