Pump and Dump Schemes | 18 U.S. Code § 1348

Pump and Dump Schemes - 18 U.S.C. § 1348

Securities fraud, particularly the grave offense of 'pump and dump' schemes, is of the utmost concern for federal authorities. These schemes, which involve the deliberate inflation and subsequent sale of stocks, are treated with the utmost seriousness and are typically prosecuted as violations of Title 18 U.S. Code 1348.

At the heart of a pump-and-dump scheme lies the deliberate dissemination of false or misleading information. This misinformation is strategically designed to create a buying frenzy that will 'pump' up the price of a stock, only to be followed by the 'dump' phase, where the perpetrators sell their shares at an inflated price.

Once the fraudsters dump their shares and stop hyping the stock, the stock price typically falls, and investors lose money. These schemes often occur on the Internet, where messages urging readers to buy a stock quickly are common.

Often, promoters claim to have "inside" information about a development that will benefit the stock.

False or misleading information about a company's stock price may be spread through sources, including social media, investment research websites, investment newsletters, online advertisements, email, Internet chat rooms, direct mail, newspapers, magazines, and radio.

Microcap companies are particularly vulnerable to pump-and-dump schemes because there is often limited publicly available information about them. This vulnerability underscores the need for caution when considering investments in such companies.

The same basic fraud is now occurring using little-known virtual currencies and digital coins or tokens. Thanks to mobile messaging apps or Internet message boards, modern pump-and-dumpers don't need a boiler room. They just organize anonymously and hype the currencies and tokens using social media.

Some of these pump-and-dump groups and chat rooms have thousands of members. These members subscribe to the group and follow the conversations, which indicate when the next pump-and-dump will occur.

The next post will announce the coin that will be bid up, followed by the exchange platform where the pump will take place. If you are charged with engaging in a pump-and-dump scheme, you could face up to 25 years in federal prison if convicted. The severity of this penalty underscores the serious nature of these schemes.

What Is a Pump and Dump Scheme?

As noted above, a pump-and-dump scheme is a fraudulent practice that involves a series of calculated steps. It begins with artificially inflating a stock's price (the 'pump') through false or misleading statements.

Once the price is sufficiently inflated, the perpetrators sell off their shares at the higher price (the 'dump'), leaving other investors with devalued or worthless stocks as the price crashes.

The "pump" phase is often achieved through false or misleading statements designed to create hype and attract unsuspecting investors. These statements might exaggerate a company's value, spread inaccurate financial forecasts, or fabricate news of partnerships or deals.

Once the stock price surges due to this artificially generated demand, the perpetrators sell their shares, leaving other investors with devalued or worthless stocks as the price crashes.

Some pumps and dumps use false news reports, typically about a famous high-tech business leader or investor who plans to pour millions of dollars into a small, lesser-known virtual currency or coin.

Other fake news stories have featured major retailers, banks, or credit card companies announcing plans to partner with one virtual currency or another. Links to the phony stories are also accompanied by posts that create false urgency and tell readers to buy now.

Once the pump begins, it's over in minutes. This rapidity underscores the need for investors to be vigilant and recognize these schemes before it's too late.

These pumps and dumps occur in the largely unregulated cash market for virtual currencies and digital tokens and typically on platforms that offer a wide variety of coin pairings for traders to buy and sell.

What Does the Law Say?

The full text of 18 U.S. Code 1348 Securities and Commodities Fraud is listed below.

"Whoever knowingly executes, or attempts to execute, a scheme or artifice-

(1) to defraud any person in connection with any commodity for future delivery, or any option on a commodity for future delivery, or any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l) or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)); or

(2) to obtain, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of any commodity for future delivery, or any option on a commodity for future delivery, or any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l) or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d));

Shall be fined under this title, or imprisoned not more than 25 years, or both."

Overview of 18 U.S.C. 1348

Title 18 U.S. Code 1348 prohibits securities fraud, including 'pump and dump' schemes, which involve artificially inflating a stock's price through false statements and then selling it before the deception is revealed.

