Defense of Individuals Accused of “Pump and Dump” Schemes

Pump and dump schemes are deceptive practices in which individuals or groups artificially inflate the price of a security or cryptocurrency, only to sell their shares at the peak, leaving unsuspecting investors with substantial losses. These fraudulent activities can have devastating effects on investors.

The rise of pump and dump schemes is attributable to several factors. First and foremost is the ease of disseminating information in today’s digital age. Social media platforms and online forums have provided an ideal setting for fraudsters to spread false rumors or hype around a particular stock or cryptocurrency. These platforms grant access to a large pool of potential victims who may be easily influenced by seemingly credible sources.

Furthermore, the anonymous nature of online transactions makes it challenging to trace and hold perpetrators accountable. Pump and dump schemes have found a new avenue for exploitation in cryptocurrencies. Cryptocurrency markets, characterized by decentralized exchanges and minimal regulation, offer fertile ground for manipulative practices. In addition to technological advancements facilitating these schemes, investor psychology also plays a crucial role.

Common Strategies to Defend against Pump and Dump Allegations

To defend against pump and dump charges, it is crucial to have an attorney experienced in matters related to the SEC and its rules and regulations. He or she will need to build a strong defense by employing various strategies that focus on research, due diligence, and risk management.

Here are the most common strategies I use to defend against pump and dump allegations and charges:

Lack of Intent

To establish a lack of intent defense in a pump and dump scheme case, the defendant must show that they did not have the intent to deceive or defraud investors. This means that the defendant must show that he believed in the potential of the asset promoted, and that he did not intend to artificially inflate the price of the asset for the purpose of dumping it on investors at a profit.

There are a number of factors that a defendant can point to to support a lack of intent defense.

For example, the following factors could be important if defendant:

Conducted due diligence on the asset promoted and believed in good faith that it was a sound investment.
Made no false or misleading statements about the asset or its prospects.
Disclosed all relevant information about the asset to investors.
Did not profit from the scheme by selling shares of the asset at a high price.

Even if a defendant did make some false or misleading statements about the asset, they may still be able to establish a lack of intent defense if he can show that he believed what he was saying at the time. For example, if a defendant relied on information that he believed to be true, but which turned out to be false, he may not have had the requisite intent to deceive or defraud investors.

The burden of proof is on the prosecution or plaintiff to prove that the defendant had the intent to deceive or defraud investors. If the defendant can raise sufficient doubt about the intent, he may avoid liability.

Here are some examples of evidence that a defendant could use to support a lack of intent defense in a pump and dump scheme case:

Email correspondence in which the defendant expresses the sincere belief in the potential of the asset.
Due diligence reports on the asset.
Financial records showing that the defendant did not profit from the scheme.
Expert testimony on the value of the asset and the defendant’s good faith belief in its potential.

It is important to note that a lack of intent defense is not a guarantee of success. The prosecution or plaintiff may overcome the defense by presenting evidence that the defendant knew or should have known that they were participating in a pump and dump scheme. For example, the prosecution may present evidence that the defendant was involved in similar schemes in the past, or that they were aware of the red flags associated with pump and dump schemes.

Ultimately, the success of a lack of intent defense will depend on the specific facts of the case and the evidence that is presented at trial. Defendants are advised to consult with an experienced attorney to discuss their case and develop a defense strategy.

Mistake of Fact

A mistake of fact defense in a pump and dump scheme case means the defendant must show that she made a mistake about a material fact that was essential to the decision to participate in the scheme. The mistake must have been reasonable.

A material fact is one that would have reasonably influenced or changed the defendant’s decision to participate in the scheme if she had known the truth. For example, if a defendant made false statements about the value of an asset because she mistakenly believed that the asset was worth more than it actually was, the defendant may establish a mistake of fact defense.

The identity of the other participants in a pump and dump scheme can also be a material fact. For example, if a defendant was unaware that other participants in the scheme were planning to dump the asset, they may be able to establish a mistake of fact defense.

