How Does a Market Manipulation Scheme Actually Work?
May 5, 2020
Bad guys can play the market in so many ways, creating elaborate fictions worthy of the grandest literary prizes. These schemes often involve multiple ways to ‘fly below the radar,’ such as utilizing various brokerage accounts, false names, shell companies and the like. In many cases, the thieves craft elaborate ways to add credibility to their false narratives. They create fake websites, press releases and partner with professional experts who can issue formal legal and tax opinions to boost legitimacy. Schemes are growing ever more complex with new players and instruments, including high-frequency traders, crypto-currencies and cross-border stock manipulation. But make no mistake, the SEC is working hard to keep pace.
Between 2016-2019, the SEC received 2100 whistleblower submissions citing marketing manipulation as a primary violation.
Examples of market manipulation schemes
In a sweeping action in 2019, the Commission charged 18 traders in a $31 million market manipulation scheme. In its emergency action, the SEC alleged that the traders generated fake activity and interest in over 3,000 securities by artificially increasing and decreasing the share prices. Fraudsters work hard to hide their misconduct. In this case, as set out in the SEC’s complaint, the traders used dozens of brokerage accounts to enter buy and sell orders.
In a landmark action in 2014, the SEC brought its first case against a high-frequency trading firm for using “gravy,” its code name for a computer algorithm that entered lightning quick trades seconds before the close of trading each day. In so doing, the firm artificially impacted share prices on a vast scale; “gravy” made comprised nearly 70% of trading during the final seconds of trading of these shares during the six-month scheme. While the scheme involved a relatively small trading firm, and at $1 million, a fairly small penalty, the case sent a powerful message to high-frequency trading firms that the SEC is carefully watching when their conduct crosses the line.
In 2013, the SEC charged a Chicago-based biofuel company and numerous individuals involved in a $4.4 million market manipulation scheme. The complex fraud involved the reverse merger of Zenergy International with a publicly traded shell company. With misleading press releases and financial disclosures – even a complicit attorney who issued improper opinion letters—the fraudsters drove up the price of Zenergy’s stock and subsequently dumped their shares for huge profits. Our partner, Timothy Warren, who had oversight of the SEC’s Chicago Regional Office at that time, noted that the “case covers a broad range of parties who were involved in various aspects of a pump-and-dump scheme to make illicit profits at the expense of the investing public.”
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