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Pumps & Dumps 101
Who Are The Insiders?

When referring to a company's "insiders", one usually assumes that reference is being made to the officers and directors of that company.  Normally, that would be correct as these are the people assumed to have
access to "inside" information, i.e. information about the company that has not been made known to the general public.

It is important to redefine the term "insider" when considering a company that is the subject of a Pump & Dump campaign, because while some insiders may or may not have specific knowledge of inner workings of the company, they could have access to cheaper stock from which to profit from during an upcoming promotion.

Let's take a look at the some of the "insiders" of a company that are neither officers or directors, and that you could be up against when trying to profit from a Pump & Dump campaign.

The Initial Shareholder

Many of the company's undergoing Pump & Dump campaigns were created as new public shells, i.e. public company's with no real assets, just for the purpose of an intended sale to someone with an asset (real or not). As part of the transaction, the person who created the shell will almost always maintain just enough stock to stay under the radar and avoid reporting requirements, usually under 5% of the total stock outstanding.

In other cases, a previously operating public company has ceased doing business, and becomes a shell without an asset.  The shareholders are usually reverse split out of their positions, and the shell becomes available for a new asset to be vended into it, in a process known on the street as "wash, rinse, repeat". These shells are initially owned by a person or group of persons who took control of the shell by converting debt (real or not) into stock.  Then, as with a new shell, these shareholders will maintain a nominal shareholder position, just enough to avoid reporting requirements.  Alternatively, nominee shareholders consisting of actual people or corporations, may hold stock in their names, but on behalf of the actual owner, in order to mask his control position or large holding in the company. This is very common and many stocks that have been washed, rinsed and repeated have continued to be under the thumb of the same person(s), no matter how many different lines of business the company has undertaken or times the company has changed its name.

In either case, the initial shareholder is usually not listed as an officer or director and does not own enough stock in his name to warrant registration, but you must believe that he knows everything that is going on in the company, including the timing of the next Pump & Dump campaign.

The Seed Shareholders

In a newly created public shell, a number of seed shareholders (usually 30) are required in order to give the company its "public" nature. These seed shareholders are always friends and relatives of the founding shareholder, occasionally acting as shareholders in name only, when they are actually nominees of the founder.  The seeds own nominal amounts of stock, purchased for very little, especially in comparison to the share price that the stock will get set at just prior to the Pump & Dump campaign. In a strong campaign, each seed shareholder can earn hundreds of thousands of dollars, just for tying up a few hundred dollars for a couple of years.

The Attorneys and Accountants

Attorneys and accountants are often paid for their initial services with stock, served up at discounted exchange rates, as compensation for not being paid in cash and not being able to sell their stock for a year. Although they are required to report their holdings, it is common for the stock to be issued to nominees of these service providers, who will then write off the bill to the company as a bad debt, thereby avoiding the tax consequences. Often the attorneys are actually the initial or founding shareholder of the company itself, again making use of nominee shareholders to mask their control of the public shells.  San Diego Attorneys, Thomas and Elizabeth Coldicutt, have been cited by the SEC for repeatedly committing such frauds. The Coldicutts are the parents of Andrew Coldicutt, and in-laws to Andrew's wife, Abby Ertz, both of whom are also San Diego attorneys habitually taking on public company clients that are the subjects of Pump & Dump campaigns.

The Promoters

Although they usually deny it, the promoters, and/or the agencies that actually retain them, are often paid in stock for their services, or will front load, i.e. buy stock out of the market in advance of the coming Pump & Dump campaign. And of course, they definitely know when a Pump & Dump campaign will launch and may be intimately involved in the timing and content of press releases.

The Hijackers

Although it doesn't happen as often as companies subjected to a Pump & Dump campaign would like to have you believe, occasionally, a company with a penny stock will get hijacked, especially if the company has a good story to tell, making it especially easy to convince the naive to buy stock in spite of its probable overvaluation.  In a hijacking, a group of investors and/or promoters will front load stock prior to perpetrating a Pump & Dump campaign.  If that stock is tightly held or usually thinly traded, a successful campaign could send shares skyrocketing, albeit very temporarily. In addition to front loading stock, the hijackers may then double dip by shorting the now over-inflated stock, if it becomes available for borrowing at any of the brokers that allow such practices, such as Interactive Brokers or Sure Traders. They know that as soon as the promotion is over, they will be able to cover their short positions at significantly lower prices.

The Tipped Off

Of course it is human nature to want to let your close friends and relatives in on a money-making scheme, especially if you believe it is infallible.  The tipped off may in turn tip off their own friends and relative, all of whom may front load stock.

You Against The Insiders

When you buy stock during a promotion, you are most likely buying the stock of any of the insiders listed above. If you're lucky, you may occasionally be able to pawn off that stock on the next guy down the pyramid for a small profit, but more often than not you will be one of the many left holding the bag. You also have to consider the educated, those who have learned to spend hours reading filings and recognize the names involved, thereby being able to speculate on coming promotions and giving them an opportunity to front load. They will also be selling into a Pump & Dump campaign along with the insiders and you, when you are ready to cash out. Don't forget that most of the insiders acquired very cheap stock, often at small fractions of the Pump & Dump launch price. They don't care what they get for their stock as it is all pure profit and just air. Many of the insiders will also short any stock that is available for borrowing, knowing that they will be able to buy it back at greatly reduced prices. Eventually, there will be many more sellers than buyers and the pyramid will collapse.