The U.S. Securities and Exchange Commission and Federal prosecutors are cracking down on “pump and dump” schemes designed to mislead securities regulators and defraud investors. A pump-and-dump scheme is generally understood to be any plan to boost the price of a stock based on false, misleading, or greatly exaggerated statements by individuals with an established position in the company’s stock or their proxies. The perpetrators then sell their positions after the hype has led to an increase in the share price. Essentially, the promoters manufacture a micro bubble by touting the imminent success of a company while concealing their ownership and/or knowledge that their representations are untrue. Once investors pour in, “pumping” the stock price to new highs, the fraudsters sell their established position in the company, “dumping” the stock at its peak. They make a handsome profit, but once the company is unable to follow through on the hype, the microbubble pops and the stock price falls to new lows.
In recently unsealed court filings, the SEC brought a civil complaint against five Canadian citizens who allegedly used a web of offshore entities to buy stocks while hiding their insider ownership and evading securities rules. The group used email promotions and cold calls to inflate the stock price. The Defendants then dumped their shares when the stock was at its peak, siphoning millions of dollars off the new investors. The five defendants "defrauded ordinary investors by misleading them to believe that they were purchasing shares in the ordinary course of the market, when — in reality — the shares being offered were being dumped by company insiders," the SEC said.
Criminal charges have also been levied against one of the defendants who prosecutors say fraudulently took control of a fake clothing company using an alias/alter ego, listed the company for sale on the market and profited from the sale of its shares. The company initially marketed itself as a maker of “anti-aging health and beauty products”. By late 2019 the company had shifted to “wearable tech” selling cold weather clothing but reported no sales according to the criminal complaint. Per prosecutors, the company promoted itself as having “the possibility to manufacture masks at some facilities.” A clear attempt to capitalize on the worldwide shortage of personal protective equipment during the COVID-19 pandemic. However, per the SEC the company has no inventory, revenue, or assets.
The SEC has identified one of the civil defendants as the ringleader who arranged transactions through several shell companies to avoid public registration statements that could have tipped investors off to the shares being dumped by the insiders.
Even during the COVID-19 pandemic, federal regulators are continuing to investigate and enforce rules designed to protect investors and prevent foul play. A federal crackdown on these illegal activities highlights the need for investors to remain vigilant when deciding how to invest their wealth. If you believe you have been defrauded by false promotions related to stock purchases or have been pulled into a “pump-and-dump” scheme, the experienced attorneys at Cosgrove Law Group, LLC available to discuss your situation.
 This commonly occurs through press releases, cold calls, and advice posted on investing message boards. In some instances perpetrators use third party proxies or shell companies to publicize the stock.