Every investor should know about pump and dump and churning. While their tactics and actions are different, they are both types of investment fraud that can wreak havoc on your investment goals. Their dynamic names to describe fraudulent tactics are quite apt.
Pump and Dump
Pump and dump is a classic boiler-room fraud tactic that is alive and well, online. The original principle of this type of fraud still applies to the scam today. Classically done with small-cap stocks, investment marketers push certain stocks that the brokerage firm owns. Once the cost of the stock peaks, the brokerage dumps their shares and scores a tidy profit out of the accounts of investors.
The evolution of this strategy now appears in the cryptocurrency investment arena. Internet investment chats have replaced the marketer's phone calls, but the principle remains the same. Co-conspirators construct an upward trajectory for a digital currency through new investments, then dump their shares into the market, sending the values into freefall.
Churning is the practice of buying and selling investments for a customer at a higher rate than necessary to generate more commissions. Reverse churning is a variation on this practice where clients' money is invested in fee-based accounts that generate income for the financial advisor regardless of activity. Churning and reverse churning are guaranteed money makers for everyone but the investor.
In both pump and dump and churning, the interests of the individual investor come behind those of the broker or advisor and can be subject to legal censure. It is wise to seek legal counsel if you think you may have been a victim of investment fraud.