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Does creating online hype constitute pump and dump fraud?

On Behalf of | May 14, 2024 | Criminal law

Investment fraud comes in a variety of different forms. Some types of investment fraud involve a professional intentionally misleading people, possibly by using funds received by new investors to provide false returns to others on prior investments. That type of fraud is a Ponzi scheme and usually results in later investors losing everything that they pay into an investment fund.

Other forms of investment fraud may occur simply because someone wants to take on new clients or expand their business. The internet has made it easier than ever before for businesses courting investors and financial professionals to communicate with others about what they have to offer.

Could someone who tries to drum up online hype about an investment opportunity face accusations of a pump and dump scheme later?

Pump and dump fraud often begins online

Long gone are the days when people had to slowly develop professional connections to influence the opinions of others. Creating a few fake social media accounts can be enough to create an online furor in some cases.

A few well-timed comments or posts talking about an investment opportunity could draw a lot of attention to a company’s IPO or the existing stock offered by an organization trying to connect with new funding from private investors. A pump and dump scheme specifically involves intentionally manipulating public opinion about a company or investment opportunity.

The goal is to draw attention from others and motivate people to invest. Then, the parties that manipulated public opinion sell their holding during the increase in demand, leaving others with investments of questionable value. The attempt to draw attention to an IPO with guerrilla marketing tactics online does not automatically lead to accusations of pump and dump fraud.

The parties engaging in those marketing efforts typically need to have the intention of misleading investors for their own financial gain. What looks suspicious to regulatory officials or investors who do not receive the returns they want might simply be well-intentioned attempts to help a struggling business secure an influx of capital that could save it during a difficult time.

Those involved in a business’s operations or in charge of securing investments could potentially face white-collar criminal charges if regulatory agencies can credibly claim that they intentionally misled investors with an intent to profit financially from the situation. Defending against financial fraud allegations often requires a careful analysis of the evidence and proving that someone didn’t act with fraudulent intent.