Securities include:
- Stocks;
- Bonds; and
- Mutual funds.
These types of investments are purchased by individuals who are attempting to make a profit. Stocks are purchased from corporations and give an individual part ownership in the company.
Securities law is a complex area of law which is governed by various state and federal regulations which applies to the conduct of investors. Securities laws were created because of the unique information which investors hold.
Securities laws and regulations help to ensure that an investor receives accurate and necessary information related to the type of value of that which they invest in when they make a purchase of securities. Securities laws also ensure that individuals who are insiders and have information regarding securities do not abuse their knowledge of this inside information by making investments based on information which has not yet been made public.
The Securities Act of 1933 is one of the main securities laws and was created for two main reasons, including:
- Requiring investors to receive accurate financial information and other significant information concerning securities being offered for public sale; and
- Prohibiting fraud, deceit, misrepresentation, and other fraud in sale of securities.
What Are Pump and Dump Crimes?
A pump and dump crime is a type of white collar crime which involves stocks and securities. When a pump and dump scheme occurs, a group of individuals may release positive reviews of a company, typically referring to its growth or new innovations.
Following this, the company begins obtaining a reputation as the newest hot stock on the market. In some cases, these positive reviews are false statements or fraudulent reviews. After this occurs, an unsuspecting victim may invest their money in one of these highly-touted securities, which then drives up, or pumps up, the price of the stock.
In certain cases, the creators of the pump and dump scheme may secretly issue shares of stock to themselves. Once the price rises sufficiently high, the scammer will then dump, or sell, the stocks without warning.
This then causes the price of that stock to dive and lose value, causing the investors to lose their interests. Because of the misrepresentation and fraud which occurs related to pump and dump schemes, these types of schemes are illegal and can result in severe legal penalties.
What is Internet Fraud?
Generally, the types of schemes which have victimized investors and consumers for many years prior to the creation of the Internet and e-commerce are now being conducted online. Internet fraud is a term which is used to describe a type of scheme that uses one or more components of the Internet, including:
- Chat rooms;
- E-mail; and
- Message boards.
These internet components are used to do one or more of the following activities:
- To present fraudulent solicitations to prospective victims;
- To conduct fraudulent transactions; and
- To disseminate the proceeds of fraud to financial institutions or to other individuals who are connected with the scheme.
One common form of internet fraud involves market manipulation schemes. The SEC and criminal prosecutors indicate that perpetrators are using two main methods of this type of fraud online, including pump and dump schemes and scalping schemes.
As previously noted, pump and dump schemes use fraudulent or false information in order to cause a dramatic price increase in a thinly traded stock or stocks of a shell company, then immediately selling the holdings to gain substantial profits. Scalping schemes involve the dissemination of fraudulent or false information in an effort to cause a price increase in the stock of a particular company.
How Are Internet Fraud Cases Being Prosecuted?
Because jurisdiction is often a complicated issue in cases which involve e-commerce, the most common place for prosecution has been in the federal court system. Offenders may face punishment under FCC, SEC, and other statutes.
Because of this, perpetrators of these types of schemes may face a wide variety of fines and, in some cases, incarceration in a federal prison.
What Types of Persons Are Targeted as Victims of Such Crimes?
Pump and dump schemes are often used to target certain individuals who are willing to invest their money into these sham stocks. Victims of this type of scheme often includes individuals such as:
- Elderly individuals, such as individuals:
- in retirement homes;
- who have dementia; or
- who have declining mental capacities;
- Individuals with significant amounts of retirement funds;
- Individuals who are on disability or are living off of pensions plans; and
- Individuals who have a mortgage, or who have taken out a second or third mortgage.
In many cases, individuals who are victims of these pump and dump schemes will lose a significant portion of their retirement funds, pension benefits, or loan amounts. Victims of these schemes often have a good faith, honest belief in the securities in which they are investing.
Because of these types of schemes, it is important for individuals to work with professional financial advisers or with an attorney who can assist them with making and maintaining their investments.
What are Some Remedies Regarding Securities Fraud?
An investor may have a variety of options if they want to receive compensation or to punish a company or individual that engages in securities fraud, including:
- Notifying law enforcement. The Justice Department has a long and distinguished history of prosecuting federal securities crimes;
- Bringing a class action lawsuit. When numerous investors are injured by a company’s abuse of insider trading or poor accounting practices, the injured investors can start a class action lawsuit; and
- Contacting the Securities and Exchange Commission (SEC).
What Are the Legal Penalties for Pump and Dump Crimes?
Pump and dump crimes may result in various legal and criminal penalties, which include:
- Misdemeanor charges or felony charges, depending on the extent of the scheme and the amount of money which was involved;
- Criminal fines;
- Jail or prison time; and
- A loss of business licensing; and/or
- Sanctions by governing bodies, such as the SEC.
What Steps Can I Take to Protect My Investments?
Investors can take a variety of steps in order to protect their investments, including:
- Ensuring that the brokerage firm is licensed;
- Checking the Central Registration Depository (CRD), which contains information about brokers and licensing; and
- Staying in contact with the individual’s broker.
How Can I Avoid Pump and Dump Situations?
An individual can avoid becoming a victim of a pump and dump scheme by working with an experienced securities professional, as well as an attorney, if necessary. An individual should attempt to verify any claims on their own as much as possible as well as research any opportunities which the individual may be presented with.
Internet securities fraud may, in some cases, play a role in a pump and dump scheme. It also helps to research the background of a new company prior to investing in it.
Do I Need a Lawyer for Help with Pump and Dump Schemes?
It is essential to have the assistance of a criminal lawyer for any issues, questions, or concerns you may have regarding pump and dump schemes. These types of schemes may take years to unfold.
In some cases, these types of schemes have gone on for many years prior to being discovered. If you or a loved one has been affected by a pump and dump scheme, it is important to contact a lawyer as soon as possible.
Your attorney can review your case and provide you with legal advice and guidance regarding stock regulations. In addition, if you are required to file a lawsuit or attend a court hearing, your attorney can represent you through the process.
