A charge of a pump and dump scheme affects individuals and companies working in the financial markets and securities industry. This includes securities firms, banks, asset management companies, brokerage firms, and more.
If you are under investigation for stock manipulations by the Securities and Exchange Commission (“SEC”), the Department of Justice (“DOJ”), or any other federal government agency, it is critical that you understand how the investigatory process is conducted, how it makes its charging decisions, and how it prosecutes or settles its cases.
It is also critical that you are represented by an experienced SEC or federal criminal defense attorney who understands the processes and can strategically protect you through the complex and stressful legal procedure to give you the best possible chance of avoiding civil and criminal charges.
What is a “Pump and Dump Scheme?”
A pump and dump scheme is a misrepresentation, or a market manipulation, conducted by scammers to artificially inflate the price of a security to make a profit.
Securities fraud itself is not a complicated concept but can be particularly difficult to grasp if you lack an understanding of securities regulation.
Generally, securities fraud occurs when someone makes a false or misleading positive statement about a company or the value of its stock, inducing others to make a financial decision based on that false statement.
Pump and Dump Schemes Consist of Two Parts
According to the Securities and Exchange Commission (“SEC”), pump and dump schemes consist of two parts:
- First, stock promoters attempt to boost a stock price by sharing misleading or false statements about the positive performance of an underlying company. These promoters use several methods to spread this false information, including telemarketing, emailing, and social media. The promoters may claim to have imminent inside information on the company and encourage their followers to purchase shares of the stock quickly.
- Second, once the false information inflates the stock price, the promoter will put his own shares of stock on the market, selling them at an artificially high price. This harms investors who purchase these shares because now their stock is at risk to drastically drop in price once it is revealed that the information is false.
Peter owns 40% of a company’s 100,000 shares, which he purchased for ten cents per share, making his original investment $4,000. Peter conspires to inflate the value of the shares by touting the company’s imminent invention that will revolutionize the industry.
Peter promotes this invention through e-mail, telemarketing, and ads on the radio, television, newspapers, and social media. As investors learn about this company’s promoted invention, they are induced to purchase shares of the company in hopes of making money from the company’s expected success.
Peter then begins selling his shares.
- First, he sells 1,000 of his shares at $1 per share or ten times more than he paid for them.
- Then, Peter sells 5,000 shares for $2 per share, then 10,000 shares at $3 each.
- Finally, he sells his remaining 24,000 shares at $4 each. Peter has now sold his 40,000 shares, which he purchased for $4,000, for $137,000. Over time, investors begin to realize the company’s invention was a lie and the share price has drastically decreased.
Microcap Companies and “Over the Counter” Markets
Pump and dump schemes are a form of stock fraud typically involving microcap companies. These are companies with a market capitalization of under $250 million. The majority of microcap stocks are called “penny stocks,” which allow trades at or below $1 per share.
Pump and dump schemes are easily accomplished because penny stocks are generally traded “over the counter” in such markets as the OTC Bulletin Board or the Pink Sheets, as opposed to the major markets such as the NASDAQ or the New York Stock Exchange.
OTCBB and Pink Sheet stocks have fewer regulations and less oversight, and it is easier to manipulate a stock when there is little or no independent information about the company. Some estimates find that pump and dump stock scams account for approximately 20% of all stock-spam e-mail messages.
Pump and dump schemes have been around for many years, but have recently become prevalent through global internet use. Treated as a form of stock fraud, pump and dump schemes are a white-collar crime that is prosecuted by federal authorities and can lead to large fines.
How Are Securities Professionals Put at Risk of Investigation or Prosecution?
Several activities may trigger an investigation into you or your company regarding securities fraud.
Some of those activities include:
- reverse mergers;
- wash trades;
- match trades;
- stock splits;
- misleading press release;
- misleading information on Form 10-K, Form 8-K, or Form 10-Q;
- the unauthorized distribution or sale of company stock;
- significant promotion shortly before a sell-off and decline in stock value;
- the creation of nominee accounts that conceal a share beneficiary’s true identity;
- owning a controlling interest in a company, for which you are the promoter, stock trader, or money manager;
- owning a shell company that owns a controlling interest in a company, for which you are a promoter, stock trader, or money manager;
- companies that provide little or no financial information;
- an unauthorized initial public offering;
- complaints by investors; and
- a whistleblower.
