Imagine opening an email one morning with a breathless tip about a little-known mining company poised to strike gold, or a biotech firm about to announce a cancer cure. The message urges you to buy now, before the rest of the market catches on. Days later, the stock does spike. Then it collapses, and the person who sent the email walks away richer while you stare at a near-worthless position.
This is the classic “pump-and-dump” scheme: a promoter buys a thinly traded stock, hypes it with misleading claims to drive the price up, then dumps their shares before the crash. Regulators have been chasing these schemes for centuries. But a basic question has gone largely unanswered: who actually falls for them, and how badly do they get hurt?
A team of researchers set out to answer that. In a working paper distributed through the National Bureau of Economic Research, Christian Leuz of the University of Chicago Booth School of Business, along with Steffen Meyer, Maximilian Muhn, Eugene Soltes, and Andreas Hackethal, paired a database of 470 pump-and-dump schemes with the trading records of over 110,000 retail investors at a major German bank. Their central finding: participation is far more common than many would guess, the losses are substantial, and not everyone who buys in is a victim in the traditional sense.
Why this question has been hard to answer
Most prior research on stock manipulation has relied on stock-level data, looking at how prices and trading volumes move during a tout. That approach can tell you that a scheme pumped the price, but it can’t tell you who bought the stock, how much they invested, or what happened to their broader portfolio afterward.
The researchers got around this by combining two datasets. The first was a list of pump-and-dump schemes compiled from Germany’s financial supervisory authority, BaFin, which investigates and refers suspected market manipulation cases to prosecutors. They added hand-collected cases from German consumer protection websites, financial forums, and complaint boards. Together, these sources yielded 470 distinct schemes running from 2002 to early 2015.
The second dataset came from a German online bank, covering a random sample of about 113,000 retail customers. For each, the team had complete trading records, portfolio holdings, and demographic information including age, gender, education, profession, and self-reported risk tolerance.
How the analysis worked
To identify participants in a scheme, the researchers flagged any investor who purchased a touted stock within 60 days of the start of the promotion. To confirm these purchases were actually responses to the scheme (rather than coincidences), they used two checks. One compared trading patterns around the exact start of a promotion and found a sharp jump in buying right as the tout began, with no matching jump in the stock’s price just before. The other matched touted stocks to non-touted stocks with similar recent price paths. The touted stocks drew far more buying after the promotion began, suggesting the promotion itself was driving the response.
The numbers are striking. About 7.6% of all sample investors bought into at least one pump-and-dump scheme during the study period. The average participant invested roughly €6,449 in a given scheme, an amount equal to about 11% of their portfolio value. The average return on those investments was negative 28%. When the team scaled their losses up to estimate the effect across all German online investors, they calculated that the average scheme drained at least €1.45 million from retail accounts.
For reference, that figure exceeds the 90th percentile of damages from financial frauds criminally prosecuted in the United States during the same period. These are not nickel-and-dime crimes.
Not everyone is a victim
One of the more unexpected findings involves the variety of investors who participate. A common image of the pump-and-dump victim is an unsophisticated retiree or novice, tricked by promises of a miracle stock. Some participants fit that description. Many do not.
About 15% of tout investors bought into four or more schemes across the sample period. Their average return across all those investments was still negative 24%, yet they kept playing. The researchers grouped investors by their past behavior in non-touted stocks and identified distinct types: new traders, conservative traders (fewer than three trades in six months), day traders, short-term traders who flipped stocks within a week, and an intermediate group.
Day traders and short-term traders together made up roughly 20% of tout participants, a much higher share than in the control group. These investors bought into schemes, exited quickly, placed larger-than-average bets, and posted better (though still often negative) returns. They appear to be treating touted penny stocks like lottery tickets, knowingly gambling on the possibility of riding a bubble up before it pops.
Conservative traders showed the opposite pattern. They were less likely to participate, but when they did, they held on longer and took larger losses, consistent with being genuinely deceived.
Personal demographics like age and profession explained relatively little about who participated. Portfolio composition and past trading behavior were much stronger predictors. Investors with a higher share of penny stocks, more individual holdings, and more frequent trading were the likeliest participants.
Do warnings work?
BaFin occasionally issues public warnings about ongoing manipulation campaigns. The researchers examined 21 schemes for which such warnings were released during the first 60 days of the pump phase. After a warning, the number of new investors buying the stock dropped by roughly 25% to 30%.
But the effect was concentrated almost entirely among regular traders. Day traders and short-term traders barely adjusted their behavior. Warnings, it appears, work on people who would have been deceived, not on people who knew what they were buying.
The lasting damage
The pain from a pump-and-dump scheme does not always end when the stock crashes. Using a matched comparison design that tracked investors’ portfolios for months after their first scheme, the researchers found that regular traders who got caught in one became 19% more likely to close their brokerage account or drop below €1,000 in holdings. They cut back on blue-chip stocks and mutual funds, and some left the stock market entirely. These effects grew over time rather than fading.
Investors who made money on an early scheme showed a different pattern: they invested in the next one faster, held it longer, and eventually accumulated larger cumulative losses, a pattern consistent with getting hooked after an initial win.
What this means for investor protection
For regulators and brokerages, the findings point to a few practical takeaways. Public warnings can reduce participation, but only among a subset of investors. Educational campaigns are unlikely to deter those who are deliberately speculating. Brokerages could build prompts into their platforms that ask investors to weigh the claims in a promotional message before buying, or introduce friction that slows down impulsive trades.
One caveat worth noting: the data come from a single German online bank, and German markets differ from U.S. or other markets in their regulatory structure and the mix of venues where penny stocks trade. The findings are likely relevant beyond Germany, but they are not a direct measurement of American or other retail investor behavior.
The broader point is that market manipulation has consequences that ripple past the individual loss. When participating investors drive up prices during the pump phase, they make the scheme more profitable for promoters, encouraging more such schemes. And when deceived investors abandon the market afterward, the damage to overall capital market participation outlasts any single fraud.
