Investment fraud can prove devastating for those who trust professionals to manage their resources. Some types of investment fraud, such as Ponzi schemes, take advantage of individual investors for the enrichment of the professional operating the scheme. The investment professional defrauding their clients usually maintains a face-to-face relationship with the very people whose investment capital they misappropriate.
Other forms of fraud may not feel as malicious, in part because there is a degree of separation between the people involved in the fraudulent activity and those who fall victim to their conduct. Pump-and-dump schemes are a well-known form of investment fraud. Those trying to capitalize on previously unsuccessful investments by manipulating public perception might be at risk of prosecution if they mislead others to increase the value of their investment holdings.
How a pump-and-dump scheme works
There are many penny stocks and other questionable investments. They may not cost much to obtain initially, but they also offer limited opportunity for a return on the initial investment. In some cases, parties who have acquired stock in small, potentially unsuccessful businesses with minimal prospects decide to create their own luck.
Instead of waiting to see how the company evolves over time, they create artificial excitement about the business online. They make claims about upcoming projects or announcements that could result in a windfall for those who have invested previously. Sharing tips on popular investment forms and in the comment sections of articles talking about the company or other businesses in the same sector is a clever way to draw attention to a little-known business and investment opportunities.
By making exaggerated or outright fabricated claims, those who already invested in the business could inspire numerous others to also invest in the same company. As new people seek to acquire an interest in the company, current investors may see the value of their holdings increase substantially. They can then sell their holdings at a profit despite the company doing little to increase the public value of its stock.
The people drumming up excitement online sell their holdings before people realize that the investment is unlikely to prove profitable due to limited prospects for the business. The outside parties who acquired stock because of the exaggerated or falsified information about the company may then see their holdings slump in value.
In scenarios where regulatory professionals and investigatory agencies can connect questionable claims about investments to specific parties, those involved in spreading inaccurate information could be at risk of investment fraud charges. Pump-and-dump schemes could lead to federal charges because they involve communications infrastructure and people in many different jurisdictions.
Learning more about different scenarios that lead to white-collar criminal charges can help people avoid mistakes that put them at risk of prosecution. Misrepresenting the value of an investment online could potentially lead to allegations of fraudulent conduct even if those making such statements had no direct professional relationship with investors.
