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Difficulty: MediumProhibited Market Manipulation and Fraudulent Practices

An investor accumulates a large position in a thinly traded micro-cap stock and subsequently posts false, misleading information on online financial message boards claiming the company has secured a major government contract. After the stock price rises significantly due to increased buying demand, the investor sells their entire position for a substantial profit. Which prohibited market practice has occurred in this scenario?

  1. A pump-and-dump schemeAnswer
  2. B
    Wash trading
  3. C
    Unauthorized principal market making
  4. D
    An SRO criminal prosecution violation

Answer

A pump-and-dump scheme
The described conduct is a classic example of a pump-and-dump scheme. The perpetrator inflates ('pumps') the stock price by spreading false or misleading positive information to generate buying interest, then sells ('dumps') their accumulated shares at the higher price, leaving other investors with losses when the stock price inevitably collapses.

Step-by-Step Solution

1
Analyze the trader's actions described in the scenario
The trader accumulated shares, disseminated false optimistic rumors online to inflate the stock price, and sold shares at the higher price.
Identifying the sequence of activities establishes the nature of the market manipulation.
2
Compare the actions against defined prohibited market practices
Artificially inflating a security's price using false or misleading statements to profit by selling shares is defined as a pump-and-dump scheme under federal securities laws and SRO rules.
Distinguishing pump-and-dump tactics from other manipulative practices such as wash trading or front running ensures proper classification.

Key Concept

Pump and Dump Market Manipulation
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Topics

Prohibited Market Manipulation and Fraudulent Practices