What Is the Poop and Scoop Scheme?
The illegal scheme called "poop and scoop" involves a small group intentionally spreading false information about a stock to lower its price. This strategy has become easier with the rise of online communities and finance-related discussion groups. Engaging in poop and scoop can result in legal consequences and potential prosecution by the Securities and Exchange Commission (SEC).
Basics
In the “poop and scoop” scheme, individuals with insider knowledge disseminate false information, rumors, and damaging details to manipulate the stock's value. Their objective is to drive down the price so they can purchase the stock at a discounted rate, a tactic known as "scooping." If successful, they benefit from the market's mass selling, causing a significant price drop. Securities exchange regulators, including the SEC, strongly disapprove of the “poop and scoop” practice and take legal action against those involved.
How Does the Poop and Scoop Tactic Work?
"Poop and scoop" is a deliberate strategy used to manipulate the market price of a security by releasing or promoting false, negative information about a company or asset. Participants in this scheme aim to buy the targeted security at a discounted price, recognizing that the temporarily depressed market price does not reflect the security's true value. They intend to later sell the security at a profit.
The SEC classifies "poop and scoop" as a form of market manipulation and securities fraud under the 1934 Securities Exchange Act. It is considered an illegal activity that carries potential legal consequences. This strategy stands in contrast to the "pump and dump" approach, where individuals disseminate false information to artificially raise the price of a security, enabling them to sell it at a significantly higher price.
Although "pump and dump" is more commonly observed, as it can yield substantial gains with low-value stocks, "poop and scoop" is less frequent. The potential for profits is generally higher when inflating and subsequently selling a low-value stock, compared to deliberately devaluing and selling a well-established, higher-priced stock. Nevertheless, engaging in either practice is illegal and can lead to punitive action by the SEC within the United States.
Short and Distort
Unethical traders sometimes employ an illegal tactic called "short and distort." They engage in short selling, borrowing securities to sell them to buy them back at a lower price. However, instead of buying at a discount caused by false information, they intentionally spread misinformation to drive down the security's value and make a profit.
Another scenario involves an activist hedge fund that publicly accumulates a short position while launching a campaign against specific corporate actions. In this case, opportunistic individuals may assist the hedge fund by amplifying negative news and contributing to the stock's scrutiny, ultimately benefiting from the situation by capitalizing on it and building a short position.
Wash Trading and Bear Raiding
The market is susceptible to two manipulative practices: "wash trading" and "bear raiding." Wash trading involves repeatedly buying and selling a security to create a false impression of high demand. On the other hand, bear raiding happens when a potential investor expects the price of a stock to decline and aggressively sells it to drive down its value. Bears are the opposite of bulls, who buy stocks expecting their value to increase.
Technological Progress Impact
The growth of online communities and platforms has fueled the spread of misinformation, making it challenging for companies to combat. Even with strong PR teams, regulatory constraints hinder their efforts. A single tweet can dramatically impact stock prices, posing difficulties for regulators in deciphering the intentions behind social media posts.
High-speed trading algorithms have mixed effects on market manipulation tactics like "poop and scoop." Algorithms acting on fake news can increase manipulators' profits while amplifying social costs. Alternatively, algorithms programmed to distinguish between fake and legitimate information could mitigate the issue. However, there is a risk that intelligent algorithms could be used alongside fake news bots, deceiving less sophisticated algorithms and traders, and leading to greater market damage.
Poop and Scoop Real Example
James Alan Craig, a Scottish national, was charged by the SEC for violating securities laws in November 2015. He tweeted false statements from fake accounts resembling legitimate securities research firms. Craig aimed to profit from the resulting price swings by buying and selling shares, but his attempts were largely unsuccessful.
In one instance, he tweeted from an account resembling Muddy Waters, falsely claiming that Audience Inc. was under investigation. This caused a 28% drop in Audience Inc.'s stock price. The next day, using an account resembling Citron Research, Craig tweeted that Sarepta Therapeutics Inc. was under investigation, resulting in a 16% decline in Sarepta's stock price.
Conclusion
The motives behind "poop and scoop" and hedge fund investors are pretty similar. Both aim to spread information to drive down a stock's price and benefit from purchasing discounted shares. However, "poop and scoop" is a deliberate manipulation tactic, while an activist hedge fund can be viewed as part of the capitalist system at work. Perpetrators of "poop and scoop" can face prosecution by the Securities and Exchange Commission.