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 Washington State, pump and dump schemes are considered a form of securities fraud and are illegal under both state and federal law. The Washington Securities Act (RCW 21.20) prohibits fraudulent and deceptive practices in the sale of securities, including making false or misleading statements to manipulate stock prices. At the federal level, the Securities Exchange Act of 1934, enforced by the Securities and Exchange Commission (SEC), also prohibits such manipulative and deceptive practices. The SEC actively pursues cases against individuals and companies involved in pump and dump schemes. Violators may face severe penalties, including fines, restitution, and imprisonment. Investors are encouraged to be cautious of unsolicited stock recommendations and to conduct thorough research before making investment decisions.