MANIPULATIVE SCHEMES

BOILER ROOM OPERATIONS - A boiler room is a place or operation—usually a call

center—where high-pressure salespeople call lists of potential investors ("sucker lists")
to peddle speculative, sometimes fraudulent, securities. Sucker lists identify victims of
previous scams.

A boiler room is a scheme in which salespeople apply high-pressure sales tactics to

persuade investors to purchase securities, including speculative and fraudulent
securities.

Most boiler room salespersons contact potential investors through cold calls.
Some notable boiler room tactics include making claims that cannot be easily verified by
the investor, demanding immediate payment, or issuing threats for noncompliance.
These methods, if not illegal, clearly violate the National Association of Securities
Dealers' (NASD) rules of fair practice.

Boiler room sales tactics are also restricted by the Securities and Exchange
Commission's Rule 10b5, which forbids dealers from making untrue statements,
omitting material facts, or other deceitful behavior.

What is Section 10b of the securities Act?

Section 10(b) makes it unlawful to “use or employ, in connection with the purchase or
sale of any security” a “manipulative or deceptive device or contrivance in contravention
of such rules and regulations as the [SEC] may prescribe.”

What is cold calling?

Cold calling is the business practice of contacting a potential customer or client who has
not expressed previous interest in speaking with a customer service representative or
making a purchase

WASH SALE - A wash sale occurs when an investor purchases a security 30 days
before or 30 days after selling an identical or similar security.

The IRS instituted the wash sale rule to prevent taxpayers from using the practice to
reduce their tax liability.

Investors who sell a security at a loss cannot claim it if they have purchased the same
or a similar security within 30 days (before or after) the sale.

An investor notices they are in a losing position, so they close it by selling the stock or
exiting a trading position.
The sale allows them to take a loss that they can legally claim on their tax returns as a
reduction of their earnings for that year, which reduces their total tax liability.

The investor will look to purchase the security at or below the price at which they sold it
—if the purchase occurred 30 days before or after the sale, it is considered a wash sale,
and the loss cannot be claimed.

MATCHING ORDERS - Matching orders is the process of identifying and effecting a

trade between equal and opposite requests for a security (i.e., a buy and a sale at the
same price).

Order matching is how many exchanges pair buyers and sellers at compatible prices for
efficient and orderly trading.
Over the past decade, this process has become almost entirely automated.

Generally, a buy order and a sell order are compatible if the maximum price of the buy
order matches or exceeds the minimum price of the sell order. From there, the
computerized, order-matching systems of different exchanges use a variety of methods
to prioritize orders for matching.

MARKING THE CLOSE – Marking the close is the practice of buying a security at the
very end of the trading day at a significantly higher price than the current price of the
security. The purpose of the practice of marking the close is to raise the closing price of
the security, making it appear to be higher-valued than it actually is.

PAINTING THE TAPE - Painting the tape is a form of market manipulation whereby
market players attempt to influence the price of a security by buying and selling it
among themselves to create the appearance of substantial trading activity. The goal of
painting the tape is to create the illusion of an increased interest in a stock to trick
investors into buying shares, which would drive the price higher.

KEY TAKEAWAYS
Painting the tape is a type of market manipulation whereby market players attempt to
influence the price of a security at the expense of investors.
Painting the tape increases volume and attracts investors, who then may push a price
higher. The market manipulators will then sell their holdings to investors unaware of the
manipulation.
Painting the tape is an illegal activity and prohibited by the SEC because it creates an
artificial price.
SQUUEZING THE FLOAT - This is done by “taking advantage of a shortage of
securities in the market by controlling the demand side and exploiting market
congestion during such shortages in a way as to create artificial prices.”

HYPE AND DUMP - In a pump and dump scheme, fraudsters typically spread false or
misleading information to create a buying frenzy that will “pump” up the price of a stock
and then “dump” shares of the stock by selling their own shares at the inflated price.
Once the fraudsters dump their shares and stop hyping the stock, the stock price
typically falls and investors lose money.

SHORT SALE - A short sale is the sale of an asset or stock the seller does not own. It is
generally a transaction in which an investor sells borrowed securities in anticipation of a
price decline; the seller is then required to return an equal number of shares at some
point in the future. In contrast, a seller owns the security or stock in a long position.
A short sale is the sale of a stock that an investor think will decline in value in the future.
To accomplish a short sale, a trader borrows stock on margin for a specified time and
sells it when either the price is reached or the time period expires.
Short sales are considered a risky trading strategy because they limit gains even as
they magnify losses. They are also accompanied by regulatory risks.

PEGGING OR FIXING STABILIZING PRICE OF SECURITY - It shall be unlawful for

any person acting for himself or through a dealer or broker, directly or indirectly, to
effect, either alone or others, any series of transactions for the purchase and/or sale of
any security traded in an Exchange for the purpose of pegging, fixing or stabilizing the
price of such security unless otherwise allowed by the SRC or these Rules.
EXAMPLES OF MANIPULATIONS
 1. Painting the tape. A series of transactions in securities that are reported publicly to
give the impression of activity or price movement in a security.

 2. Marking the close. Buying and selling securities at the close of the market in an
effort to alter the closing price of the security.

 3. Improper matched orders. Transactions where both the buy and sell orders are
entered at the same time with the same price and quantity by different but colluding
parties.

 4. Wash sales. Transactions in which there is no change in beneficial ownership of a

security.

 5. Squeezing the float. Taking advantage of a shortage of securities in the market by

controlling the demand side and exploiting market congestion during such shortages in
a way as to create artificial prices.

 6. Hype and dump. A buying activity at increasingly higher prices and then selling
securities in the market at the higher prices. It is also called “pump and dump”.

 7. Short and distort. Selling at lower prices and then buying at such lower prices.

 8. Disseminating false or misleading market information through media, including the

internet, or any other means to move the price of a security in a direction that is
favorable to a position held or a transaction; and 

 9. Other types of prohibited conduct and/or manipulative practices which include,

among others, the creation of temporary funds for the purpose of engaging in other
manipulative practices.