The Financial Industry Regulatory Authority has begun a new push to uncover so-called ‘pump-and-dump’ schemes, according to Financial Advisor.
Regulators say these schemes are carried out by fraudsters who spread false or misleading information to create a buying frenzy that will “pump” up the price of a stock and then “dump” shares of the stock by selling their own shares at the inflated price. Once they dump their shares and stop hyping the stock, the stock price typically falls and investors lose money.
The latest FINRA investigation in this area involves broker-dealers who take small foreign companies public. In a targeted exam letter, the authority said it is conducting a review of firm practices regarding public and private offerings of small-capitalized exchange-listed issuers with business operations in foreign jurisdictions, such as China. “Specifically, FINRA is reviewing certain member firms that have been involved in multiple small-cap offerings as either an underwriter, bookrunner, syndicate member, selling group member or placement agent, as well as certain member firms that have participated in initial and/or secondary market trading related to small-cap offerings, including firms with omnibus accounts trading in these securities,” the letter states.
FINRA said it is seeking information about written supervisory procedures, compliance policies, training materials and due diligence processes of offerings conducted between January 2023 and September 2025. Firms were also asked to provide a list of every small-cap offering in which they’ve participated, the total number of shares sold and to how many customers, as well as how much money the firm earned.
FINRA has previously warned members of the emerging threat posed by the pump-and-dump schemes involving initial public offerings by small companies operating overseas. In a 2022 regulatory notice, FINRA said it had observed significant unusual price increases on the day of or shortly after the IPOs of certain small-cap issuers, most of which involve issuers with operations in other countries. The authority said it was concerned about potential nominee accounts that invest in the small-cap IPOs and subsequently engage in apparent manipulative limit order and trading activity.
This type of securities fraud has also been the subject of scrutiny by the Securities and Exchange Commission, which launched a Cross-Border Task Force in September to investigate potential U.S. federal securities law violations related to foreign-based companies, including potential market manipulation, such as pump-and-dump and “ramp-and-dump” schemes, another form of stock manipulation resulting from controlled trading activity. Some of the investors harmed by ramp-and-dump schemes appear to be victims of social media scams.
The SEC has since forced nine companies to temporarily stop trading, citing unusual price moves and potential social media manipulation of the stocks. The firms are listed in the U.S., but their operations are primarily overseas.
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