By LawInspectsYes, pump and dump is absolutely illegal in the United States. As a matter of fact, this type of tactic is illegal in most countries around the globe. You must have heard of this type of strategy from somewhere, or the idea of it could have erupted in your head, but the thing is, if you’re going down this path, you should be aware of the serious legal trouble you can get in later down the line.
What’s a Pump and Dump?
It is a widely known scam from a long time ago that a pump and dump is essentially one. To give the idea of it in the simplest words possible, well, it is when an individual or group disseminates completely fabricated or at least greatly misleading information in order to convince people to buy a stock or a cryptocurrency. Because of all the buying, the price skyrockets, hence the “pump.” After that, the fraudsters unload their shares at the high price, hence the “dump.”
The price goes down drastically after these people withdraw their money, and regular investors are stuck with heavy losses. To put it simply, it’s a ploy from the time when the stock market was in its infancy, and presently, it has also penetrated the crypto world.
How Do These Scams Actually Work?
In the past, fraudsters operated pump and dump schemes via “boiler rooms” that involved making cold calls to trick investors into buying low-priced stocks. Now, the majority of the work is done on the internet. Scammers rely on social media, group chats, counterfeit websites, or even influencer accounts to create excitement around a stock or a coin.
In order to hype people up, they could assert that they have “inside info” or invent success stories. As soon as the price increases, they get rid of their products quickly; thus, most people are left with shares or tokens that have no value. Small-cap stocks and newly launched cryptocurrencies are usually the ones to which these kinds of operations are directed because of the simplicity of the manipulation.
Is Pump and Dump Illegal in the U.S.?
Yes, absolutely illegal. According to 18 U.S. Code § 1348, it is, in actuality, a crime punishable at the federal level to trick or exploit investors for personal gain. Just the endeavor of performing a pump and dump without benefiting financially is also regarded as an unlawful act.
If you are caught, you may be sentenced to 25 years in prison at most and be liable for very large fines. Moreover, it is not only the principal perpetrators that this threat concerns, as a matter of fact, any individual who deliberately facilitates the dissemination of false information can also be severely punished.
Real-Life Examples
One of the most famous examples is Stratton Oakmont, the firm that was associated with Jordan Belfort, maybe you got the reference from The Wolf of Wall Street. That was a fun movie, but it is a real story. Like, what they did was to artificially inflate the value of the low-priced stocks, sell them at the high prices, and then the investors were the ones to bear the losses.
For quite a while, the crypto market has been full of stories about “pump groups” on Telegram and Discord doing exactly the same thing: they choose random coins, make a fuss about them, unload their stocks, and then vanish. In fact, the case of Enron, a major corporate scandal, has been found to utilize manipulative tactics of the same kind before its collapse. It sounds a get-rich-quick scheme, which it of course is, but you’ll get in some serious trouble for doing something like that. Keep that one in mind.