Pump and dump schemes meet the criteria for prosecution under 18 U.S.C. 1348, which specifically prohibits fraudulent schemes related to stocks, securities, and commodities.

The law covers any securities required to comply with federal reporting regulations, including those listed on major exchanges or over-the-counter markets. The law makes it a federal crime to do either of the following:

To knowingly defraud individuals or entities in connection with stocks, securities, or commodities; or
To knowingly obtain money or property through false or fraudulent representations related to these financial instruments.

The statute covers attempts to execute such schemes, not only completed acts of fraud. In other words, you can be charged with a crime simply for trying to engage in a pump-and-dump scheme, even if you received no money from it.

Simply put, a pump-and-dump scheme is a type of market manipulation in which individuals or groups artificially inflate the price of a stock by spreading false or misleading information (the 'pump') and then sell their shares at the inflated price before the stock price crashes (the 'dump').

This is done to make a quick profit at the expense of other investors who are unaware of the manipulation.

What are the Elements of the Crime?

To secure a conviction against you for a pump and dump scheme under Title 18 U.S. Code 1348, the prosecution must prove several key elements beyond a reasonable doubt:

Existence of a Scheme to Defraud (Such as a Pump and Dump Scheme). This means you participated in or devised a plan designed to deceive, mislead, or manipulate others in connection with securities or commodities.
Misrepresentation or Fraudulent Intent: The government must establish that you knowingly made false or misleading statements or engaged in deceptive practices with the intent to manipulate stock prices for personal gain. (Incidentally, inaccurate statements do not qualify as fraud, for example.)

It's important to note that actual harm to victims or monetary loss is not necessary for a conviction. Under the law, the mere execution or attempt to execute the scheme is sufficient.

What is an Example?

A group of individuals buys a significant number of shares in a small tech company, then launches a social media campaign falsely claiming the company is about to secure a major partnership.

This misinformation generates excitement and artificially inflates the stock's price (the 'pump'). Once the stock peaks, the perpetrators sell their shares at a profit (the 'dump'), causing the stock value to collapse and leaving other investors at a loss. This scheme could be prosecuted under U.S.C. 1348.

Related Federal Laws

18 U.S. Code Chapter 63, mail fraud and other fraud offenses have several related federal laws, including the following:

18 U.S.C. 1341 - Frauds and swindles.
18 U.S.C. 1342 - Fictitious name or address.
18 U.S.C. 1343 - Fraud by wire, radio, or television.
18 U.S.C. 1344 - Bank fraud.
18 U.S.C. 1345 - Injunctions against fraud.
18 U.S.C. 1346 - Definition of "scheme or artifice to defraud."
18 U.S.C. 1347 - Health care fraud.
18 U.S.C. 1348 - Securities and commodities fraud.
18 U.S.C. 1349 - Attempt and conspiracy.
18 U.S.C. 1350 - Failure of corporate officers to certify financial reports.
18 U.S.C. 1351 - Fraud in foreign labor contracting.
18 U.S.C. 1352 - Demands by foreign officials for bribes.

Penalties for a Conviction

The penalties for violating 18 U.S.C. 1348 are severe. A conviction can result in:

Fines: Depending on the scale of the fraud and the financial harm caused, the court may impose significant financial penalties.
Imprisonment: Defendants face up to 25 years in federal prison for each violation.

Common Defenses Against Accusations

Although defending against pump-and-dump charges can be challenging, a skilled federal criminal defense attorney can implement several viable legal defenses depending on the circumstances of the case. Key defenses might include:

Lack of Intent: Fraudulent intent is a critical crime element. Showing that your alleged actions were unintentional, based on legitimate market activity, or unrelated to manipulating stock prices can undermine the prosecution's case.
Absence of False Statements or Misrepresentations: Your attorney may argue that you did not willfully make false or misleading statements or that the statements you made were based on good faith belief in their accuracy.
Entrapment: If undercover federal investigators or informants induced you to commit criminal actions that you would otherwise not have done, this counts as entrapment, which may result in a dismissal of the charges.

For more information, contact Eisner Gorin LLP, a federal criminal defense law firm based in Los Angeles, California.

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