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Pump and dump schemes represent some of the most prevalent and hazardous securities fraud cases. Criminal prosecutors and regulators aggressively pursue them, targeting both companies and individuals involved.
What is a Pump and Dump Scheme?
A pump and dump scheme artificially inflates stock value, allowing perpetrators to profit while investors suffer losses. The SEC describes these schemes as involving the touting of a company’s stock — typically microcap companies — through false or misleading statements to the marketplace.
False claims appear across social media platforms like Facebook and Twitter, bulletin boards, chat rooms, newsletters, press releases, and investment research websites. After purchasing shares at lower prices, fraudsters disseminate positive rumors to inflate stock prices. Unsuspecting investors create buying demand, bidding up share prices. Fraudsters then sell their shares at artificially elevated prices, cease promotion, and prices typically fall — investors lose money.
Additional Forms of Illegal Conduct
Beyond false statements, the SEC identifies these illegal practices:
- Impersonating stock promoters and promising to sell large stock quantities
- Assuring unknowing investors that promoters will control stock prices
- Claiming knowledge of individuals purchasing massive stock quantities to artificially increase prices
How Do Federal Authorities Target Pump and Dump Schemes?
Federal authorities employ various methods targeting pump and dump schemes. The SEC monitors microcap and large-cap stocks on public exchanges, while the DOJ investigates and prosecutes violations.
However, prosecutors must prove all essential elements for conviction. Even with clear market manipulation evidence, targeted companies and individuals typically possess multiple available defenses.
Potential Defenses
No Misrepresentations Were Made — If prosecutors cannot prove misrepresentations occurred, criminal liability may be precluded.
No Deceptive Conduct Took Place — If prosecutors cannot prove deceptive actions, this serves as complete defense.
No Investor Losses Resulted — Without losses, the government’s case may collapse.
No Evidence of Intent — Proving intent proves extremely difficult, requiring specific evidence about actions’ motivations.
Prosecutors Obtained Evidence Through Illegal Means — Evidence obtained illegally cannot be used under the exclusionary rule.
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