Illegal stock market manipulation refers to deceptive or fraudulent activities designed to artificially influence the price or trading volume of securities.
These schemes mislead investors, distort fair market pricing, and violate federal securities laws.
Regulators such as the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) aggressively investigate and prosecute market manipulation because it undermines investor confidence and market integrity.
Your best hope for a favorable outcome is with an experienced California federal criminal defense attorney at Eisner Gorin LLP.
To schedule a consultation, call (818) 781-1570 or contact us here.
Below are some of the most common types of illegal stock market manipulation.
Pump and Dump Schemes
A pump-and-dump scheme occurs when individuals artificially inflate the price of a stock through false or misleading statements and then sell their shares at the inflated price.
How Pump and Dump Works
Typically, fraudsters:
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Spread misleading information about a company
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Promote the stock through newsletters, social media, or spam emails
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Encourage investors to buy shares
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Sell their shares once the price rises
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Leave investors with losses when the price collapses
These schemes are common with low-priced or thinly traded stocks, often referred to as penny stocks.
Spoofing
Spoofing is a manipulation strategy in which traders place large, fake orders to buy or sell securities with no intention of executing them.
The goal is to create the illusion of demand or supply in order to influence other traders and move the market price.
Once the price moves in the desired direction, the manipulator cancels the fake orders and executes legitimate trades to profit from the price change.
Spoofing is illegal under federal law and can lead to both criminal and civil penalties.
Wash Trading
Wash trading occurs when a trader simultaneously buys and sells the same security to create artificial trading activity.
The purpose is to mislead investors into believing there is strong market demand or liquidity for a stock.
This type of manipulation can influence market prices and attract unsuspecting investors.
Wash trading is prohibited under federal securities laws and exchange rules.
Short and Distort
A short and distort scheme is the opposite of pump and dump.
In this scheme, a trader:
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Takes a short position in a stock
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Spreads false negative information about the company
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Causes the stock price to fall
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Profits from the decline
This type of manipulation often involves online forums, social media, or misleading reports.
Insider Trading Manipulation
While insider trading is its own crime, it can also constitute market manipulation when individuals trade based on nonpublic material information.
Insiders may use confidential company information to influence stock prices or coordinate trading strategies that mislead other investors.
These activities violate federal securities laws and can result in significant penalties.
Marking the Close
Marking the close occurs when traders place large orders near the end of the trading day to artificially influence a stock's closing price.
Closing prices are often used to determine:
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Mutual fund valuations
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Index calculations
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Performance reporting
Manipulating the closing price can create misleading impressions about a stock's value.
Cornering the Market
Cornering the market occurs when individuals or groups attempt to control a large share of a security's available supply.
By controlling supply, they can artificially drive up prices and force other traders to buy at inflated prices.
This tactic has historically been used in commodities markets and in securities trading.
Churning
Churning occurs when a broker conducts excessive trading in a client's account primarily to generate commissions rather than to benefit the client.
While churning is typically associated with broker misconduct, it can also distort trading activity and market behavior.
Penalties for Stock Market Manipulation
Illegal market manipulation can result in severe consequences, including:
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Criminal prosecution
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Civil enforcement actions by the SEC
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Large financial penalties
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Disgorgement of profits
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Trading bans
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Prison sentences in serious cases
Federal prosecutors often pursue these cases under securities fraud statutes and other financial crime laws.
Frequently Asked Questions
What is stock market manipulation?
Stock market manipulation involves illegal actions designed to artificially influence the price or trading volume of securities in order to mislead investors or generate unlawful profits.
Is stock manipulation a federal crime?
Yes. Many forms of market manipulation violate federal securities laws and can be prosecuted by the SEC or federal prosecutors.
What are common examples of market manipulation?
Common examples include pump-and-dump schemes, spoofing, wash trading, short-and-distort schemes, and insider trading.
Who investigates stock market manipulation?
Federal agencies such as the SEC and FINRA investigate suspected market manipulation, often working with federal prosecutors and law enforcement.
When to Contact a Securities Fraud Defense Attorney
Allegations of stock market manipulation are complex and often involve extensive financial records, electronic communications, and trading data.
If you are under investigation for securities fraud or market manipulation, consulting with an experienced federal defense attorney can help you understand your legal options and protect your rights.
Eisner Gorin LLP is here to help. Schedule your consultation by calling (818) 781-1570 or using the contact form. Our law firm is based in Los Angeles.
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