Tag: crime

What is Market Manipulation?

The financial market is supposed to be a place where investors put their hard-earned money to work. Market manipulation disrupts the playing field, undermining the integrity of financial systems and causing a great deal of harm to investors. Between 2020 and 2022, the United States recovered $2.7 billion from market manipulation incidents.

What Does Market Manipulation Mean?

The stock market thrives on constant movement as part of a healthy financial ecosystem. However, when someone artificially exploits the supply and demand for securities, the stock market sees a shift in the pricing and value of certain stocks. Market manipulation is an attempt to take advantage of those shifts with insider information, or create false ups and downs to turn a profit. A simple example might be spreading misinformation about a stock in order to cause its price to rise or fall.

How Market Manipulation Works

Market manipulation disrupts the natural flow of supply and demand in a security. For example, a person may attempt to manipulate the stock market in their favor by engaging in a series of transactions designed to make it look like there is a flurry of activity around their stock. This illusion prompts others to buy into such stock, convinced that the company is on the rise because of this artificial energy. This way, the person who began the market manipulation ends up in a better position.

Who Manipulates Stocks?

The stock market is manipulated by any number of bad actors. Investors, company leadership, and anyone who buys and sells securities may attempt to partake in market manipulation.

Why is Market Manipulation Illegal?

If the stock market naturally ebbs and flows, and people are always seeking to profit from it, why is market manipulation illegal?

The answer lies in the importance of honest trading practices and consumer trust. Market manipulation is a method of misleading investors, usually by spreading false information or artificially adjusting prices. Just as you should not sell someone a house by claiming that it has six stories when it is really a shack, similarly you should not manipulate security prices to scam investors.

Who Investigates Market Manipulation?

The US Department of Justice’s Market Integrity and Major Frauds Division (MIMF) investigates claims of securities fraud and market manipulation. The MIMF Division prosecutors can bring criminal charges as well as civil claims for damages against those accused of market manipulation. They utilize data analysis tools and traditional law enforcement techniques to identify and prosecute instances of securities fraud, manipulation, spoofing, insider trading, and more.

How Big Players Manipulate the Stock Market

While more smaller and highly liquid stocks or widely traded securities, are most susceptible to market manipulation, major players can influence the stock market in significant ways. Large financial institutions like Goldman Sachs or Morgan Stanley have a massive hold on how the overall market moves. The 2008 financial crisis is a reminder of how securitization and risky trading of mortgage-backed securities played such a role and led to a ripple effect throughout the market.

Market Manipulation Examples

Stock market manipulation is only limited by the bounds of human ingenuity. Unfortunately, there are a number of ways scam artists attempt to manipulate the market. We have outlined common market manipulation schemes that have emerged over the years:

CRYPTOCURRENCY MARKET MANIPULATION

Although cryptocurrency is less regulated than other investments, it can still be subject to market manipulation. The legal classification of crypto assets as securities is still debatable. However, an August 2023 ruling in Manhattan federal court stated that all cryptocurrencies should be considered securities, regardless of the context in which they are sold. The SEC guidelines on the subject, meanwhile, have hinged on whether or not the particular blockchain is sufficiently decentralized.

The ICO, or Initial Coin Offering, is usually the area where cryptocurrency market manipulation occurs. Crypto is particularly vulnerable to the spread of misinformation on social media, the use of celebrities to artificially inflate an ICO’s value, and pump-and-dump schemes.

HEDGE FUNDS MARKET MANIPULATION

The 2021 GameStop scenario highlighted the upper hand hedge funds often have in the market. In this case, a group of individuals met online and attempted to manipulate the market. Retail investors on Reddit collectively purchased the stock in large quantities after being concerned about the alleged short selling by hedge funds that could devalue GameStop. This surge in buying pressure forced hedge funds to buy back their shares for more money to cover their short sales. However, in the long run, many hedge fund managers profited from the massively increased prices.

FUTURES MARKET MANIPULATION

Attempting to create monopoly power, or “cornering the market” is the primary method of futures market manipulation. This strategy involves a major player artificially creating scarcity in the market by buying up available assets, along with a large stake in a futures contract for delivery at a later date. This is followed by the player refusing to sell at anything except their own price, creating a squeeze on investors who need to buy contracts to fulfill their delivery obligations. Because the futures market hinges upon upcoming deliverables, it forces short sellers to buy contracts at inflated prices from the dominant player.

