Manipulating a securities price or volume can be considered market manipulation. It is a federal offense to manipulate the market because it undermines public confidence, giving some individuals or companies an unfair advantage over other investors. Unfortunately, market manipulation can sometimes be difficult for investors to see. If you or someone you know has been accused of market manipulation, having an experienced attorney on your team can make a big difference in the outcome of your case. Contact Cofer Luster stock manipulation criminal defense lawyers today by calling us at 682-777-3336 or contacting us through our online form.
How Does Market Manipulation Work?
Market manipulation can occur through intentionally controlling or artificially affecting the price of a security or through interference with the free movement of supply and demand. To be guilty of market manipulation, someone must intentionally deceive or defraud investors by driving the price or volume up or down.
The recent use of Reddit and Twitter to gain information concerning stocks has created issues because the actions drive volume and price up and down based on the information being distributed. However, it may not always constitute market manipulation because people are permitted to share their opinions about trading. Following the recent rise of using social media for trading information, the U.S. Securities and Exchange Commission (SEC) has warned people about trading based on social media and online messaging board posts.
Market Manipulation Techniques
Pump and Dump: The pump and dump schemes are the most common schemes used to manipulate the stock of smaller companies. This scheme is generally used for penny stocks that are traded over the counter because over-the-counter stocks do not have guidelines as strict as securities on larger exchanges such as the Nasdaq. To pump the stock, people will spread misinformation about the stock to create demand and buy many shares at a lower price to show demand. Once the stock price is increased in value, the person who pumped the stock will dump their shares and stop spreading the misinformation, resulting in the price falling. As a result, many investors are left with worthless shares of stock.
Wash Trades: Wash trades are a form of fictitious trading and manipulation of volume. It requires someone to place orders to buy and sell the same amount of shares for the same share price. As a result, there is no change in stock ownership, but it makes it look like there is an increased interest in the stock.
Spoofing: Spoofing is also a form of fictitious trading and manipulation of volume. It requires someone to place many buy and sell orders that will be canceled before they can be executed. Placing large orders and canceling them before they’re filled makes it appear like there is more open interest in the stock than there is, which can entice an investor to trade the stock.
Buying Or Selling The Close: Buying or selling the close is also a manipulation of price and volume because it places large orders for the last few minutes of the day, which can artificially drive up the stock’s price at the end of the day.
Federal Laws Concerning Market Manipulation
The Securities Act of 1934 and the Commodities Exchange Act make the following types of market manipulation federal offenses:
- Fictitious trading: Fictitious trading is used to manipulate the volume of stock being traded and thereby manipulate the price of a stock. Usually, these trades result in minimal risk for the person performing the fictitious trade because there is no change in ownership, and it merely makes it appear that shares are being bought. Examples of fictitious trading include spoofing, wash trades, and buying and selling the close.
- Price manipulation: Price manipulation schemes can occur in many ways, including pumps and dumps. It can also occur with the use of inactive shell companies to conduct fake transactions that do not cause the shares to change ownership.
- Circulation of rumors: The circulation of rumors is usually used in pump-and-dump market manipulation schemes, but it can be sued for other types of market manipulation. For example, knowingly spreading false information to affect a stock is considered market manipulation under federal laws.
Under federal law, anyone who willfully participates in any market manipulation may be liable to anyone who purchases or sells the stock at the affected price. Individuals found guilty of market manipulation can face up to ten years in prison and fines of up to $1,000,000.
Examples Of Market Manipulation
There have been several cases of market manipulation over the years. The following are recent examples where the SEC has brought charges:
- Atlas trading: In December 2022, the SEC brought charges against eight people for their participation in a market manipulation scheme that used Twitter and Discord to manipulate stock prices. The group of individuals allegedly made $100 million by using their platforms to drive up the price of stocks so that they could dump their shares, leaving their followers with less valuable stock.
- Hometown International: In September 2022, the SEC brought charges against three people for their role in manipulating the price of Hometown International shares, which led to an inflated market capitalization of $100 million for a company that allegedly produced less than $40,000 in revenue annually.
- Coscia: Coscia was convicted of using a variation of a pump and dump scheme to manipulate the market. He was ordered to return the $1.4 million he made using market manipulation. In addition, he was ordered to pay an additional $1.4 million as a civil penalty.
The SEC does not take market manipulation lightly and will bring charges against individuals it believes are participating in unlawful trading activity. Being convicted of market manipulation can be extremely devastating mentally and financially. Having an experienced federal defense attorney on your side can make a difference in the outcome of your case.
A Texas Attorney Can Help In Your Market Manipulation Case
Contact a skilled and knowledgeable attorney immediately if you or someone you know is accused of market manipulation. An experienced attorney will review the facts of your case and discuss your legal options with you. Contact Cofer Luster market manipulation criminal defense lawyers today for a confidential consultation and to learn more about your legal options. Call us at 682-777-3336 or contact us by filling out our online form.