Federal Statutes and Regulations Prohibiting “Pump and Dump Schemes”
There are a variety of laws that make “pump and dump” schemes illegal. These include, among others, the Securities Act of 1933, the Securities Exchange Act of 1934, and 18 U.S. Code Sections 371, 1341, 1343, 1348, and 1349. Each of these laws is explained below.
The Securities Act prohibits anyone involved in selling or offering securities to participate in a scheme to defraud. Section 17(A) is a key anti-fraud provision, which specifically criminalizes making material misstatements, omitting material facts, or otherwise participating in a scheme to obtain money or property by defrauding potential securities purchasers.
A willful violation of any statute concerning securities registration statements or prospectuses required by under the Securities Act of 1933, or any rule or regulation established by the SEC, is a felony offense. Violations carry a penalty of either up to five years in federal prison, up to $10,000, or both.
Securities Exchange Act of 1934
The Security Exchange Act broadly prohibits fraud, material misstatements, or material omissions in connection with the purchase or sale of securities. Section 10b and Rule 10b-5, which are used more widely by investors suing for fraud, closely tracks Section 17(A) of the Securities Act.
It is unlawful for a person to:
- employ any device, scheme, or artifice to defraud;
- make any untrue statement of a material fact or to omit a material fact; and
- engage in any act, practice, or course of business with fraud or deceit upon any person in connection with the purchase or sale of any security.
Violation of the Securities Exchange Act of 1934 can result in fines up to $5 million and up to 20 years in federal prison for a person and $25 million for a corporation.
Fraud and Swindles Through Mail
18 U.S. Code Section 1341 prohibits fraud and swindles, including fraudulent schemes using the postal service. This section targets your or your company’s marketing materials sent via mail.
Fraudulent Schemes Carried Out by Wire, Radio, or Television.
18 U.S. Code Section 1343 criminalizes fraudulent schemes carried out by wire, radio, or television. This also includes your internet marketing or facsimiles. Section 1348 contains the penalties for violations under this title, which include fines or imprisonment up to 25 years, or both.
Attempt and Conspiracy to Commit Securities Fraud
Section 1349 criminalizes anyone who attempts or conspires to commit securities fraud.
“Conspiracy to Defraud”
18 U.S. Code Section 371 prohibits conspiracy by two or more people to commit an offense against or to defraud the United States or its agencies.
If you have been charged with violating Section 371, the prosecution must prove all of the following elements:
- An agreement existed between at least two people to defraud or commit an offense against the U.S.;
- You willfully joined said agreement; and
- You or one of the other co-conspirators committed an overt act meant to further the purpose of the conspiracy.
The prosecution does not have to prove that the conspiracy led to any proprietary or monetary loss by the U.S. government or its agencies.
Penalties for Conviction of Conspiracy
A federal conspiracy conviction carries a sentence of up to five years in federal prison and fines of up to $250,000.
However, in cases of conspiracy by organizations, you can face a fine of up to $500,000.
If the underlying crime of which you are convicted was a misdemeanor, then the punishment cannot exceed the maximum punishment of what the misdemeanor would carry.
Two evidentiary standards are used in federal court.
- Civil Evidentiary Standard. In a civil charge against you, the prosecution must establish the case by a preponderance of the evidence.
- Criminal Evidentiary Standard. In criminal charges, the prosecution must meet a higher evidentiary standard—beyond a reasonable doubt.
Who is in Charge of Securities Fraud Investigations and Prosecutions?
Several governmental agencies and departments are involved in the investigation and prosecution of pump and dump schemes. These include, but are not limited to:
- The Federal Bureau of Investigations (“FBI”);
- The Department of Justice (“DOJ”) – Criminal Division: Fraud Section; the Computer Crimes and Intellectual Property Section; the Office of the United States Attorneys; and the Criminal Division of the Office of International Affairs;
- The President’s Financial Fraud Enforcement Task Force;
- The Security and Exchange Commission (“SEC”);
- Financial Industry Regulatory Authority, Inc – Criminal Prosecution Assistance Group (FINRA CPAG);
- The Internal Revenue Service (“IRS”) – Criminal Investigation Division;
- The United States Postal Inspection Service;
- The Department of Homeland Security (“DHS”) – Investigations;
- The Secretary of State’s Diplomatic Security Service;
- The Treasury Inspector General for Tax Administration; and
- Independent journalists and reporters in the news media, such as CNBC.