The defendant must also show that she acted reasonably in making the mistake. This means that the defendant must have taken steps to try to verify the information upon which she relied. For example, if a defendant was relying on information from a paid promoter, they should have investigated the promoter’s background and track record.

Mistake of fact is an affirmative defense. As such, the burden of proof is on the defendant to prove that she made a mistake of fact. If the defendant can raise sufficient doubt about her intent because of the mistake, she may avoid liability.

The prosecution may be able to overcome the defense by presenting evidence that the defendant was reckless or negligent in making the mistake. For example, the prosecution may present evidence that the defendant failed to perform any due diligence on the asset or the other participants in the scheme.

Success in a mistake of fact defense will depend on the case’s specific facts and the evidence presented at trial. Defendants should consult with experienced attorneys to discuss their cases and develop a defense strategy.

Entrapment

To establish an entrapment defense in a pump and dump scheme case, the defendant must show that law enforcement induced him to participate in the scheme through coercive or persuasive tactics. The defendant must also show that he would not have participated in the scheme without law enforcement’s inducement.

Entrapment tactics often involve the use of undercover agents who pose as legitimate business persons and induce the law abiding individual to commit a crime..

If the defendant can show that law enforcement engaged in coercive or persuasive tactics, and that the defendant would not have participated in the scheme without law enforcement’s inducement, then the defense of entrapment may prove successful.

Here are some examples of evidence that a defendant could use to support an entrapment defense in a pump and dump scheme case:

Recordings or transcripts of conversations between the defendant and law enforcement agents.
Emails or text messages between the defendant and law enforcement agents.
Testimony from witnesses who observed law enforcement agents interacting with the defendant.

It is important to note that the entrapment defense is a very difficult defense to win. It is in the nature of confession and avoidance. The person employing the defense must admit to the conduct. Then, the defendant avoids conviction through the entrapment defense. The defendant must show that law enforcement’s inducement was the primary reason why they participated in the scheme. If the defendant had other motives for participating in the scheme, such as greed or the desire for profit, then the defense will fail. To successfully employ an entrapment defense, it will depend on the case’s specific facts and the evidence presented at trial. A defendant should consult with an experienced attorney to discuss his case and develop a defense strategy.

Here are some additional tips for defending against pump and dump scheme allegations:

Gather all relevant evidence, such as emails, text messages, and financial records.
Work with an experienced attorney who specializes in white collar crime defense.
Be prepared to negotiate a plea deal with the prosecution if necessary.

Statute of Limitations

The statute of limitations is the period of time after a crime is committed within which a defendant may be prosecuted for that crime. The federal statute of limitations for pump and dump schemes is five years. This means that the government must file criminal charges against a defendant within five years of the date on which the crime was committed or the time of the discovery of the criminal conduct. After the expiration of the five years from this date, the government cannot prosecute the defendant for the fraud.

There are a few exceptions to the statute of limitations. For example, the statute of limitations is tolled, or paused, if the defendant is a fugitive or if the government is fraudulently prevented from discovering the crime.

To establish a statute of limitations defense, the defendant must show that the government has failed to file charges within the five-year statute of limitations period. The defendant can do this by showing the date on which the crime was committed and the date on which the government filed charges. Please note that in a conspiracy charge, the calculating of the statute of limitations commences with the last action of the conspiracy. Thus, in matters alleging a conspiracy, actions occurring more than five years before the charging are permissible.

Here are some examples of evidence that a defendant could use to support a statute of limitations defense in a pump and dump scheme case:

Financial records showing the date on which the defendant purchased or sold the asset in question.
Email correspondence or text messages showing the date on which the defendant participated in the scheme.
Testimony from witnesses who can corroborate the date on which the defendant participated in the scheme.

If the defendant can show that the government has failed to file charges within the five-year statute of limitations period, the court should dismiss the charges.

It is important to note that the statute of limitations defense is a very technical defense.

