“Laws are meant to be broken.” Hollywood has produced many inspiring movies exemplifying the underdog overcoming unfair laws. We all love cheering for characters overcoming the odds for a righteous purpose. Certainly, it makes for great scripts and has built many entertainers’ careers. Back in the real world, are laws really meant to be broken?
When it comes to securities law, the answer is clearly no! Oddly, even with 80-90 years of securities law and rules, people still feel compelled to break laws. The foundation for the investing industry’s laws and rules were cemented after the roaring ‘20s during the Great Depression. Examination of the 1929 crash determined the wild west nature of the 1920s stock market was a major contributor for what was to come. In response, the foundation of securities law was laid.
The primary foundational elements were the Securities Act of 1933 and the Securities Exchange Act of 1934, both contain segments criminalizing misstatements and securities fraud. Yet to this day, people are brazen enough to execute illicit profits, hurting many investors in the process.
More recently, there has been activity that appears to replicate the good old fashioned “pump-and-dump” scheme. It lures naive investors by portraying mediocre or poor investments as highly profitable or having great future potential. The process has three phases; 1) accumulation, 2) pump and 3) dump.
The first phase is a stealthy accumulation of the targeted “investment.” Phase two hypes the investment with rumor and grandiose assurances, hence the pump. Internet chatrooms and bulletin boards have amplified the hype phase. Phase three is to sell or dump the investment near the high, letting the investment’s price fall as the hype disappears. The net effect of all this activity is the criminal gets rich as the regular folks lose out.
There are areas that the Securities Exchange Commission (SEC) has cautioned. These include internet forums (such as Reddit), trading platforms (such as Robinhood, Coinbase, etc.) and specific categories (such as microcap stocks and cryptocurrencies). To be clear, internet forums and trading platforms are not necessarily the problem, but criminal profiteers tend to utilize these tools.
The SEC is on constant alert for these types of schemes. Unfortunately, the SEC can’t identify and prosecute until the scheme has completed. The SEC can and does offer regular investor warnings of situations that appear to have signs of illegal scams designed to rob general investors of their hard-earned cash. Fortunately, global securities regulators employ diligent observation and aggressive prosecution.
Although illegal schemes are not commonplace, it is important to recognize elements as they unfold. Transparency, awareness and a little skepticism can mitigate your chances of falling victim to this criminal activity. These are attributes we utilize as we evaluate investment options. Please enjoy your weekend rest assured knowing we are always working in your best interest.
Conceptual Chart “Pump and Dump”: https://crimesciencejournal.biomedcentral.com/articles/10.1186/s40163-018-0093-5/figures/1
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