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.[1] The
perpetrators then sell their positions after the hype has led to an increase in
the share price.[2]
Essentially, the promoters manufacture a micro bubble by touting[3] 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.[4] 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.
[2] Id.
[3] 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.
No comments:
Post a Comment