Investment Scams: Pump and Dump

Pumping and Dumping Defined
The phrase "pump and dump" (sometimes referred to as "hype and dump") in a financial context refers to a highly illegal practice where a small group of informed people buy a stock before they recommend it to thousands of investors. The result is a quick spike in stock price followed by an equally fast downfall. The perpetrators who bought the stock early sell-off when the price peaks at a huge profit. Most pump-and-dump schemes recommend companies that are mid cap and have a small float. Small companies are more volatile and it's easier to manipulate a stock when there's little or no information available about the company.
Pump and Dump's Cousin: Short and Distort
To this point we have only talked about scamsters making money by driving a stock's price up, however, there is also a variation of this scam called the "short and distort". Instead of spreading positive news, fraudsters use a smear campaign and attempt to drive the stock price down. The fraudster's profit is made by holding a short position in the stock, benefiting from a decline in its price.
Top 3 Ways to Avoid Getting Burnt by a Pump and Dump:
1) Always research the independence of an organization promoting a stock. Look for the small print about compensation in the form of both cash and shares.
2) If the stock trades over-the-counter or on the Pink Sheets be especially wary of a "hot tip". Smaller stocks are easier to manipulate than large caps.
3) Approach all free stock tips with the utmost skepticism. Just because something is written does not imply credibility. Understand that bulletin board postings and writers of investment newsletters can often have other motives for their recommendations.