Securities Market Manipulation Defense: Responding to Scrutiny from the SEC or DOJ

Securities market manipulation cases can involve a wide range of allegations under multiple federal statutes. As a result, for companies and individuals targeted in these cases, mounting a successful defense starts with understanding the specific allegations at hand. Once you know what you need to defend against, then you can shift your focus to building and executing a targeted defense strategy.

Market manipulation has received renewed attention from the federal government as a result of the rise in popularity in prediction markets. But, while prediction markets involve event contracts that are classified as commodities under federal law, manipulation of the US securities markets remains a significant concern as well.

The Securities and Exchange Commission (SEC) and Department of Justice (DOJ) both pursue enforcement actions in securities market manipulation cases—with the DOJ pursuing civil and criminal charges when warranted. Multiple federal statutes apply, including both securities-specific statutes and general criminal statutes that allow for prosecution in a wide range of circumstances.

What Constitutes Unlawful Manipulation of the Securities Markets?

In federal securities fraud cases, market manipulation can involve any efforts to artificially inflate or deflate the price of a security for the purpose of misleading investors. The US securities markets rely on open access to information and legitimate trading practices that seek to profit from ordinary market forces. As a result, any efforts to interfere with these forces can be deemed manipulative—and can potentially lead to federal criminal charges.

While allegations of securities market manipulation can take many different forms, the DOJ typically prosecutes cases that follow a handful of common patterns. As a result, some of the most common allegations in these cases include:

Bear Raids

Bear raids involve spreading negative rumors or engaging in aggressive short selling in order to artificially deflate the price of a security and profit from the short-term drop in price. This type of trading practice is prohibited under federal law and the SEC’s rules that apply to short selling. When executed with the intent to defraud other investors, it can lead to criminal charges.

Cornering the Market

Cornering the market involves acquiring a sufficient number of an issuer’s securities in order to effectively dictate the price of the issuer’s securities going forward. This is also prohibited under federal law and the SEC’s rules, and it can also lead to criminal charges when federal prosecutors believe that they have evidence of intent to defraud.

Layering and Spoofing

Spoofing involves placing orders in order to manipulate market prices before canceling them, while layering involves placing a large number of buy or sell orders to create a false impression of high market activity in a particular direction. Both are prohibited, and both can expose traders to federal criminal charges that carry substantial fines and prison time.

Pump-and-Dump Schemes

A pump-and-dump scheme is essentially the opposite of a bear raid. Executing a pump-and-dump scheme involves spreading false favorable information about an issuer or security in order to artificially inflate the security’s market price before selling a high volume of shares for profit. Individuals accused of perpetrating pump-and-dump schemes can face serious federal charges as well.  

Wash Trading or Painting the Tape

Wash trading involves selling and repurchasing the same security multiple times in order to create the appearance of market activity—and in turn artificially inflate the security’s market price. Painting the tape is similar, but involves placing successive trades with either increasing or decreasing prices to create the appearance of momentum in a particular direction. Both are prohibited under federal law.

What Federal Laws Prohibit Securities Market Manipulation?

Market manipulation is specifically prohibited under two federal statutes—Section 10(b) of the Securities Exchange Act of 1934 (15 USC Section 78j) and the federal securities fraud statute enacted as part of the Sarbanes-Oxley Act of 2002 (18 USC Section 1348). However, other federal criminal statutes can apply in these cases as well, and facing charges under these other statutes can substantially increase the risks involved.

Common charges in securities market manipulation cases include violations of:

Section 10(b) of the Securities Exchange Act of 1934 (15 USC Section 78j)

Section 10(b) of the Securities Exchange Act of 1934 prohibits “manipulative and deceptive practices” that violate SEC rules. Under SEC Rule 10b-5, it is unlawful to do any of the following in connection with the purchase or sale of a security: (i) “employ any device, scheme, or artifice to defraud;” (ii) “make any untrue statement of a material fact or omit to state a material fact;” or, (iii) “engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.”

