Who Falls Prey to the Wolf of Wall Street? Investor Participation in Market Manipulation

Price distortions created by so-called “pump-and-dump” schemes are well documented, but relatively little is known about the investors in these schemes. By examining 470 pump-and-dump schemes and a large data set of trading records for over 110,000 individual investors from a major German bank, we provide comprehensive evidence on the participation rate, the magnitude of the investments, the losses, and the characteristics of the individuals who invest in such schemes. Participation is quite common, with nearly 8% of active retail investors participating in at least one pump-and-dump losing on average nearly 30%. We identify several distinct types of participating investors, some of which (e.g., speculating day trader) should not be viewed as falling prey to the schemes. We also show that portfolio composition and past trading behavior better explain scheme participation than demographics. Last, we document longer-lasting effects on participating investors beyond their immediate financial losses. Our analysis highlights that an effective regulatory response to pump-and-dump schemes requires understanding who invests in such schemes and why, as, for instance, not all investors are likely to be dissuaded from investing by traditional regulatory disclosures. This paper was accepted by Eric So, accounting. Funding: This work was supported by the Clark Center for Global Markets at the University of Chicago and the Danish Finance Institute. Supplemental Material: The internet appendix and data files are available at https://doi.org/10.1287/mnsc.2023.03181 .