2017 - 18 Year in Review

27 WHO FALLS PREY TO THE WOLF OF WALL STREET? INVESTOR PARTICIPATION IN MARKET MANIPULATION Manipulative communications touting stocks are common in capital markets around the world. Although the price distortions created by so-called “pump-and-dump” schemes are well known, little is known about the investors in these frauds. By examining 421 “pump-and-dump” schemes between 2002–15 and a proprietary set of trading records for more than 110,000 individual investors from a major German bank, we (Leuz and coauthors Steffen Meyer, Maximilian Muhn, Eugene F. Soltes, and Andreas Hackethal) provide evidence on the participation rate, magnitude of the investments, losses, and the characteristics of the individuals who invest in such schemes. Our evidence suggests that participation is quite common and involves sizable losses, with nearly 6 percent of active investors participating in at least one “pump-and-dump” and an average loss of nearly 30 percent. Moreover, we identify several distinct types of investors, some of which should not be viewed as falling prey to these frauds. We also show that portfolio composition and past trading behavior can better explain participation in touted stocks than demographics. Our analysis offers insights into the challenges associated with designing effective investor protection against market manipulation. Christian Leuz Joseph Sondheimer Professor of International Economics, Finance and Accounting