Money Rehab with Nicole Lapin - Is "Pump and Dump" As Gross As It Sounds?

Episode Date: March 28, 2022

Today’s Money Rehabber wants to know: WTF does it mean to “pump and dump” crypto? In her words, “It sounds like something your mom would say during a sex talk.” But it’s not. Or, at least, not exclusively. Today, Nicole explains. See omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. So I got this hilarious and not suitable for work, as the kids these days say,

question from a money rehabber. I'm just going to get into it. Here she is. Hey, Nicole. I've been hearing the phrase pump and dump a lot around crypto. Like I saw a little while back that Kim Kardashian and Floyd merriweather were getting sued for a pump and dump scheme it sounds like something your mom would say during a sex talk like boys only want one thing he just wants to pump and dump but i'm fairly sure that's not what this means in the finance world so what

does it actually mean money move or frat boy strategy? Pump and dump is definitely a phrase that you'll see a lot in the financial trades, but it's actually not a phrase exclusively reserved for crypto. It's a term that's also used within the stock market, and it actually goes back to the origins of the stock market itself. So this is a great opportunity for me to nerd out and take you on a little historical tour of the most important financial system, the stock market. When I say the stock market, what do you picture? Maybe you think of that green Wall Street sign. Maybe you think of a serious looking building

with big imposing marble columns. Maybe you think of Leo in a cocaine frenzy in The Wolf of Wall Street. But what is the stock market, actually? If you're thinking of the stock market as a physical location, you're not actually thinking of the stock market at all. You're thinking about a stock exchange. Not to go all hippy-dippy on you, but the stock market is more of a system than a physical location. The stock market is what has been born of the semi-modern idea that you can give money to someone who needs it now with the hope that the money will come back to you and then some in the future. I say semi-modern because while the dinosaurs weren't investing in startups way back then, there is still a rich history to

the stock market. Long before there was a Wolf of Wall Street, even before there was a Wall Street, there was the Dutch East India Company. If you're a finance nerd like me, or you've seen your fair share of pirate flicks, you're probably a little familiar with this type of biz. The Dutch East India Company was revolutionary in its time, which, by the way, was the 1600s. Not all historians agree, shocker, but most pinpoint the start of the investment system as we know it to the 1600s, when European countries were sending explorers all over the world to fetch spices and tea and all sorts of goodies to sell. But remember, this was the 1600s. There was no more legroom seats on bougie airlines just yet. All journeys were by sea,

and they were perilous. To make one of these epic expeditions across oceans, you needed a ship-shaped crew, food, tools, rum, water, more rum, and so on. Oftentimes, these trips would last months. All of these expenses added up, but the potential payout of these trips were massive. So, sailors would go around asking wealthy merchants to front them the money for the journey. In exchange, when the sailor came back with the goods, they would split the profit with their sugar daddies of sorts. These transactions lay the groundwork for the modern day investment structure. The Dutch East India Company was an entity in this game. Plus, the Dutch East India Company also happens to be the very first publicly traded company. Yes, public companies are that

old. Can you believe that financial experts have had 400 years to come up with a good explanation for public companies and most of the time they still suck at it? Yeah. We've, of course, talked about what it means to be a public company in other episodes, but as a refresher, a company is considered to be publicly traded if it sells pieces of ownership in the company and the promise of some future perk to the public. That's it. It's really not that complicated. The Dutch East India Company is the first company on record to do this. At the time, this brand new structure gave wealthy merchants better financial opportunities than ever before. Put yourself in the probably uncomfortable shoes of a 1600s investor. The best option before the Dutch East India Company went public was to invest in one sailor's journey.

That was a pretty risky move. I mean, if the ship sank, your investment went to the bottom of the ocean along with it. But this new opportunity? Now, this was something special. The promise of a payout after a successful journey was still there. But with the Dutch East India Company, instead of investing in one journey, merchants would be giving their money to a company that executed many journeys. Instead of investing in one ship, merchants could now invest in a whole fleet.