CROSS-MARKET MANIPULATION

Cross-market manipulation has become more prevalent in recent years, as technology allows trades to happen in real-time and with a higher frequency. Cross-market manipulation is the effort to trade in one venue with the goal of affecting the price of the same security or financial instrument in another market. Cross-market manipulation is also known as inter-trading venue manipulation.

CHURNING MARKET MANIPULATION

Churning is an illegal practice designed to create the illusion of activity and generate commission fees. It involves an excessive amount of trading in a brokerage account solely to generate commissions for the broker from each sale, and not for the client’s benefit.

WHAT IS SPOOFING MARKET MANIPULATION?

Order spoofing, or spoofing, is a method of market manipulation designed to generate interest in a security. One or more players place multiple buy or sell orders on a stock to adjust its price, only to cancel them once other traders accordingly adjust their activities. Thus, the bids are “spoofs,” and therefore, never meant to be followed through.

WHAT IS COORDINATED PRICE MANIPULATION IN THE STOCK MARKET?

Coordinated price manipulation involves agreements between competitors to artificially inflate or deflate stock market prices. For instance, short selling, while legal on its own as a strategy, can cross the line into market manipulation by generating fear around securities to unnaturally lower its price.

WHAT IS LAYERING MARKET MANIPULATION?

Layering is a form of spoofing that involves placing a series of orders designed to be eventually canceled. However, in layering market manipulation efforts, the bids are all placed at different price points, setting the market price somewhere in the middle of the fake trades. This way, the manipulator achieves a better understanding of the market price based on their fake activity, and can trade on the other side of the market to turn in a profit while canceling extraneous offers.

FRONT-RUNNING MARKET MANIPULATION

Front running is often done by an individual broker who has insider information about a future development that will impact stock price. For example, a broker who is ordered to sell a large amount of stock instead goes to their own account before executing the trade and dumps their stock in the same company, now knowing the market price is predicted to plummet. Here, the broker has “run out in front” of natural market fluctuations to illegally sell their stock.

SHORT SELLING MARKET MANIPULATION

Short selling can become market manipulation in the event of cross-market manipulation or coordinated price manipulation.

Naked short selling is the illegal practice of selling shares in an asset before acquiring them, or ensuring that they can in fact be purchased or acquired. The goal here is the same as in usual shorting; however, in short selling, shares must be borrowed before they can be offered to other investors.

PUMP-AND-DUMP SCHEMES

Pump-and-dump schemes typically involve spreading misinformation about a stock in order to “pump up” a frenzy of orders and investments. The perpetrators then “dump” their stocks at the new and artificially inflated price point. The Securities and Exchange Commission (SEC) warns that microcap securities are particularly vulnerable to pump-and-dump schemes because of limited publicly available information.

How Do You Tell if a Stock is Being Manipulated?

Opportunities for market manipulation have become more widespread with mobile trading apps, AI algorithms and bot activity enabling trading to happen in the blink of an eye from anywhere. Traders must examine stock market activity more thoroughly, keeping an eye out for possible warning signs of market manipulation:

  • Unlikely performance compared to company indexes: The stock market cannot tell the full picture of a company’s well-being. It is better to compare market prices against other metrics like revenue, growth potential, and capitalization. When a company’s stock prices remain low even as other signs point to growth, it may be a sign that artificial market activity is at play.
  • Fake news on social media: The spread of bot-led accounts designed to appear like genuine human activity on social media points toward the potential for misinformation. False information often plays a key role in market manipulation and price-adjusting efforts.
  • Flurries of activity: Churning, spoofing, and layering all involve sudden onsets of orders not related to genuine developments. A sudden rush can indicate that a stock is being manipulated. Likewise, a large volume of activity without matching price action can be a warning sign of wash trading.

How Do You Stop Market Manipulation?

Here are some tips to protect yourself from stock market manipulators:

  • Understand your risk appetite and ensure you have an exit strategy for your investments
  • Verify claims that seem too good to be true
  • Avoid excessively large bids or “limited time offers”
  • Review your account activity on a regular basis and report any suspicious activity in your account

SEC MARKET MANIPULATION

The SEC runs the Office of the Whistleblower, which allows whistleblowers to come forward to anonymously report market manipulation. The SEC Office of the Whistleblower has awarded over $1 billion to whistleblowers who have shared information leading to a recovery after a stock market manipulation scheme.

