What You Need to Know About This Common (and Dangerous) Type of Securities Fraud
Pump and dump schemes are among the most common (and most dangerous) types of securities fraud. Criminal prosecutors and regulators target them heavily—and when they find them, they target both the companies and the individuals involved. Many pump and dump schemes involve one or more companies and numerous individuals, all of which can face substantial fines and other penalties.
If your company is under investigation for engaging in a pump and dump scheme, or if you are personally facing allegations of engaging in a pump and dump scheme, it is critical that you engage experienced defense counsel immediately. Not only is pump and dump fraud dangerous from a legal perspective, but these schemes can also lead to substantial losses for investors. As a result, pump and dump allegations can trigger parallel criminal and civil enforcement proceedings, and companies and individuals targeted in these proceedings can face millions of dollars in fines, restitution, and other financial liability.
What is a Pump and Dump Scheme?
So, what is a pump and dump scheme? In broad terms, a pump and dump scheme involves artificially inflating the value of a company’s stock and then profiting while investors are left holding the bag. The U.S. Securities and Exchange Commission (SEC) describes pump and dump schemes as follows:
“Pump-and-dump schemes involve the touting of a company’s stock (typically microcap companies) through false or misleading statements to the marketplace. These false claims could be made on social media such as Facebook or Twitter, on bulletin boards, in chat rooms, or through seemingly independent commentary in newsletters, press releases, investment research websites, or other media. After purchasing shares of a company’s stock at lower prices, fraudsters spread positive rumors in order to “pump” up the price of that stock. Believing these false claims, unsuspecting investors create buying demand and bid up the share price. The fraudsters then “dump” their shares at these artificially inflated prices, stop hyping the stock, and the share price typically falls; investors lose their money.”
This highlights a common misconception about pump and dump schemes. While many people think of these schemes as involving the dissemination of false information on the Internet, the SEC’s list of examples highlights the fact that pump and dump schemes can take a variety of different forms. For example, in addition to pumping up stock prices through false claims, the SEC has identified the following as examples of illegal conduct in pump and dump cases as well:
- Pretending to be a stock promoter and promising to sell large amounts of a stock, or to limit sales of the stock, so that interested investors can purchase shares at a certain price
- Assuring unknowing investors that the promoter will control the price of a stock
- Claiming to know individuals who will buy huge amounts of a stock and therefore artificially increase its price
In many cases, pump and dump schemes involve a variety of false claims, deceptive practices, and other forms of market manipulation. If the SEC, U.S. Department of Justice (DOJ), or another federal agency believes that your company (or you personally) may be involved in a pump and dump scheme, it will be important to quickly identify any and all allegations that are being targeted so that you can focus on building a comprehensive and strategic defense.
How Do Federal Authorities Target Pump and Dump Schemes?
While pump and dump schemes can take a variety of different forms, federal authorities also have a variety of different ways to target these schemes. The SEC uses various methods to monitor microcap and large-cap stocks traded on public exchanges, and the DOJ has the authority to investigate and prosecute any company or individual suspected of violating federal securities laws.
But, while the SEC and DOJ have various ways of targeting pump and dump schemes, they must be able to prove all essential elements of their allegations in order to secure a conviction. As a result, even when the government’s evidence of market manipulation and stock price inflation is clear, companies and individuals targeted in pump and dump investigations will often have multiple defenses available. Here are just some examples of the types of defenses that may be available in pump and dump cases:
- No Misrepresentations Were Made – As discussed above, pump and dump schemes typically (though not always) involve the dissemination of false information. If the government cannot prove that any misrepresentations were made—either intentionally or unintentionally—this can preclude criminal liability.
- No Deceptive Conduct Took Place – In addition to making false statements, engaging in other forms of deceptive conduct can also lead to criminal prosecution for pump and dump fraud. However, as with misrepresentations, if prosecutors cannot prove that you or your company acted deceptively, this can serve as a complete defense to criminal culpability.
- No Investor Losses Resulted – Even if the government can prove that a company or individual made misrepresentations or engaged in deceptive conduct, this typically will not be enough to prove criminal liability in a pump and dump case. If no investors suffered losses, then the government’s case should collapse on its own.
- No Evidence of Intent – In many pump and dump cases, prosecutors must be able to prove intent in order to secure a conviction. Proving intent can be extremely difficult, as prosecutors must have evidence of a specific reason for a company or individual’s actions.
- Prosecutors Obtained Evidence Through Illegal Means – In criminal pump and dump cases, the exclusionary rule applies. This means that prosecutors cannot use any evidence obtained through illegal means. If it is possible to keep the government’s key evidence out of court, this may be enough to avoid a conviction regardless of whether the government’s allegations are true.
These are just examples. When facing allegations of engaging in a pump and dump scheme, it is imperative that you work with experienced defense counsel to build and execute a defense strategy that is custom-tailored to the facts at hand.
FAQs: Defending Against Allegations of Engaging in a Pump and Dump Scheme
What Should I Do if the SEC is Investigating My Company for Engaging in a Pump and Dump Scheme?
If the SEC is investigating your company for engaging in a pump and dump scheme, you need to engage experienced federal defense counsel right away. There are several law firms that handle pump and dump cases (including Spodek Law Group), and you cannot afford to put your company’s future in the SEC’s hands. An experienced defense lawyer will be able to take control of the SEC’s investigation, ensure that your company is not unnecessarily exposing itself to liability, and present the arguments needed to prevent an enforcement action if possible.
What are My Company’s (and My) Potential Penalties in a Pump and Dump Case?
In a pump and dump case, the potential penalties vary depending on the specific allegations at issue. If the SEC alleges that your company can be held civilly liable for engaging in a pump and dump scheme, then it can see fines, disgorgement, restitution, and other remedies. If you are facing criminal allegations, you could be at risk for substantial prison time in addition to fines, restitution, and other penalties.
Does the SEC Work with the DOJ in Pump and Dump Cases?
Yes, the SEC works with the DOJ in pump and dump cases. If the SEC discovers evidence of criminal conduct during its investigation, it can then refer the case to the DOJ for criminal prosecution. This, in turn, means that companies and individuals targeted in pump and dump cases can face both civil and criminal penalties.
What are the Defenses to Allegations of Engaging in a Pump and Dump Scheme?
As discussed above, there are several potential defenses to allegations of engaging in a pump and dump scheme. While the specific defenses that are available in your (or your company’s) case will depend on the specific facts involved, some examples of potential defenses in pump and dump cases include lack of misrepresentations, lack of deceptive conduct, lack of intent, and the exclusionary rule.
Do I Need an Attorney if I am Facing an SEC or DOJ Investigation for Pump and Dump Fraud?
Yes, if you are facing either an SEC or DOJ investigation, you should engage an attorney to represent you. Not only can an experienced attorney help you identify the substantive defenses you have available, but an experienced attorney will also be able to protect your constitutional rights and make sure that you are not inadvertently exposing yourself to prosecution.
Speak with a Federal Defense Lawyer at Spodek Law Group
If you need to speak with a federal defense lawyer about an SEC or DOJ pump and dump investigation, we strongly encourage you to contact us promptly. To arrange a free and confidential consultation at Spodek Law Group, call 212-300-5196 or tell us how to reach you online now.
