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 Michigan, pump and dump schemes are considered a form of securities fraud and are illegal under both state and federal law. The Michigan Uniform Securities Act (MUSA) prohibits fraudulent and deceptive practices in connection with the offer, sale, or purchase of securities. This includes making false or misleading statements about a company to artificially inflate stock prices. Additionally, federal laws enforced by the Securities and Exchange Commission (SEC), such as the Securities Act of 1933 and the Securities Exchange Act of 1934, also prohibit these activities. The SEC can take civil enforcement actions against individuals or companies involved in pump and dump schemes, and criminal prosecution can occur under federal securities laws. Penalties for those convicted of securities fraud in Michigan can include fines, restitution, and imprisonment. Investors in Michigan who believe they have been victims of a pump and dump scheme should report the activity to the Michigan Department of Licensing and Regulatory Affairs (LARA) and may also contact the SEC to file a complaint.