David Portnoy to Launch a “Pump and Dump” ETF?

stock pump and dump scams

Since when did Pump and Dump scams become legal? In the past, if you spearheaded a pump and dump scam for a stock in America, the SEC would investigate you, arrest you and fine you or even send you to court for a possible prison sentence.  For example, here is the story of American George David Gordon that was arrested just ten years ago along with four other men for pumping three stocks higher and then quietly dumping them between 2004 and 2006. Aggregately, they were fined $46M and the ringleader, Mr. Gordon, was sentenced to more than 15 years in federal prison.

Even the infamous Wolf of Wall Street, Jordan Belfort, essentially ran an illegal stock pump and dump scam and served 22 months in prison as a result, though allegedly, he is still, like a coward, reneging on promises made in court to repay the victims he scammed. Here is a third story of three Americans and one Frenchman, Michael Saquella, (also known as Michael Paloma), 47, Lawrence J. Kaplan, 63, Henry J. Zemla, 38, and Justin Medlin, 26, all of who fraudulently pumped the prices of fifteen stocks higher before dumping them to aggregately defraud investors of $20M. As a consequence, in 2007, each man faced a fine of $250,000 and up to five years in prison.

In the past decade, there are literally dozens of such cases in which men, some even as young as teenagers were arrested, fined and sent to prison as a consequence of executing pump and dump schemes. The chances that anyone reading this article has actually heard of any of the above cases, or any of the other dozens of cases in which pump and dump scammers were arrested and imprisoned is practically zero. However, the chances that you have heard of the pump and dump scams involving Gamestop (GME) and AMC stock, both of which are currently involved in a second round of pumping and dumping, even if just on a peripheral basis, is practically 100%.

A “pump and dump” scam is basically the illegal act of artificially inflating the market price of an owned stock through false promotion and selling it once the price has risen as a result of the surge in interest. This is what happens dozens of times a day now on the Robinhood trading platform and though pump and dump scams are more closely associated with penny stocks, the act of colluding to artificially drive the price of a stock higher and then selling it at its peak, as happened with GME above $300 a share and with AMC above $20 a share is the exact definition of a pump and dump scam, as neither stock deserved to ever be trading anywhere near those valuations based upon fundamentals and were artificially pumped higher by those that dumped them near their peak artificially inflated prices.

Of course, the consistent dozen or so stocks that have constituted the bulk of the US S&P500 gains for the entirety of the past decade could also, in legal terms, be identified as pump and dump scams that were simply pumped higher by Wall Street banker-controlled HFT algorithms as their overbloated prices are distorted way beyond any reasonable alignment with fundamentals as well, though not quite on the same magnitude as happened with Gamestop stock last month. The fact is that the Redditors really misrepresented the Gamestop and AMC short squeeze to the general public.

Rather than being an attempt to punish hedge funds that were overleveraged in their short positions of these two stocks (as such actions would in the end, accomplish absolutely nothing in manufacturing systemic change in the global financial system that benefited the people), a more accurate description of the short squeeze would have been an attempt to benefit from the exact same nonsense from which Wall Street bankers have benefited for decades, even though such deliberately artificial distortions of share prices were supposed to be illegal.

In other words, the game was really an “if you can’t beat ‘em, then join ‘em” scheme, even if its participants believed the opposite to be true. To think that they could actually beat institutions with far deeper pockets and far better access to cash to fight the squeeze displayed a naïve understanding of the industry.

Again, this is not to say that the intentions of the movement were not noble. I believe that they were noble but just very misguided due to most participants having little experience in the industry and not truly understanding the true and inherent risks of “holding the line” at a $300+ GME share price and a $20+ AMC share price. Don’t confuse my honesty with sentiment that I am not down with the cause. As a former employee of a Wall Street bank, I have been down with the people’s cause when I quit the industry more than fifteen years ago out of disgust from observed rampant systemic criminality. In fact, I have spoken many times about my proposed solution to fighting the goliaths, but most recently in the aforementioned link, that requires participation in solely physical and not paper financial markets.

In addition, numerous wrong beliefs and concepts were also widely forwarded in the narrative about a potential silver short squeeze for the entirety of last month. To ensure my patreons didn’t fall victim to any of the false beliefs being spread online as “truth”, I sent them an exclusive podcast that explained everything wrong with the online silver narrative here (if you are an skwealthacademy patreon and haven’t watched this yet, you can do so here, or if you are not, you can view a short sneak peak of this entire forty minute podcast here).  

The fact is that far more often than not, the online consensus about financial issues is the wrong conclusion. In fact, if you’re not yet subscribed to my YouTube channel and want to learn exactly what I was telling my patreons through 4-5 videos I send them every week regarding where gold and silver prices were heading (with my predictions of exact provided price levels during February when the rest of the online gold and silver community was predicting imminent gold and silver price explosions higher last month), just ensure that you subscribe to my channel today.

I find it ironic that the latest ETF being pushed by a social media celebrity (David Portnoy) is one that will contain the most bloated, overpriced stocks whose prices are artificially distorted by social media blitzes that convince thousands of people to partake in the pump portion for a group of stocks of a pump and dump scheme. Portnoy is calling the new ETF he founded which is set to launch tomorrow “the social media sentiment” ETF, which is described as a pool of 75 US large-cap stocks with the highest degree of positive investor sentiment and bullish perception from the portfolio, to be rebalanced monthly (which means a high degree of turnover is likely) and to be selected by AI programs that scan Twitter to determine the composition of the ETF. 

Portnoy stated, “Twitter, social media, all of it, is dictating stock prices”, which in layman terms, can be translated as “true price discovery is completely broken in the US stock market and therefore people should own the stocks whose positive outlooks are artificially inflated the most on Twitter based on little fact and that are momo stocks likely to trade higher on the momentum of artificial story creation.”

Thus, while not really the equivalent of a “pump and dump” ETF and truly not deserving of a moniker like “the pump and dump” ETF versus the “social media sentiment” ETF coined by Portnoy, it is about as close to a pump and dump ETF as one can get as no one that truly understands stock markets would every seek the advice spewed on social media platforms by novices to the game (who often dominate social media threads about stock “advice”). Furthermore, though I would not coin Portnoy’s ETF as a “pump and dump” ETF as an accurate description, I do believe that describing it as a basket of the most price-distorted US large cap stocks will turn out to be a fairly accurate description, as the description of its composition reveals that a direct positive relationship between social media sentiment and stock prices will be used to determine what stocks will be held in the ETF.

J. Kim

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