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 California, pump and dump schemes are considered a form of securities fraud and are illegal under both state and federal law. The California Corporations Code governs securities within the state and prohibits the use of any device, scheme, or artifice to defraud in connection with the purchase or sale of any security. This includes making false or misleading statements about a company to artificially inflate the stock price. Additionally, the federal Securities Exchange Act of 1934, enforced by the Securities and Exchange Commission (SEC), also prohibits such fraudulent activities in the securities markets. The SEC can bring civil enforcement actions against individuals or companies who engage in pump and dump schemes, and perpetrators may also face criminal charges, which can result in fines and imprisonment. Investors who are victims of pump and dump schemes in California may also have the right to bring a private legal action to recover their losses.