“Just when you thought it was safe to go back in the water.” This is the famous tag line from JAWS, celebrating its 50th anniversary this year. 1970s cutting-edge animatronics pale in comparison to today’s CGI. Yet many of us remember the chills of a man-eating monster just below the surface while comfortably sitting our your movie seats. Movie theaters… remember those?
Augmenting this famous tagline for investments, “just when you thought it was safe to go back in the market.” After decades of securities laws, rules, and convictions, some still feel it’s appropriate to manipulate securities and markets for ill-gotten gains. Just this week, Kohl’s stock shot up nearly 100% in pre-market trading on Tuesday morning. Clearly, the retailer was not worth double what it was the previous day. No! This is clear market manipulation. It was so evident that Kohl’s stock trading was halted.
The foundation for the investing industry’s laws and rules was cemented after the roaring ‘20s during the Great Depression. Examination of the 1929 crash determined that the wild west nature of the 1920s stock market was a major contributor to what was to come. In response, the foundation of securities law was laid. The primary foundational elements were the Securities Act of 1933 and the Securities Exchange Act of 1934, both of which contain segments criminalizing misstatements and securities fraud. Yet to this day, people are brazen enough to seek illicit profits, hurting investors in the process.
More recently, there has been activity that appears to replicate the good old-fashioned “pump-and-dump” scheme. It lures naive investors by portraying mediocre or poor investments as highly profitable or having great future potential. The process has three phases: 1) accumulation, 2) pump, and 3) dump.
The first phase is a stealthy accumulation of the targeted “investment.” Phase two hypes the investment with rumors and grandiose assurances, hence the pump. Internet chatrooms and bulletin boards have amplified the hype phase. Phase three is to sell or dump the investment near the high, letting the investment’s price fall as the hype disappears. The net effect of all this activity is that the criminal gets rich as the regular folks lose out.
There are areas that the Securities Exchange Commission (SEC) has cautioned. These include internet forums (such as Reddit), trading platforms (such as Robinhood, Coinbase, etc.), and specific categories (such as microcap stocks and cryptocurrencies). To be clear, internet forums and trading platforms are not necessarily the problem, but criminal profiteers tend to utilize these tools.
The SEC is on constant alert for these types of schemes. Unfortunately, the SEC’s retroactive enforcement leaves many financially, and often emotionally, injured. The SEC can and does offer regular investor warnings of situations that appear to have signs of illegal scams designed to rob investors of their hard-earned cash. Fortunately, global securities regulators employ diligent observation and aggressive prosecution.
Although illegal schemes are not commonplace, it is important to recognize elements as they unfold. Transparency, awareness, and a little skepticism can mitigate your chances of falling victim to this criminal activity. These are attributes we utilize as we evaluate investment options. Please enjoy your weekend, rest assured knowing we are always working in your best interest.
Recent Comments