Pump and dump schemes have two parts. In the first, promoters try to boost the price of a stock with false or misleading statements about the company. Once the stock price has been pumped up, fraudsters move on to the second part, where they seek to profit by selling their own holdings of the stock, dumping shares into the market.
These schemes often occur on the internet where it is common to see messages urging readers to buy a stock quickly. Often, the promoters will claim to have inside information about a development that will be positive for the stock. After these fraudsters dump their shares and stop hyping the stock, the price typically falls, and investors lose their money.
In Texas, pump and dump schemes are considered a form of securities fraud and are illegal under both state and federal law. The Texas Securities Act, along with federal legislation such as the Securities Exchange Act of 1934, prohibits the manipulation of securities prices, including through deceptive practices like making false or misleading statements to inflate stock prices. The Texas State Securities Board (TSSB) is the state agency responsible for enforcing securities laws and protecting investors from fraud. Violators of the Texas Securities Act can face both civil and criminal penalties, including fines, restitution, and imprisonment. Additionally, the U.S. Securities and Exchange Commission (SEC) may also investigate and prosecute individuals involved in pump and dump schemes under federal law, which can lead to additional penalties including significant fines and lengthy prison sentences. Investors in Texas are encouraged to report suspected pump and dump schemes to the TSSB or the SEC.
