Pump and dump schemes have two parts. In the first, promoters try to boost the price of a stock with false or misleading statements about the company. Once the stock price has been pumped up, fraudsters move on to the second part, where they seek to profit by selling their own holdings of the stock, dumping shares into the market.

These schemes often occur on the internet where it is common to see messages urging readers to buy a stock quickly. Often, the promoters will claim to have inside information about a development that will be positive for the stock. After these fraudsters dump their shares and stop hyping the stock, the price typically falls, and investors lose their money.

In Alabama, pump and dump schemes are considered a form of securities fraud and are illegal under both state and federal law. The Alabama Securities Commission (ASC) is the state agency responsible for enforcing securities laws and protecting investors from fraud. Under the Alabama Securities Act, it is unlawful to engage in any act or practice that defrauds or deceives any person in connection with the offer, sale, or purchase of any security, which includes pump and dump schemes. At the federal level, the Securities and Exchange Commission (SEC) also combats such schemes under various statutes, including the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws prohibit manipulative and deceptive practices in the securities markets, and the SEC can bring civil enforcement actions against individuals or companies who engage in pump and dump schemes. Additionally, criminal charges can be filed by federal prosecutors under securities fraud statutes and other relevant laws. Investors in Alabama who believe they have been victims of a pump and dump scheme can report the activity to the ASC or the SEC.