Poop and Scoop Explained: Definition, Mechanism, and Real-World Example

What Exactly Is Poop and Scoop?

"Poop and scoop" is a deceptive tactic where a small group of insiders disseminates false rumors and misleading information to intentionally depress a stock's value. By spreading this "poop," they aim to "scoop" up shares at a reduced price. If successful, the market reacts by selling off the stock, causing its price to plunge significantly, allowing these insiders to purchase shares cheaply.

This manipulative practice is condemned by securities regulators and is subject to enforcement actions by the U.S. Securities and Exchange Commission (SEC).

Key Highlights

• Poop and scoop is an illegal market manipulation strategy involving the spread of false information to drive down stock prices.
• The growth of online forums and social media platforms has made executing such schemes easier and more accessible.
• The SEC actively prosecutes individuals involved in poop and scoop activities.

How Does Poop and Scoop Work?

This strategy relies on intentionally releasing negative and untrue information about a company or asset to influence its market price downward. The perpetrators then purchase the undervalued stock, knowing the dip is artificial and temporary. Later, they aim to sell the shares for a profit when the price rebounds.

The SEC classifies poop and scoop as securities fraud and market manipulation under the Securities Exchange Act of 1934.

Quick Insight

Poop and scoop is the inverse of the "pump and dump" scheme, where false positive news is spread to inflate a stock's price before selling at a profit.

While less frequent than pump and dump, poop and scoop targets well-known, higher-priced stocks, whereas pump and dump often involves low-value stocks. Both tactics are illegal and punishable under U.S. law.

Poop and Scoop Compared to Short and Distort

A related illicit method is "short and distort," where traders short sell a stock and then spread false negative information to drive the price down, profiting from the decline. Unlike poop and scoop, which involves buying low after spreading rumors, short and distort profits from falling prices via short positions.

Sometimes, activist hedge funds build legitimate short positions while publicly criticizing a company’s actions. Opportunistic manipulators might amplify negative news to boost the impact, intensifying price declines and benefiting from the short position.

The Role of Technology in Market Manipulation

The rise of social media, online communities, and finance discussion groups has amplified the spread of misinformation. Companies often struggle to combat fake news due to regulatory constraints on their communications. Even a single misleading tweet can cause a stock’s price to drop sharply, complicating regulatory oversight.

Noteworthy Fact

Influencer marketing has further complicated efforts to maintain fairness in financial markets.

High-frequency trading algorithms that react to news can both exacerbate and mitigate the effects of poop and scoop schemes. Algorithms acting on false information can increase manipulators’ profits and market disruption, but smarter algorithms capable of distinguishing fake from real news might reduce such risks. However, these advanced algorithms could also be exploited to spread and trade on more convincing misinformation, magnifying market damage.

Real-Life Example of Poop and Scoop

In November 2015, the SEC charged James Alan Craig from Dunragit, Scotland, with securities law violations. Craig used fake Twitter accounts mimicking reputable securities research firms to post false claims about two companies. Despite largely unsuccessful attempts to profit, his tweets caused significant stock price drops.

For instance, Craig falsely claimed Audience Inc. was under investigation via a fake account resembling Muddy Waters, causing its stock to plunge 28%. The following day, he similarly targeted Sarepta Therapeutics Inc. through an account resembling Citron Research, resulting in a 16% price decline.

Other Common Forms of Market Manipulation

Market manipulation also includes "wash trading," where securities are repeatedly bought and sold to create artificial demand, and "bear raiding," where large sell-offs are used to drive prices down. Bears anticipate price declines, while bulls expect price increases.

Why Market Manipulation Harms Society

Research shows that while manipulation can be profitable for perpetrators, it undermines market efficiency by distorting true security valuations. This impairs the market’s role in allocating resources effectively across the economy.

Final Thoughts

Although both poop and scoop operators and hedge fund investors aim to profit from downward price movements, poop and scoop involves intentional misinformation to manipulate stock prices illegally. In contrast, activist hedge funds typically operate within legal boundaries of capitalism. The SEC vigilantly prosecutes those engaging in poop and scoop to protect market integrity.

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