Pump and Dump

"Pump & Dump" by Robert H. Tillman and Michael L. Indergaard
Robert H. Tillman and Michael L. Indergaard
Authors and St. John's University sociology professors
Wednesday, February 22, 2006; 1:00 PM

In their new book, "Pump and Dump: The Rancid Rules of the New Economy," sociology professors Robert H. Tillman and Michael L. Indergaard say that recent corporate scandals such as Enron and WorldCom are symptoms of corporate governance problems that began in the 1990s.

Using a financial fraud theory called "pump and dump," corporate elite artificially inflated stocks and securities in order to sell their shares at higher prices, leaving any fall-out and responsibility on naive investors.

Tillman and Indergaard, who both teach at St. John's University in New York City, were online Wednesday, Feb. 22 at 1 p.m. ET to answer questions about their book.

A transcript follows .


Michael L. Indergaard: Hello and thanks for joining us to discuss the problem of corporate corruption. In our book, "Pump and Dump: the Rancid Rules of the New Economy", we show why recent financial scandals implicate the U.S. system of corporate governance and a host of politicians who have cashed in on the public trust. Our hope is that citizens will take a closer look at the business and political elites who hide behind free market mantras.

Robert H. Tillman: Welcome. We're looking forward to your comments.


Rockville, Md.: I am curious why two sociology professors would be writing a book on business. What are your backgrounds that you would feel comfortable addressing these issues? Have either of you worked in the finance area? While many of the problems that have emerged over the past 10 years have been pretty egregious, I find that enforcement of our laws is much better today than it was in earlier eras. The Rockefellers, Mellons, Goulds, Kennedys and Morgans of those eras got away with quite a bit and never had much in the way of negative repercussions. Even in the 70's and 80's there were plenty of businessmen whose activities today would justify prison time, but who got away with it. Sure, there are problems today, but at least now there are ramifications.

Robert H. Tillman: Good question. My specialty in sociology is white-collar crime and my colleague's is primarily in economic sociology. Many of the issues we explore in our book can get technical but at their root are not that difficult to understand. We focus on cases of blatant frauds where it is clear that those involved intended to deceive investors, employees, etc.

You're probably right that there were many violations in the past but one of the differences is that today there are so many more opportunities to commit corporate crimes. With new financial instruments, IPOs, etc.


Bethesda, Md.: In your book, do you offer-up any solutions on how to avoid messes like Enron or WorlCom? Are there regulations in place to stop "pump and dump" schemes and if not what should be done by the SEC or Congress?

Michael L. Indergaard: Thanks for the question. Sarbanes-Oxley addressed some problems but there have been attempts to water it down. More generally, strong resistance to reform is threatening to bring it to a halt. We propose that there has been little recognition of larger problems of governance and policy.

Robert H. Tillman: Some of the necessary reforms have been implemented, like requiring companies to expense stock options--which has finally been put in place after much wrangling. But others have not. Such as requiring boards of directors to have outside members. I worry that as memory of the scandals fades people will be less vigalent about seeing that reform measures stay in place


Philadelphia, Pa.: I asked this same following to John Bogle earlier. I would please appreciate your reaction this query:

I was in an Ivy League business school in the 1970s. I recall being the only person in one class who felt that American businesses operating in foreign countries should follow the business laws of the countries within which they operate even if no American laws were broken by breaking the foreign law. I felt this was not only a moral question but also one that shows we respect the cultures of the people with whom we do business. This is just one example of what I found to be a rampant problem among my classmates. What I observed among my classmates was a cut-throat drive for personal success at nearly any cost. I can verify the tales that many college students have heard as being correct: library readings for classes were often missing (this was the days before the Internet), cheating was rampant and indeed widely boasted, and I learned never to work in a group. The object of learning groups was to stab others in the back in order to lower the class average. From all this, I did learn one valuable lesson: never hire anyone from my class to work for me.

Over time, as I watched and read about many of my classmates in the news taken away from their jobs in handcuffs, I was not in the least bit surprised. The question I have always wondered though is, if I could tell within minutes that I would never want these greedy cheaters working for me, how did they get hired and kept at these brokerage houses and businesses? Do many businesses themselves actually seek out cheating greedy people? Or do they worm their way into these businesses, in which case I feel sorry for the businesses when they find the personal spending accounts of these employees inflated and the business deals they made turned out to be ethically questionable.