CFTC MARKET MANIPULATION

The Commodity Futures Trading Commission (CFTC) relies heavily on tips and whistleblower information to ensure fair trading practices in the commodity and futures markets. The CFTC Whistleblower Program offers rewards for information as well as protection against retaliation.

How Do You Prove Market Manipulation?

A whistleblower attorney can be your strongest ally to help you gather proof of market manipulation, including:

  • Proof of intent to defraud: Emails, text messages, social media posts, and sworn testimonies to private conversations
  • Refutation of legitimate business purposes: Internal memos, monthly reports, notes from meetings, staff emails, etc. to show that the suspicious activity was not in pursuit of legitimate business purposes
  • Records of trades, monthly account statements, canceled checks, wire transfers, stock transfers, and more: All of these documents can help present a bigger financial picture to illustrate the motive to manipulate market prices

What Are the Consequences of Market Manipulation?

Market manipulation undermines fair and stable markets, and erodes investors’ trust in financial systems. When investors fear manipulation, they may become less confident and willing to invest in diverse portfolios. Market manipulation also creates an uneven playing field, hurting fair competition when scam artists profit at the expense of investors who may lose savings and watch their assets dissolve.

Rewards for Reporting Market Manipulation

You may qualify as a protected whistleblower under the following statutes:

How Are Whistleblowers Protected After Reporting Market Manipulation?

Whistleblowers can anonymously report suspected market manipulation through the SEC Whistleblower Program and have their identity redacted even from Freedom of Information Act (FOIA) requests. Whistleblowers who have been retaliated against by their employers can sue for the following actions:

  • Reinstatement to former seniority level
  • Payment of double back pay, with interest
  • Payment of front pay, in cases where reinstatement is not possible
  • Attorney fees and legal costs
  • Additional damages

Biggest Market Manipulation Cases

New market manipulation cases are constantly coming to light, as whistleblowers step forward to reveal wrongdoings in the stock market. Some of the biggest market manipulation settlements include:

  • $1.186 billion against Glencore International AG: The CFTC ordered Glencore to pay $1.186 billion to settle accusations that the energy and commodities trading firm strategically manipulated at least four US-based S&P Global Platts physical oil benchmarks from 2007 to 2018.
  • $920 million from JP Morgan for spoofing: The 2020 settlement ordered JP Morgan Chase to pay $920.2 million to settle allegations of at least eight years of spoofing in precious metals and US Treasury futures contracts.
  • $249 million from Morgan Stanley and former executive Pawan Passi: In 2024, the SEC charged Morgan Stanley and its former executive Pawan Passi for executing block trades and acting on insider information. The firm agreed to pay $249 million to settle allegations of multi-year wrongdoing.

What is the SEC Doing about Market Manipulation?

The SEC relies on tips from whistleblowers to take out insider trading rings, spoofing attempts, pump-and-dump schemes, and other kinds of market manipulation attempts. If you have information about such tactics, you may be able to take part in the SEC Whistleblower Program. A whistleblower lawyer with Tycko & Zavareei LLP can help make sure your claim is as strong as possible before you bring it to the SEC. Remember, information once reported is no longer eligible for a reward.

Market Manipulation: FAQs

IS MARKET MANIPULATION ILLEGAL?

Yes. While everyone wants to “get ahead” on the stock market, manipulating the market is an illegal activity that can result in criminal penalties like jail time, as well as the imposition of civil fines and damages.

WHAT IS A REAL-LIFE EXAMPLE OF MARKET MANIPULATION?

One of the most notorious examples of market manipulation is the 2001 Enron scandal. When the energy company was found to have altered and misrepresented financial statements to inflate its stock price, it went bankrupt and multiple executives were indicted for the fraud.

WHO DOES MARKET MANIPULATION HURT?

Market manipulation hurts investors who lose money on investments that are either illegitimate or inaccurately represented. At the same time, its negative impact may also be felt throughout the economy, the 2008-2009 Great Recession being a case in point.