Due Diligence Defense

To establish a due diligence defense in a pump and dump scheme case, the defendant must show that she conducted a reasonable investigation of the asset she was promoting and that she believed in good faith that it was a sound investment.

The scope of a reasonable investigation will vary depending on the case’s specific facts.

However, in general, the defendant should have:

Reviewed the asset’s financial statements and other public filings.
Researched the asset’s management team and industry.
Spoken with other investors and analysts who know the asset.
Consulted with an expert on the asset if necessary.

The defense is predicated upon the defendant believing in good faith that the asset was a sound investment. This means that the defendant must have genuinely believed that the asset was worth the price at which she promoted it. If the defendant had doubts about the asset’s value, she should not have promoted it to investors.

Here are some examples of evidence that a defendant could use to support a due diligence defense in a pump and due diligence scheme case:

Due diligence reports on the asset.
Financial records showing that the defendant invested her own money in the asset.
Expert testimony on the value of the asset.

It is important to note that the due diligence defense is not a guarantee of acquittal. The prosecution may be able to overcome the defense by presenting evidence that the defendant’s due diligence was inadequate or that the defendant did not believe in good faith that the asset was a sound investment.

For example, the prosecution may present evidence that the defendant failed to review the asset’s financial statements or that she ignored red flags that should have put her on notice that the asset was a risky investment. The prosecution may also present evidence that the defendant made false or misleading statements about the asset, even though she knew or should have known that the statements were false.

Ultimately, the success of a due diligence defense will depend on the facts and the evidence presented at trial.

Reliance on Advice Counsel Defense

A reliance on counsel defense in a pump and dump scheme case means the defendant must show that he relied on the advice of an attorney when making decisions about the asset he was promoting, and that the attorney’s advice was reasonable.

The reliance on advice of counsel defense requires that the defendant relied on the attorney’s advice in good faith. This means that the defendant must have genuinely believed that the attorney’s advice was correct and that he was not simply trying to use it as a shield against criminal liability.

The attorney’s advice must also have been reasonable. This means that the attorney must have conducted a reasonable investigation and that the advice was based on a sound legal analysis. If the attorney’s advice was clearly unreasonable, the advice of counsel defense will not apply. Moreover, the use of the advice of counsel defense requires that the defendant provided counsel with full and accurate information on which to base the advice and that the counsel’s advice not be used as a part of the scheme to defraud.

Here are some examples of evidence that a defendant could use to support a reliance on counsel defense in a pump and dump scheme case:

Emails or letters between the defendant and the attorney seeking advice about the asset.
Notes from meetings between the defendant and the attorney.
Attorney’s opinion letters or other legal documents.
Testimony from the attorney about the advice they gave to the defendant.

It is important to note that the reliance on counsel defense is not easy to defend. The prosecution may present evidence that the defendant did not rely on the attorney’s advice in good faith or that the attorney’s advice was clearly unreasonable.

For example, the prosecution may present evidence that the defendant ignored the attorney’s advice or that he failed to disclose relevant information to the attorney. The prosecution may also present evidence that the attorney was involved in the lawful scheme.

The success of a reliance on counsel defense will depend on the specific facts of the case and the evidence that is presented at trial. Moreover, it is a defense that is rarely successful.

Conclusion: A Collective Effort To Combat Securities Fraud

If you have been charged in a pump and dump scheme, the Serafini Law Office can provide you with the best representation possible. Our team will work tirelessly to protect your freedom, rights, and reputation.

Mr. Richard A. Serafini is a federal criminal defense lawyer who has been practicing law for over 40 years. He is a former supervisor in the U.S. Securities and Exchange Commission in the Enforcement Division. With his vast knowledge and experience in securities litigation and securities fraud matters, he is just the person you need to formulate an aggressive defense strategy to help you achieve the best results.

Our law firm offers representation in securities investigations throughout the United States and on a range of legal services to the following cities and states: Miami, Fort Lauderdale, Boca Raton, West Palm Beach, Florida, Pennsylvania, and New York.