Is there a business culture among some companies that attracts these people? If so, shouldn't there be a means for this culture to recognize when mistakes are made and can then to respond to correct itself and its own behavior? Did businesses never learn to look for warning signs and self-correct their own problems?

Michael L. Indergaard: Interesting issue. Leading figures in fraud often surrounded themselves with people who were willing to collaborate in dubious activities. They often selected people who were drawn to risk-taking and the prospects of high rewards. Importantly, the ringleaders also created organizational routines and cultures that socialized people into going along with suspect activities. They used a mix of bribery and bullying to normalize corruption.


Columbus, Ohio: I've long felt that an prime but unspoken motivation for privatizing social security was to create coerced artificial demand for stocks, to the benefit of those who already owned them. Am I alone in this view?

Robert H. Tillman: I think there's more than a little truth to your observation. Clearly Wall St and corporate American would have profited tremendously with the privatization of Social Security. It is truly amazing that the administration could have proposed this in the wake of massive corporate scandals in which investors were betrayed by the very people who would under privatization have access to more of their funds Hopefully, this proposal is dead and gone.


Minneapolis, Minn.: The cases of Enron and Worldcom, among others, are classic examples of why government oversight is essential to protect investors. Do you see any real push by Congress and the SEC to strengthen the integrity of the Market beyond window dressing? Also, will this become an increasingly large concern as the Boomers retire and are even more dependent upon their portfolios for retirement income?

Michael L. Indergaard: We see some substance and a whole lotta damage control. One thing that troubles us is that there has been little repudiation of the blind faith in markets that abetted the gutting of regulations. And there has been little, if any accountability for politicians who cashed in on positions of public trust.


Annapolis, Md.: I'm on Amazon concurrently with this post ordering your book.

Recently, I was re-reading an old economics text book I have. It almost seems as if some of the basics (supply/demand curve analysis in particular) are changing as the markets become global in combination with rapid M&A activity plus this vertical and horizontal integration momentum.

I get the impression we are in uncharted territory. From your perspective, how did the globalized economy emerge? Was it a result of random factors? Or were certain people/organizations responsible?

Michael L. Indergaard: We stress the role of neoliberal ideologies and political mobilizations in weakening regulations during the 1990s. Certainly, these same forces have been vigorously promoting a certain type of globalization during the same period. Enron, for example, was at the forefront of promoting privatization of energy industries in developing countries and in exploiting such shifts. In this they were assisted by a host of U.S. government agencies and international bodies which provided Enron with something like $7 billion in support.


Washington, D.C.: Are there any other techniques that corporate big-wigs use along with "pump and dump" to manipulate investors?

Robert H. Tillman: Yes. The variations seem endless. One of the frauds that we explore in the book involved the outrageous rip-offs of electrical energy consumers in California in the late 1990s. These scams cost Californians an estimated $9 billion. Its useful to think about how many people could have been educated, housed or fed with that money. The most galling aspect of this was the fact that under deregulation, many of these practices were not illegal and very few of those responsible were ever punished.

Outside of California, recent revelations about standard practices in the insurance industry also make one wonder if there's any area of the corporate world that is free from corruption.


Munich, Germany: There's a fair amount of hype being published on the Internet by PR firms, trying to establish interest in a company stock, which is often deceptive, especially for small investors.

Would you agree, that while the Internet has empowered small investors to a certain degree by providing access to previously unattainable information, the Internet has also become the domain of large organizations that are well versed in presenting potentially misleading information?

Michael L. Indergaard: Nice to hear from Europa. I'm not sure that much of the info on the Internet is much more helpful than the many emails I get which want to give hot stock tips. The new economy, based as it is on network forms of organization, provides countless opportunities to hide information from investors. There are lots of unresolved issues about the Silicon Valley system which relies on insider ties. Their linkages with the financial system makes their privileged access to information, and ability to shape impressions, all the more problematic.


Arlington, Va.: Just curious -- what does "neoliberal" refer to ideologically? Does this mean "third way" Democrats?

