Securities Fraud - Title 18 U.S. Code § 1348
Securities fraud, especially the serious 'pump and dump' schemes, is a major concern for federal authorities. These schemes, which involve artificially inflating stock prices to sell them at a profit, are taken very seriously and are generally prosecuted under Title 18 U.S. Code 1348.
A pump-and-dump scheme involves intentionally spreading false or misleading information.
This tactic aims to generate a buying frenzy to 'pump' up the stock's price, followed by the 'dump' phase, where the perpetrators sell their shares at the higher price.
Once fraudsters sell off their shares and cease promoting the stock, its price usually drops, causing investors to lose money. These schemes are frequently found online, where messages encouraging rapid buying are widespread.
Promoters often assert they possess "inside" information about upcoming developments that will boost the stock.
Spreading False Information
False or misleading information about a company's stock price can be spread through various sources, including social media, investment research websites, newsletters, online ads, email, chat rooms, direct mail, newspapers, magazines, and radio.
Microcap companies are particularly at risk of pump-and-dump schemes because of the limited publicly available information about them. This highlights the importance of exercising caution when contemplating investments in these companies.
The same fundamental scheme of fraud now takes place through obscure virtual currencies and digital tokens. With the help of mobile messaging apps or online message boards, today's pump-and-dumpers no longer require a boiler room.
Instead, they coordinate anonymously and promote the currencies and tokens via social media.
Pump-and-Dump Groups
Some of these pump-and-dump groups and chat rooms consist of thousands of members. Members subscribe to the group and monitor conversations to know when the next pump-and-dump will happen.
The upcoming post will reveal which coin will be targeted for a pump, along with the exchange platform where the manipulation will take place.
Participating in a pump-and-dump scheme could lead to a sentence of up to 25 years in federal prison if convicted. This harsh penalty highlights the serious consequences of such schemes.
What Exactly Is a Pump and Dump Scheme?
A pump-and-dump scheme is a deceptive tactic involving specific steps. It starts with artificially boosting a stock's price (the 'pump') via false or misleading information.
When the price is sufficiently high, the perpetrators sell their shares (the 'dump'), causing the stock price to plummet and leaving other investors with devalued or worthless stocks.
The "pump" phase typically involves using false or misleading statements to generate hype and attract unsuspecting investors. Such statements may overstate a company's worth, provide incorrect financial projections, or invent news about partnerships or deals.
Once the stock price rises artificially due to manipulated demand, the perpetrators sell their shares, causing the stock to crash and leaving other investors with devalued or worthless stocks.
False News Reports
Some pump-and-dump schemes involve false news reports, often about a well-known tech executive or investor supposedly investing millions into a small, lesser-known virtual currency or coin.
Other false news stories have claimed that major retailers, banks, or credit card companies are planning to partner with various virtual currencies. These fake stories are often shared with posts that generate a false sense of urgency, urging readers to buy immediately.
Once the pump starts, it quickly concludes within minutes. This speed highlights the importance of investors staying alert and identifying these schemes early.
Such pumps and dumps occur in the largely unregulated cash market for virtual currencies and digital tokens, often on platforms that offer numerous coin pairings for trading.
What Does Section 1348 Say?
The full text of 18 U.S. Code 1348 Securities and Commodities Fraud says "Whoever knowingly executes, or attempts to execute, a scheme or artifice-
(1) to defraud any person in connection with any commodity for future delivery, or any option on a commodity for future delivery, or any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l) or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)); or
(2) to obtain, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of any commodity for future delivery, or any option on a commodity for future delivery, or any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l) or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d));
Shall be fined under this title, or imprisoned not more than 25 years, or both."
Breaking Down Section 1348
As noted, Title 18 U.S. Code 1348 bans securities fraud, such as "pump and dump" schemes. These schemes involve artificially boosting a stock's price with false statements and selling before the fraud is uncovered.
Under 18 U.S.C. 1348, such fraudulent schemes involving stocks, securities, and commodities are explicitly illegal.
The law applies to any securities that must adhere to federal reporting rules, including those traded on major exchanges or over-the-counter markets. It also establishes that committing either of the following acts is a federal crime:
- Intentionally deceive individuals or entities regarding stocks, securities, or commodities; or
- Intentionally acquire money or property by making false or fraudulent claims about these financial instruments.
The statute applies to attempts to carry out such schemes, not just completed fraudulent acts. Essentially, you can be charged with a crime for attempting to participate in a pump-and-dump scheme, even if no money was exchanged.
What Must Be Proven to Convict?
To secure a conviction for a pump and dump scheme under Title 18 U.S. Code § 1348, the prosecution must establish several essential elements beyond a reasonable doubt.
- Existence of a scheme to defraud (such as a pump-and-dump scheme): this indicates involvement in or creation of a plan intended to deceive, mislead, or manipulate others related to securities or commodities.
- Misrepresentation or fraudulent intent: The government must prove that you intentionally made false or misleading statements or engaged in deceptive practices to manipulate stock prices for personal gain. (For instance, inaccurate statements alone are not considered fraud.)
It's important to recognize that a conviction does not require actual harm to victims or financial loss. The law considers the execution or attempt to carry out the scheme as enough for a conviction.
What Are the Related Federal Laws?
Chapter 63 of 18 U.S. Code covers mail fraud and other related federal fraud offenses, including the following laws:
- 18 U.S.C. 1341 - Frauds and swindles.
- 18 U.S.C. 1342 - Fictitious name or address.
- 18 U.S.C. 1343 - Fraud by wire, radio, or television.
- 18 U.S.C. 1344 - Bank fraud.
- 18 U.S.C. 1345 - Injunctions against fraud.
- 18 U.S.C. 1346 - Definition of "scheme or artifice to defraud."
- 18 U.S.C. 1347 - Health care fraud.
- 18 U.S.C. 1348 - Securities and commodities fraud.
- 18 U.S.C. 1349 - Attempt and conspiracy.
- 18 U.S.C. 1350 - Failure of corporate officers to certify financial reports.
- 18 U.S.C. 1351 - Fraud in foreign labor contracting.
- 18 U.S.C. 1352 - Demands by foreign officials for bribes.
What are the Penalties for a Conviction?
The penalties for violating 18 U.S.C. 1348 are serious, and a conviction can lead to:
- Fines: The court may issue substantial financial penalties based on the extent of the fraud and the financial damage incurred.
- Imprisonment: Each violation can result in up to 25 years in federal prison.
What are the Available Defenses?
Although defending against pump-and-dump charges can be challenging, a skilled federal criminal defense attorney can implement several viable legal defenses depending on the circumstances of the case. Key defenses are discussed below. :
Fraudulent intent is a key element of the crime. Demonstrating that your actions were unintentional, involved legitimate market activity, or were not related to stock price manipulation can weaken the prosecution's argument.
Your attorney might contend that you did not intentionally make false or misleading statements, or that your statements were made in good faith, believing they were accurate.
If federal investigators or undercover informants persuaded you to commit crimes you wouldn't have otherwise committed, this is considered entrapment and may result in charges being dismissed.
For further assistance, contact Cron, Israels & Stark, a federal criminal defense law firm located in Los Angeles, California.