Market Manipulation Lawsuit (2024)

Market manipulation refers to the deliberate attempt to interfere with the free and fair operation of the financial markets. This typically involves influencing the price or trading volume of a security (like a company’s stock) through deceptive or misleading tactics such as spreading false information, engaging in “wash trades,” or creating artificial price movements.

Is Market Manipulation Always Illegal?

While there are legitimate strategies in trading and investing that might influence a market’s dynamics, any act intended to deceive or defraud market participants can be considered illegal market manipulation. It’s crucial to distinguish between lawful trading strategies and actions that purposely distort market prices or create false trading activity.

Legal Market Influences

Certain financial strategies are completely legal, even though they might significantly influence market prices and volumes.

Here are some scenarios:

• Large Volume Trades: A large institutional investor like a hedge fund or mutual fund might buy or sell a substantial amount of a company’s stock. This could significantly affect the stock’s price due to the size of the transaction, but it is not considered illegal as the trade is genuine and not intended to deceive the market.
• High Frequency Trading (HFT): Some firms use algorithms and high-speed connections to execute a large number of trades in fractions of a second. This can have substantial impacts on market dynamics, but as long as it’s not being used to create deceptive market conditions, it’s legal.
• Public Announcements: If a company announces major news—such as a merger, a new product, or changes in leadership—it can greatly affect the company’s stock price. As long as the news is accurate and disclosed in a manner consistent with securities regulations, this is perfectly legal.

When Is Market Manipulation Illegal?

Market manipulation becomes illegal when actions are specifically designed to distort the price or trading volume of securities, thus misleading investors and interfering with the fair operation of the market. These practices are illegal because they can cause significant harm to investors, undermine confidence in the markets, and hinder the efficient allocation of resources in the economy.

What Type of Crime Is Market Manipulation?

Market manipulation is a form of white-collar crime. White-collar crimes are non-violent offenses typically committed by business professionals, often involving financial deception or fraud. These crimes are usually investigated by regulatory agencies such as the Securities and Exchange Commission (SEC) in the United States and can result in both civil and criminal penalties.

SEC Investigation Process

An SEC investigation into market manipulation usually begins when the agency detects suspicious trading activity through its market surveillance system or when an insider, investor, or other market participant files a tip or complaint.

• Preliminary Investigation: The SEC starts with an informal inquiry. This can involve analyzing trading records, reviewing public filings, or conducting interviews.
• Formal Investigation: If the SEC determines there’s enough preliminary evidence, it can move to a formal investigation. In this stage, the SEC has the power to issue subpoenas, which compel witnesses to testify or provide documents.
• Findings and Recommendations: The SEC staff analyzes the evidence from the formal investigation. If they find significant evidence of wrongdoing, they prepare a report outlining the violations and recommend enforcement actions to the SEC commissioners.
• Enforcement Actions: If the commissioners agree with the staff’s recommendations, they can authorize various enforcement actions. These can range from fines and disgorgements to injunctions prohibiting future violations or bans from certain types of business activity. The SEC can also refer the case to the Department of Justice for criminal prosecution.

Example of SEC Investigation

Let’s say a small, publicly traded biotech company’s stock price sees a sudden and unusual increase in trading volume and price. An investor, feeling that this spike is suspicious, files a tip with the SEC.

The SEC initiates a preliminary investigation, examining the trading data around the price spike. They find that a small group of traders purchased a large number of shares shortly before the price jump. In public online forums, these same traders had been spreading unfounded rumors about the biotech company’s new drug being on the brink of FDA approval.

With this information, the SEC moves to a formal investigation, issuing subpoenas to the traders to obtain their trading records and communications. They discover that the traders were working in coordination to pump the stock price by spreading false rumors.

After a thorough review, the SEC staff conclude that this is a case of “pump and dump” market manipulation. They recommend severe penalties for the traders, including heavy fines and trading bans. The SEC commissioners agree and authorize the enforcement actions. They also refer the case to the Department of Justice, as the manipulative actions were not just a violation of civil securities law but also a criminal offense.

What Is the Punishment for Market Manipulation?

Penalties for market manipulation can vary widely depending on the nature and severity of the offense, as well as the jurisdiction in which the crime occurred. Potential penalties may include significant fines, disgorgement of profits, trading bans, and imprisonment. For instance, under U.S. federal law, a person convicted of securities fraud (which includes market manipulation) can face up to 25 years in prison and millions of dollars in fines.

Several actions can constitute illegal market manipulation.

Here are some examples:

• Pump and Dump: This involves artificially inflating (pumping) the price of a stock by spreading false or misleading information to attract investors. Once the price has been driven up, the fraudsters sell (dump) their shares at the elevated price. When the truth comes out, the stock price collapses, leaving the deceived investors with significant losses.
• Churning: This is when a trader creates artificial activity in a stock by buying and selling shares to give the impression of high trading volume, attracting other investors. This deceptive activity is illegal as it gives a false impression of interest in the stock.
• Spoofing: This involves placing large buy or sell orders with no intention of executing them, intending to influence the price of the security. These orders are often canceled before they can be filled. This creates a false impression of the demand or supply of the security, misleading other market participants.

In general, if an action is intended to deceive or mislead market participants, creating artificial prices or trading volumes, it’s likely considered illegal market manipulation.

What Should I Do If I Have Been Accused of Illegal Market Manipulation?

If you’ve been accused of illegal market manipulation, it’s essential to consult with a lawyer who handles securities law and white-collar crime cases. Legal counsel can help you understand the charges against you, your rights, and potential defenses.

LegalMatch is a reputable platform where you can find experienced market manipulation lawyers. Once you submit your case on LegalMatch, attorneys who are knowledgeable about market manipulation and securities law will review your information and provide legal advice tailored to your situation. They will assess the evidence against you, analyze applicable laws and regulations, and help you understand the potential consequences you may face.

Don’t wait another moment. The earlier you start to look for legal help, the better your chances of achieving a favorable outcome. Visit LegalMatch today and find the right securities lawyer for your market manipulation case.