Generally, the DOJ’s Criminal Division, the DOJ’s U.S. Attorneys’ Office, the DOJ’s Business and Securities Fraud Section, the SEC, and local and state law enforcement work in collaboration to prosecute securities fraud cases. FINRA also refers hundreds of cases to the SEC and other government agencies each year.
The Investigative Process
Generally, the investigating body, typically the SEC, will try to determine whether or not you engaged in or conspired to engage in a potential pump and dump scheme. The investigation begins with requests for documents, testimony, or both through either issuance of a subpoena or a voluntary request.
Complying with a Subpoena
You are legally obligated to comply with a subpoena, but not for a voluntary request. Once you produce documents, you will then be called for your testimony under oath about the subject matter of the investigation and relevant documents.
After You Provide Testimony
After your testimony and the testimony of witnesses in the investigation, the investigating body will do one of two things. It will either drop its investigation or, if it believes it has enough evidence to prove you violated Federal Securities Laws, it will issue a Wells Notification.
What is a “Wells Notification?”
A Wells Notification is a formal, written notice that it intends to charge you. You have a right to respond to a Wells Notification. At this stage, you can either convince the investigating body to not file charges and settle the matter or, if a settlement cannot be reached, contest the charges in either an SEC administrative proceeding or in federal court.
What are the Penalties of Being Convicted?
Penalties for conspiracy may result in up to five years in prison, up to $250,000 in fines, or both. Penalties for wire fraud may result in up to 20 years in federal prison and up to $250,000 in fines. Penalties for violations of the Securities Act, Securities Exchange Act, and criminal statutes are listed above.
Consequences from an SEC investigation or federal conviction can lead to serious consequences, including the following:
- misdemeanor or felony charges depending on the extent of the scheme and the amount of money involved;
- civil monetary penalties, such as fines;
- loss of professional license;
- forfeiture of criminal proceeds, sometimes known as disgorgement or restitution, including forfeiture of personal and real property (i.e., aircraft, personal vehicles, real estate properties, and funds and securities on deposit at banks and brokerage accounts);
- significant tarnish of personal and corporate reputation; and
- forfeiture of all rights and interests in relevant corporate entities.
This is not an exhaustive list, and typically, the penalties for these crimes are a mixture of all the above.
Defenses Against Charges of a “Pump and Dump” Scheme
Our attorneys can help you strategize your best legal defense against charges of securities fraud and conspiracy.
Your first defense against pump and dump charges is to prove that you did not mislead or lie to investors about a company’s financial position. The truth of a statement can easily be proved by producing company financial statements, company newsletters, and other market trends that led to a good-faith belief the company was a sound investment.
If you have been charged with conspiracy, violating 18 U.S. Code § 371, you can raise certain defenses, including:
- There was no agreement to engage in a conspiracy. Although § 371 does not require an agreement to be made in writing, an experienced attorney can make it difficult for the prosecution to prove the existence of an agreement or that an agreement ever took place.
- You did not willfully join the agreement to engage in the conspiracy. Under the law, a person must intend to agree or intend for the crime to be committed. A forced agreement made under duress or threat is insufficient to convict you.
- There was no overt act meant to further the conspiracy. The law requires that an act in furtherance of the conspiracy was committed knowingly. You cannot be convicted if there was no act made furthering the conspiracy agreement.
Other defenses include:
- Suppression of evidence from searches and discovery produced after court-appointed deadlines;
- Suppression of evidence in violation of the 4th Amendment;
- A right to a Bill of Particulars;
- Severance of trials between co-conspirators; and
- Suppression of prejudicial evidence against you.
“Pump and Dump Schemes” in the News
South Florida Conspirators Plead Guilty to Conspiracy to Commit Securities Fraud in Relation to Pump and Dump Manipulation Scheme
Charge: Conspiracy to Commit Securities Fraud
Allegations: Defendants conspired in $1 million pump and dump securities fraud scheme.
In November of 2013, Mark E. Fisher, Joseph F. Capuozzo, Eddy Ubaldo Marin, Shane R. Spierdowis, and other conspirators arranged a pump and dump scheme using a substantial number of Valentine Beauty, Inc. (“VLBI”) shares.