Under Section 32 of the Securities Exchange Act of 1934 (15 USC Section 78ff), willful violations of Section 10(b) carry fines of up to 5millionforindividuals(25 million for corporate entities) and up to 20 years of federal prison time.

The Federal Securities Fraud Statute (18 USC Section 1348)

The federal securities fraud statute makes it a criminal offense to knowingly execute or attempt to execute any scheme or artifice to defraud in connection with the purchase or sale of federally regulated securities. This covers essentially all forms of market manipulation. Violations of the federal securities fraud statute carry fines of up to 250,000forindividuals(500,000 for corporate entities) and up to 25 years of federal prison time.

The Federal Wire Fraud Statute (18 USC Section 1343)

The federal wire fraud statute (18 USC Section 1343) makes it a federal offense to use the phone or internet in connection with the execution (or attempted execution) of a fraudulent scheme. Thus, in virtually all cases, securities market manipulation will trigger culpability for wire fraud. Violations of the federal wire fraud statute carry fines of up to 250,000forindividuals(500,000 for corporate entities) and up to 20 years of federal prison time in most cases, though the maximum penalties can increase to a $1 million fine and 30 years of prison time in certain circumstances.

The Federal Money Laundering Statute (18 USC Section 1956)

The federal money laundering statute (18 USC Section 1956) makes it a federal offense to conduct financial transactions that involve the proceeds of “specified unlawful activity,” including all forms of securities fraud. Violations of the federal money laundering statute carry fines of $500,000 or twice the value of the property involved, whichever is greater, and up to 20 years of federal prison time.

The Federal Attempt and Conspiracy Statute (18 USC Section 1349)

Under the federal attempt and conspiracy statute (18 USC Section 1349), “[a]ny person who attempts or conspires to commit any offense under this chapter shall be subject to the same penalties as those prescribed for the offense, the commission of which was the object of the attempt or conspiracy.” The language, “any offense under this chapter,” encompasses securities fraud and wire fraud (among other offenses). The broad language of Section 1349 allows federal prosecutors to pursue charges in a wide range of circumstances in which criminal charges otherwise would not be warranted.

What Are Some Potential Defenses to Securities Market Manipulation Allegations?

While allegations of securities market manipulation can take many different forms (and lead to many different charges), there are also several defenses that can be used in these cases. Keeping in mind that the specific defenses that are available in any particular case will depend on the specific evidence and allegations at hand, some examples of potential defenses include:

• Lack of Knowledge or Willfulness – Charges under the federal securities fraud statute require evidence of knowledge, while charges under Section 32 of the Securities Exchange Act require evidence of willfulness. If prosecutors cannot prove knowledge or willfulness as required, this alone can be enough to avoid criminal culpability.
• Good–Faith Reliance on Professional Advice – If you were relying on the advice of a professional (and were doing so in good faith), this can be sufficient to overcome any allegations of knowledge or willfulness.
• Legitimate Trading Strategy – Legitimate trading strategies that have an impact on the market do not constitute market manipulation. If you can show that you were executing a legitimate trading strategy, this could serve as a complete defense to criminal culpability as well.
• No Actual Market Manipulation – Even if your trading strategy was not legitimate, if it did not actually manipulate the market (or if prosecutors cannot prove that it actually manipulated the market), then you do not deserve to face criminal charges in federal court.
• Insufficient Evidence of Guilt – Regardless of the circumstances at hand, prosecutors must be able to gather sufficient admissible evidence to prove your guilt beyond a reasonable doubt. If prosecutors cannot meet their burden of proof, you are entitled to have your charges dismissed.

Speak with an Experienced Securities Fraud Defense Lawyer at Oberheiden PC

 At Oberheiden PC, we provide experienced legal representation for individuals, companies, and firms accused of securities market manipulation. To speak with one of our senior securities fraud defense lawyers in confidence, call 888-680-1745 or request a free initial consultation online today.