Market Manipulation
Often falling under the term “securities fraud,” market manipulation refers to the artificially raising or lowering the price of stock on any security. Market manipulation generally involves a series of stock transactions that artificially inflate or reduce the price of a stock or security. It can also involve misleading behavior in the purchase or sale of securities or making false or misleading statements in the sale of securities.
“Pump and dump” schemes are one of the most common market manipulation schemes. Pump and dump is an attempt to increase stock prices through misleading, false or exaggerated claims as to stock performance or value. Typical defendants usually own a large amount of the company’s stock and they sell their shares once the buzz on the street has led to a higher share value.
Market manipulation schemes can occur on any of the national securities exchanges, but they are most common in the Over the Counter (OTC) marketplace. Pump and dump schemes usually target penny stocks, which are commonly the easiest security to manipulate. Due to the small number of shares that are available in this context, it does not require many new buyers to inflate the price of this security.
Securities fraud is not only a crime under California state law, it is also a federal crime. Therefore, if you are charged with securities fraud in California, you may also face federal charges. Some examples of federal offenses are: Federal SEC 10b-5, and Section (16)(b). The former makes it illegal to use interstate commerce in any fraudulent scheme in connection with the purchase or sale of a security. The latter rule is an anti-speculation rule that provides for recovery by the corporation of profits the insiders gained from trading the corporation’s stock. The rule, similar to strict liability, is that any profit realized by a director, officer or shareholder owning 10% or more of the outstanding shares of the corporation from any purchase or sale, or sale and purchase, within a period of less than six months, must be returned to the corporation.
The Securities and Exchange Commission (SEC) leads in conducting primary securities violations investigations. The federal Department of Justice will then get involved if criminal charges will be filed.
Federal penalties for securities fraud are much harsher than those under California law. If convicted, the defendant may face fines of $10,000 or more and up to 25 years in federal prison. Restitution typically goes hand in hand with this category of crimes.
In addition to these criminal charges, the defendant may have to defend against a civil lawsuit against the alleged victims of the fraud.
Computer hacking or computer intrusion is another method used in market manipulation schemes. Experienced and technically advanced individuals hack into an individual’s online brokerage account (which typically has advanced security features) to prompt the accounts to purchase a specific security to artificially inflate the price. Like traditional pump and dump schemes, once the value of the security rises to a certain level, perpetrators sell their own shares for a profit.
Examples of Defenses Against Market Manipulation
Securities fraud cases usually involve complicated and sophisticated business transactions. For this reason, people often get caught up in them because of something they did only accidentally or negligently. The California Corporate Securities Law of 1968 requires that the conduct be done ‘willfully.’ This means that the defendant has to have known what he was doing and acted on purpose. If the state can’t show that that’s true, then we can help you have the charges reduced or dismissed.
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