What is illegal stock promotion and manipulation?
Illegal stock promotion and manipulation is a type of securities fraud. It is sometimes called a “pump and dump” scam.
This type of fraud involves an investor or group of investors promoting a stock that they hold and then selling their shares after the price goes up because of their endorsement.
How does a pump-and-dump scam work?
Scammers post messages on the internet encouraging investors to buy a stock based on fraudulent insider information. If the scam succeeds, the price of the stock will go up and the scammers will sell their shares. This causes the price to drop rapidly and usually results in the investors losing their money. Scammers running these schemes often target low-value stocks because they do not have to attract a large number of investors to cause the price to go up.
What are the penalties for these scams?
Securities fraud is subject to multiple state and federal regulations. Pump-and-dump scams can result in either misdemeanor or felony charges depending on the seriousness of the crime and the amount of money involved. These charges may result in a variety of penalties:
- Criminal fines
- Loss of business license
- Prison time
- Sanctions by governing bodies, such as the SEC
The courts have ordered some high-profile defendants to pay millions of dollars in fines and restitution in addition to serving prison time.
The serious potential consequences of a conviction for illegal stock promotion and manipulation make it critical for brokers and stock promoters to follow the law when encouraging investors to buy stocks. A conviction for fraudulent activity can cost you your career, your freedom and a lot of money.