So if one ship went down, no problemo. Their money would fund the next one. And voila, modern day investing was born. If you bought shares in the Dutch East India Company, you could make money in two ways. First, you could have an agreement with the company to get a portion of the company's profits called dividends. Or second, you could sell your shares to another interested investor and pocket the money from that sale. This second money-making method gave rise to the first stockbrokers, or more generally, shareholders who sell their shares to other investors. In the 1600s, the approach to selling stocks was an anything-goes system. And yes, this is where the

pump-and-dump phrasing comes in. These early stockbrokers would try to jack up the price of a stock by creating elaborate lies about the company. It would essentially go like this. A broker would go up to a wealthy merchant and say something along the lines of, hey dude, I hear there's a Dutch East India Company ship filled with gold, treasure, love potions, and spices that will make you taller. It's going to be coming back to port literally any day now. Dividends are going to be massive for all investors, bro. I need cash right now because my mom is sick. So I'm going to have to sell my shares, but shareholders are going to make some serious dough in the next few days, and so you should totally buy me out. I'll give you a good deal. Then, obviously, the merchant would go and

buy the share at whatever price the broker named, because who doesn't want to be tall and popular? And the stockbroker would pocket that cash. Then, when the Dutch East India Company ships would come back sans gold and sans love potions, the merchant would realize that the price of this share actually wasn't worth what they paid. And that, ladies and gentlemen, is what it means to pump and dump. It's when someone owns an investment security, like shares of a stock or cryptocurrency, and they try to inflate the value of the asset through phony tactics

so that they can sell the asset at an inflated price, pocket the profit, and then get out before people realize that they had bought into an investment at a higher value than it's actually worth. So this pumping and dumping was happening a lot in the 1600s, and it actually got worse in the next century. In the 1700s, merchants would get together on Wall Street and sell shares auction style. And that is the very same Wall Street that exists in modern day New York. People have been

investing on Wall Street for centuries, which blows my mind to think about. But anyway, in the 1700s, men, yes, that's not me misspeaking, it was exclusively men at the time, would stand on Wall Street and shout out the prices that certain shares were selling for. Interested investors would gather around Wall Street and bid on these stocks, and shares would go to the highest bidder. This system changed forever when, in 1792, a couple of stockbrokers got together and signed the Buttonwood Agreement on, you guessed it, Wall Street. These stockbrokers were fed up with this

system of auctioning shares. They had their experiences with phonies coming in and pumping and jumping, which was annoying if you fell victim to a pump and dump scheme. But an even bigger deal was that some Americans were becoming skeptical about the whole investing system because of the prevalence of pump and dump schemes. Even just the suggestion of how the rumor mill and gossip affected share price made investors skittish. In order to block out the noise from sketchy sources and garner the public's faith in the system, these stockbrokers decided that they would only trade between themselves behind closed doors. Make no mistake, this move wasn't motivated entirely by the goodness of their hearts. By trading behind closed doors, these stockbrokers also shut out any other stockbrokers who wanted in on what the

Buttonwood boys had. Plus, they cut out the independent investors who had been taking the DIY approach and investing their money themselves. Before the Buttonwood agreement, anyone could stroll down Wall Street and buy shares through the auction system. After the Buttonwood Agreement, if you wanted to invest, you needed to place your money and trust in the stockbroker's hands. Moving stock trading from the streets of New York inside four walls redefined investing as a private system that takes place in a centralized location. The space the Buttonwood boys chose became known as the New York Stock Exchange, or NYSE, and it's still the most iconic exchange in the world. The NYSE is so legendary that oftentimes when someone says the stock exchange, they're likely referring to the NYSE, even though there are so many stock exchanges all over the world.

Essentially, a stock exchange is a space where stocks can be sold and purchased legitimately. And we're back to the definition of the stock exchange. And the beginning of the episode. Full circle. Mic drop. For today's tip, you can take straight to the bank. If you're hearing great things about an investment, just do your research. If the price is going up and up, you should know why. Was a new product announced? A new all-star CEO hired? If you're not seeing the rationale behind a price going up, make sure there actually is one and you're not falling for a pump and dump scheme.

Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.