VLBI was a beauty products supply company in Florida whose shares were publicly traded and quoted over the counter on OTC Link. Marin and other accomplices secretly obtained a controlling interest in VLBI stock by issuing shares to third party companies, which were controlled by Marin and Capuozzo.
Fisher, a former securities lawyer, executed various fraudulent documents to facilitate the scam, including legal opinion letters that falsely disguised ownership of VLBI shares. This allowed shares to be traded freely and sold to the public. In March and April of 2014, Marin, Fisher, Capuozzo, Spierdowis, and other conspirators arranged to transfer a substantial number of VLBI shares to fictitious entities controlled by the conspirators.
From April to September 2014, the conspirators touted VLBI stock in order to increase the trading volume and price of its shares artificially. The conspirators sold approximately $1 million worth of VLBI shares. This conspiracy continued until April 26, 2016, when the SEC suspended trading of VLBI shares.
Fisher and Capuozzo pled guilty in a U.S. District Court in Miami to one count of conspiracy to commit securities fraud. Fisher and Capuozzo are scheduled for sentencing in February and March 2019, respectively.
Connecticut Man Sentenced in Stock “Pump and Dump” Scheme
Charge: Conspiracy to Commit Mail and Wire Fraud
Allegation: Defendants conspired to commit mail and wire fraud in $19 million pump and dump scheme.
Between 2009 and July 2016, Christian Meissenn and six other conspired to defraud investors through a stock “pump and dump” scheme. Meissenn and his co-conspirators induced investors to purchase securities by making false and misleading representations in calls, e-mails, and press releases regarding shell companies, most of which were controlled by Meissenn’s associates. The conspirators then sold those securities at inflated prices, enriching themselves.
As part of the scheme, two attorneys signed false and misleading opinion letters designed to prove assurances to securities transfer agents and prospective investors. The opinion letters falsely certified that the attorneys had adequately reviewed the issuing companies’ records and filings, and were satisfied with the companies’ public disclosures.
The conspirators left investors with worthless and unsaleable stock, resulting in over 12,000 investors collectively losing nearly $19 million.
Meissenn earned approximately $4.4 million through this scheme between 2011 and 2015. He also failed to report this income to the IRS.
Meissenn pleaded guilty on November 8, 2016, to one count of conspiracy to commit mail and wire fraud, and one count of tax evasion. The judge ordered Meissenn pay restitution of $5,301,694 to victims, and another $1,527,834 to the IRS. He was ordered to report to prison on January 10, 2019, for three-month imprisonment due to his serious health condition, followed by three years of supervised release.
Six Defendants Charged in Expanded Securities Fraud Conspiracy
Charge: Conspiracy to Commit Wire Fraud, Wire Fraud
Allegation: Defendants conspired to defraud investors through fraudulent trading practices, evading SEC reporting requirements, and publishing false and misleading information through press releases.
Thomas Massey and Andrew Farmer, along with four other co-conspirators, published false press releases about Chimera Energy in 2011 and 2012 to drive up stock prices. Chimera launched a sham initial public offering, and company executives recruited “straw investors” to give the appearance of a widely distributed ownership when it was actually controlled by Chimera insiders. Massey aided in the promotion of Chimera, touting non-existent licensing deals and breakthroughs in hydraulic fracturing technology. Chimera then hired an advertising firm to promote the company and urged viewers to invest immediately. Massey received $338,000 between June 2011 and December 2012 to further the conspiracy. He pleaded guilty to conspiracy to commit wire fraud and faced up to five years in prison and $1 million in restitution to his victims who bought inflated prices.
In July 2017, three months after Massey’s guilty plea, a federal grand jury in Houston indicted Massey, Farmer, and four other co-conspirators in a superseding indictment, which now alleges an over $25 million scheme involving the stocks of at least twelve different companies between 2011 and 2017.
Two Executives Arrested for Pump and Dump Securities Fraud Scheme
Charge: Conspiracy to Commit Securities Fraud by Manipulating the Price and Trading Volume
Allegation: Defendants conspired and engaged in a pump and dump to defraud the investing public by manipulating the price and volume of a publicly-traded stock.
