Stock Manipulation Is Real, Types Of Scams

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“Buy on the rumor, sell on the news” is an overused phrase in the investment community, but before an investor takes this advice to heart, he should also verify the sources and confirm the validity of the messages that he receives. This last part of prudent counsel often gets lost in the shuffle of buy and sell orders, but it may be the only protection that an investor has when it comes to detecting obvious stock manipulation techniques employed by those bent on deceit.

Stock manipulation is also a favorite topic of the “talking heads” on financial news channels. Fraud openly exists, despite the efforts of regulatory and law enforcement officials to stamp it out. A sad testimony to risk management efforts is that fraud can never be completely eliminated, but must be tolerated at an acceptable level as a cost of doing business. The forex market is, perhaps, the only market we have that is less prone to manipulative tactics due to its shear volume, now at $4 trillion a day and counting. Even the largest hedge funds with their sophisticated forex trading platforms or even central bankers are unable to artificially drive the market in one direction or another, though their efforts to do so are widely publicized.

Stocks, however, are much easier targets. After Ted Cramer, the well-known television host of “Mad Money”, admitted in a 2007 interview with that he was guilty of manipulating stock values during his employment days at a major hedge fund, numerous articles were written on the topic as if it were new news. His direct quote was quite telling when he stated, “What’s important when you are in that hedge fund mode is to not do anything remotely truthful, because the truth is so against your view, that it’s important to create a new truth, to develop a fiction.” The “YouTube” link to the video was subsequently overrun, but it is not difficult to locate it with a current search engine.

The “Flash Crash” last May resurrected the topic, and the report and actions taken by the SEC have not restored investor confidence. However, a recent resurgence in positive performance by the Dow, S&P 500, and the NASDAQ may have quelled a complete retreat by “401K” funds invested in stocks, but when optimism and favorable news reports abound, the circumstances that favor stock manipulation abound in lock step.

It is time once again to be wary of the following schemes designed to defraud:

  • “Pump and Dump”: A typical strategy used by large position holders of OTC small business stock offerings. News headlines suddenly shout that revenues have increased 500%. A stampede ensues, prices skyrocket, and then the perpetrator unloads his position to the unwary. When the hype fades away, the stock’s value plummets like a lead balloon;

  • “Short and Distort: This technique, just as illegal as the “Pump and Dump”, is employed in a Bear market. In this case, the fraudster “shorts” the stock of his target company, and then spreads a smear campaign to foster fear in the minds of current stockholders. Numerous small sell orders are executed through different brokers to signal that something may be wrong with the company. An avalanche of selling transpires, and the unscrupulous “shorter” takes his profit and runs.

There are a variety of smaller known tactics, but most deal with “penny” stocks and the market makers that support them. The only defense is to perform your own research, check the credentials for any that authors you read, and be aware that stock manipulation is a possibility.

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