WHAT IS THE DIFFERENCE BETWEEN MARKET ABUSE AND MARKET MANIPULATION?

Market manipulation is a specific tactic within the larger issue of market abuse. Market manipulation focuses on artificially controlling prices to secure unearned profit, whereas market abuse encompasses various schemes with the aim of disadvantaging investors for personal gain.

© 2024 by Tycko & Zavareei LLP
For more news on Market Manipulation, visit the NLR Criminal Law & Business Crimes section.

Ankura CTIX FLASH Update – January 3, 2023

Malware Activity

Louisiana’s Largest Medical Complex Discloses Data Breach Associated to October Attack

On December 23rd, 2022, the Lake Charles Memorial Health System (LCMHS) began sending out notifications regarding a newly discovered data breach that is currently impacting approximately 270,000 patients. LCMHS is the largest medical complex in Lake Charles, Louisiana, which contains multiple hospitals and a primary care clinic. The organization discovered unusual activity on their network on October 21, 2022, and determined on October 25, 2022, that an unauthorized actor gained access to the organization’s network as well as “accessed or obtained certain files from [their] systems.” The LCMHS notice listed the following patient information as exposed: patient names, addresses, dates of birth, medical record or patient identification numbers, health insurance information, payment information, limited clinical information regarding received care, and Social Security numbers (SSNs) in limited instances. While LCMHS has yet to confirm the unauthorized actor responsible for the data breach, the Hive ransomware group listed the organization on their data leak site on November 15, 2022, as well as posted files allegedly exfiltrated after breaching the LCMHS network. The posted files contained “bills of materials, cards, contracts, medical info, papers, medical records, scans, residents, and more.” It is not unusual for Hive to claim responsibility for the associated attack as the threat group has previously targeted hospitals/healthcare organizations. CTIX analysts will continue to monitor the Hive ransomware group into 2023 and provide updates on the Lake Charles Memorial Health System data breach as necessary.

Threat Actor Activity

Kimsuky Threat Actors Target South Korean Policy Experts in New Campaign

Threat actors from the North Korean-backed Kimsuky group recently launched a phishing campaign targeting policy experts throughout South Korea. Kimsuky is a well-aged threat organization that has been in operation since 2013, primarily conducting cyber espionage and occasional financially motivated attacks. Aiming their attacks consistently at entities of South Korea, the group often targets academics, think tanks, and organizations relating to inter-Korea relations. In this recent campaign, Kimsuky threat actors distributed spear-phishing emails to several well-known South Korean policy experts. Within these emails, either an embedded website URL or an attachment was present, both executing malicious code to download malware to the compromised machine. One (1) tactic the threat actors utilized was distributing emails through hacked servers, masking the origin IP address(es). In total, of the 300 hacked servers, eighty-seven (87) of them were located throughout North Korea, with the others from around the globe. This type of social engineering attack is not new for the threat group as similar instances have occurred over the past decade. In January 2022, Kimsuky actors mimicked activities of researchers and think tanks in order to harvest intelligence from associated sources. CTIX continues to urge users to validate the integrity of email correspondence prior to visiting any embedded emails or downloading any attachments to lessen the risk of threat actor compromise.

Vulnerabilities

Netgear Patches Critical Vulnerability Leading to Arbitrary Code Execution

Network device manufacturer Netgear has just patched a high-severity vulnerability impacting multiple WiFi router models. The flaw, tracked as CVE-2022-48196, is described as a pre-authentication buffer overflow security vulnerability, which, if exploited, could allow threat actors to carry out a number of malicious activities. These activities include stealing sensitive information, creating Denial-of-Service (DoS) conditions, as well as downloading malware and executing arbitrary code. In past attacks, threat actors have utilized this type of vulnerability as an initial access vector by which they pivot to other parts of the network. Currently, there is very little technical information regarding the vulnerability and Netgear is temporarily withholding the details to allow as many of their users to update their vulnerable devices to the latest secure firmware. Netgear stated that this is a very low-complexity attack, meaning that unsophisticated attackers may be able to successfully exploit a device. CTIX analysts urge Netgear users with any of the vulnerable devices listed in Netgear’s advisory to patch their device immediately.

For more cybersecurity news, click here to visit the National Law Review.

