Catching the Fraudster Before You Lose Big

Financial Fraud Series: Pump & Dump Schemes

This is the second in our 5-part series on the most common types of financial fraud—Ponzi Schemes & Manipulation, Backdating Stocks, Insider Trading, Short Selling, and Pump and Dump Schemes—and how due diligence investigators can protect your company’s assets and investments by tracking down fraudsters.

Pump and dump schemes are an illegal manipulation of stock prices based on fraudulent claims. Companies promise advances in science, cures for diseases, big investment returns, and technology that exceeds standards. In return, investors clamor to get behind the latest and greatest company. When the company fails to deliver their product(s), the demand for new capital wanes, and the company stock is dumped.

As enhanced due diligence investigators, Hg conducts online backgrounds on any business, person or entity—foreign or domestic—to expose fraudulent business enterprises, locate assets, and gather undercover intelligence. In the 21st century, we monitor products, brands, persons and entities, through cutting edge intelligence gathering online and through open source research.

Hg Case study: 

My client was concerned that a competitor was outpacing technological advances of his Smart Cards in the market. The time frame was the mid-1990’s when Smart Cards were still a hot item, with years of development yet to come. This competitor claimed to build gigabyte cards that were indestructible. My client was concerned that the current standard of megabyte cards was going to be surpassed. Being a top scientist and business professional in the industry, he was stumped as to how the competitor was beating him to market.

The target of our investigation immediately was suspect, because the competitor had only discussed the coming release of his Smart Cards. The competitor actually didn’t have a product in place. When all the news articles were retrieved, I noticed that at the middle of every month this company placed its press release, disclosing all sorts of improvements and relationships. Like clockwork, each month one would read about how this company improved compression ratios, aligned themselves with a ballistic grade plastic laminating company, and new investors in an effort to impress even the savviest of Wall Street tycoons. This ongoing pump of new information generated a lot of buzz, and investors were hungry to invest in the company.

While researching the news, I focused on the target’s management. They came from Canada, recently settling in California’s Silicon Valley. I started looking into Canadian companies where these executives may have previously been employed. I found a mention of the Toronto Stock Exchange delisting a company where the CEO worked. This company was producing portable medical testing units that could scan for viruses such as HIV without the need for electricity—a sort of finger-prick analysis. While researching this company, I discovered the same pattern of monthly articles professing major accomplishments every month, until one day they stopped. As it turned out, Canadian officials suspected the claims as fraudulent. The CEO and others were investigated. The Canadian company remains open today, but the stock is close to worthless and many investors were left without reprise.

The same CEO was doing the same pump and dump here in the U.S. with his supposed leading-edge Smart Card. For our client’s sake, we knew the claimed technology didn’t exist, and we exposed the fraudulent person to the SEC for further scrutiny.

Pump and Dump Schemes

Pump and dump schemes were very common during the tech bubble years, when companies would continually profess that their emerging products would change the industry. Investors would be inspired to get in early and fast. Venture capitalists and everyday investors were all jumping on the bandwagon, putting money into false promises. Once the promotion stopped and the fraudulent truths were discovered, the demand disappeared—causing a collapse in the price of the investment and leaving many investors out of pocket. Key indicators in a pump and dump scheme are monthly or regular press releases making outlandish claims with no support. A primary point of interest is how the company is funded. Are they completely funded by venture capital, or do they produce some other product or service that can buoy them?

Remember, if something appears too good to be true, it likely is.

Cynthia Hetherington, MLS, MSM, CFE, CII is the founder and president of Hetherington Group, a consulting, publishing, and training firm that leads in due diligence, corporate intelligence, and cyber investigations by keeping pace with the latest security threats and assessments. She has authored three books on how to conduct investigations, is the publisher of the newsletter, Data2know: Internet and Online Intelligence, and annually trains thousands of investigators, security professionals, attorneys, accountants, auditors, military intelligence professionals, and federal, state, and local agencies on best practices in the public and private sectors.

2018-12-19T15:26:44-04:00 December 17, 2018|Tags: , , , , , , , |