Michael L. Indergaard: It is because of the third-way Dems that one could state that the embrace of neoliberal ideas is bi-partisan. Members of Congress and Presidents from both parties have "starring" roles in our book's scrutiny of promiscous deregulation and free market ideologies. Thanks for bringing the issue up.


Arlington, Va.: Have there been any class action suits or complaints from investors about this practice? Or is it legal and allowed?

Robert H. Tillman: If you're asking about the California energy scams, yes, there have been a number of class action suits, some of which have been successful and have recovered some money for the consumers. The problem is the difference between obtaining a judgement and obtaining cash from these companies. In order to get any money out of Enron California energy consumers will have to join a long line of people trying to get their hands on a dwindling pool of assets.


Arlington, Va.: The executives are not just inflating stock prices for their own greed, they are also helping lots of investors make money. I don't think Wall Street cares about high executive compensation packages, for example, as long as total shareholder return is high. The tragedy with an Enron or Worldcom is that the employees who couldn't dump the stocks were punished.

Michael L. Indergaard: We argue that there were multiple motivations for those who participated in dubious or fraudulent actitivities. One of the basic examples of "New Economy rules" was the doctrine that a firm could become a first mover and dominate new markets if it turned its stock into a currency with which it could make acquistions. A lot of dot-com start-ups were playing the IPO game not to gain riches but to gain crediblity as New Economy players. In many cases, executives tried to play the New Economy game and then found themselves trapped. Then they engaged in fraudulent accounting or other ruses to try to keep things afloat.


Bethesda, Md.: As a small-investor what kind of protection can I take from mistrusting the wrong people? Because I still feel like I'm in the learning stages, I look towards those in the know for guidance. Am I just being naive?

Robert H. Tillman: It's easy to be cynical in these situations--distrusting everybody. At the same time not all stocks are backed by phony information--indeed, most are perfectly honest and straightforward. But even trying to make prudent investment decisions under legitimate circumstances is difficult enough.

the only advice I can offer is to be careful not get caught up in the next wave of "irrational exuberance" or to be on the quest for "the next big thing."


NW DC: You used the term 'massive' to describe corporate scandals: Can you elaborate upon that?

ENRON and WorldCom were large companies, but they were an infinitesimal operator in a massive economy. What other evidence do you have that fraud was pervasive in business, rather than pervasive at an immaterial number of large organizations?

Robert H. Tillman: Very good question. There is a tendency to see the whole barrel as rotten. We are now working on a more systematic study to try to arrive at some more precise estimates of the scope of corporate fraud, specifically, accounting fraud, and its costs.

For now, we can rely on a study by the GAO which found that between 1997 and 2002, over 800 public companies issued restatements of their financial conditions. This represented 10% of all companies listed on the major exchanges during that period. while this leaves 90% that did not file restatements, we think that 10% is a fairly large proportion.

Hopefully, we'll have a more precise answer in the future.


Washington, DC: For the high-profile cases that we've heard about in the media (Enron, etc) aren't these the exceptions rather than the rules? There are millions of corporations in the U.S. and thousands of publicly traded companies... Are you asserting that these few bad apples are proof that the entire crop is spoiled?

Michael L. Indergaard: Bob is answering a very similar question so I will address some big picture issues raised by your question. The magnitude of false finanical statements and of the frauds committed suggest a systemic problem. Our investigation of the politics behind deregulation--and the obstruction of regulators and reformers--speaks of issues that bridge the world of economics and politics. In the 1990s, the power of the corporate elite over Congress and regulators was such that they gained the ability to both make and break the rules. Some powerful executives and professionals have been held accountable by the courts but there has been little recognition of the flaws in our governance system that abetted their misdeeds. Ultimately, what is at stake is whehter we as democracy still have the ability to reflect critically on our system and correct it.


Michael L. Indergaard: We'll conclude with the thoughts we ended our book's introduction with. "Our study suggests that unregulated markets spur the formation of rogue entrepreneurs who feed on moral society--cashing in on social resources, such as relationships, reputation, and trust. 'Caveat emptor' is a sensible guideline in any era, but when it is the only norm that stands between ordinary investors and predatory insiders, "buyer beware" is the most rancid rule of all."


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