Copyright © 2023 Ankura Consulting Group, LLC. All rights reserved.

When Your Business Partner Uses Company Money to Purchase Assets for Himself, You Have a Remedy – If You Don’t Wait Too Long

Minority owners of closely-held businesses are often shocked to learn what their business partner – usually the majority owner – has been doing with the company’s money.  In some cases, an investigation reveals that your worst suspicions are true, and your partner has actually started a competing company on the side.  But diverting assets and resources can often have results other than an active, competing business.  Sometimes embezzlement is as simple as company funds being used to purchase assets – such as real estate – in which you, of course, have no ownership interest.  This can be done by having the jointly-owned company purchase the land outright, or make the mortgage payments on property your business partner has cut you out of.  Either way, joint money is being used to subsidize your partner’s solo venture.

I have had clients come to me believing that because they do not have an ownership interest in an asset, they cannot possibly have any rights to it, or in it.  But that is not necessarily true.  For example, in New Jersey, if you are a 1/3 owner of a company, and the 2/3 majority owner uses company money to buy real property, you may have an excellent argument that you should be legally recognized as a 1/3 owner of the property, or at least be entitled to 1/3 of any profits or proceeds from it. Similarly, if company monies are used to start a competing company, you may be entitled to be awarded 1/3 ownership of that competing company, or at least damages equaling 1/3 of that company’s profits.

The logic is obvious – 1/3 of the money improperly used effectively belongs to you.  However, many business owners suspect something like this for years but fail to act, usually because they think it’s too late once the money is gone.  If you believe money is unaccounted for in your own company, you are entitled to answers.  If you can’t understand why your business partner is suddenly devoting time to other business ventures, but will not explain to you what he is doing, you are entitled to answers.  If you do a search and learn that your business partner owns real estate, and you can’t understand how he paid for it and want to know if any of your money was used, you are entitled to answers.  You can get those answers in court – but the fact that you are entitled to do so should help you get them without resorting to a disruptive and expensive judicial filing.

When, exactly, you learned of the embezzlement will impact how long you have to take action before it is legally too late.  So if you have suspicions, don’t wait to seek legal advice.  You just may have more rights than you realize.

©2022 Norris McLaughlin P.A., All Rights Reserved
For more content on business law, please visit the NLR White Collar Crime & Consumer Rights section.

SEC Issues Two Whistleblower Awards for Independent Analysis

On February 18, the U.S. Securities and Exchange Commission (SEC) announced two whistleblower awards issued to individuals who provided independent analysis to the SEC which contributed to a successful enforcement action. One whistleblower received an award of $375,000 while the other received $75,000.

According to the award order, the whistleblowers “each voluntarily provided original information to the Commission that was a principal motivating factor in Enforcement staff’s decision to open an investigation.”

Through the SEC Whistleblower Program, qualified whistleblowers, individuals who voluntarily provide original information which leads to a successful enforcement action, are entitled to a monetary award of 10-30% of funds recovered by the government.

A 2020 amendment to the whistleblower program rules established a presumption of a statutory maximum award of 30% in cases where the maximum award would be less than $5 million and where there are no negative factors present. The SEC notes that this presumption did not apply to the two newly awarded whistleblowers. According to the SEC, the first whistleblower unreasonably delayed in reporting their disclosure and the second whistleblower only provided limited assistance.

In the award order, the SEC justifies its decision to grant the first whistleblower a larger award than the second. According to the SEC, the first whistleblower’s disclosure included high quality about an issue which “was the basis for the bulk of the sanctions in the Covered Action” whereas the second whistleblower’s disclosure did not touch on this pivotal issue. Furthermore, the first whistleblower provided significant ongoing assistance to the SEC staff while the second whistleblower did not.

Since issuing its first award in 2012, the SEC has awarded approximately $1.2 billion to 247 individuals. Before blowing the whistle to the SEC, individuals should first consult an experienced SEC whistleblower attorney to ensure they are fully protected under the law and qualify for the largest award possible.

Article By Mary Jane Wilmoth of Kohn, Kohn & Colapinto. Geoff Schweller also contributed to this article.

For more whistleblower and white collar crime legal news, click here to visit the National Law Review.

Copyright Kohn, Kohn & Colapinto, LLP 2022. All Rights Reserved.