Between July 2017 and February 2018, defendants Dennis Mancino and William Hirschy, executives of HD View 360, Inc. (“HDVW”), allegedly engaged in a scheme, in which they artificially controlled the price and trading volume of shares in HDVW. The defendants tricked their victims into investing HDVW under false pretenses through weekly press releases. Once HDVW’s stock price increased, the defendants conspired with stockbrokers, who were promised kickbacks by the defendants, to dump the stock by executing manipulative trades. The manipulative trades were designed to increase the price and trading volume, giving the false appearance that HDVW’s stock price had risen as a result of genuine market demand.
Architect of Offshore Fraud Haven and More than 40 Pump and Dump Schemes Sentenced to 6 and 12 Years in Prison, Respectively, for Executing a $250 Million Money Laundering Scheme
Charge: Conspiracy to Manipulate Stock Prices, Conspiracy to Launder Money
Allegation: Defendants used shell companies in Belize and the West Indies to facilitate numerous fraud schemes, including manipulation.
Between January 2009 and September 2014, Robert Bandfield and Gregg R. Mulholland, along with their co-conspirators, engaged in three interrelated schemes:
- The first was to induce U.S. investors to purchase stock in various public companies through the fraudulent promotion of the stock, concealment of the ownership interests, and fraudulent manipulation in those companies’ stocks.
- The second was to circumvent the payment of capital gains taxes and the IRS’s reporting requirements under the Foreign Account Tax Compliance Act (“FATCA”).
- The third was to launder the proceeds from stock manipulation schemes to and from the U.S. through debit cards and attorney escrow accounts. Through these schemes, Bandfield helped his clients launder more than $250 million.
Banfield Facilitated the Schemes
Bandfield and his co-conspirators facilitated these schemes by creating shell companies in Belize and the West Indies. The structure of the shell companies was to disguise the clients’ ownership interest in the stock of U.S. public companies and trading under names through brokerage firms, skirting U.S. securities laws.
In just two months’ time, Mulholland helped increase the stock of Cynk Technology Corp. (“CYNK”) from $0.06 per share to $13.90 per share, a more than $4 billion stock market valuation for a company with no revenue and no assets.
Mulholland then used services from a U.S.-based lawyer to launder the money through five law firm accounts and then transmitting them back to members of Mulholland’s group of co-conspirators. Some clients used unidentifiable debit cards to freely transfer the proceeds back to the U.S.
Bandfield pleaded guilty
Bandfield pleaded guilty to money laundering conspiracy and setting up the elaborate fraudulent structure to manipulate stocks of dozens of U.S. companies. Later, Mulholland pleaded guilty to money laundering conspiracy for fraudulently manipulating the stocks of more than 40 U.S. companies and laundering $250 million in proceeds.
Bandfield was ordered to forfeit $1 million and all his rights and interests to three corporate entities. Mulholland, on the other hand, was ordered to forfeit an aircraft, a Range Rover Defender, two real estate properties in Canada, and the funds and securities on deposit at more than 25 bank and brokerage accounts.
The Financial Fraud Enforcement Task Force
The Financial Fraud Enforcement Task Force was established during the Obama administration to wage an aggressive and coordinated effort to investigate and prosecute financial crimes.
A charge or investigation of securities fraud pits you against the broadest coalition of law enforcement, investigatory, and regulatory agencies, which consists of more than 20 federal agencies, 94 U.S. Attorneys’ offices, and state and local partners.
Between 2010 and 2013, the Justice Department has filed nearly 10,000 financial fraud cases against nearly 15,000 defendants including more than 2,900 mortgage fraud defendants.
This is why you need an experienced securities professional on your side.
Let our attorneys help you fight charges of pump and dump violations. The processes and regulatory requirements are complex, which is why you need an experienced defense attorney committed to preserving your rights and giving you the best chance at a favorable outcome. Ultimately, our goal is to help you establish a legitimate defense. Our lawyers provide the following services:
- Explanation of the law and the charges being brought against you;
- Case assessment, recommendation, and most-likely outcome;
- Preparation of an adequate defense;
- Negotiation and communication with the prosecution;
- Protection of your rights throughout the investigation and discovery process;
- Accompaniment to and representation in all legal proceedings.
If you or someone you know has been charged with securities violations relating to pump and dump schemes, call our attorneys now for a free legal consultation.
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