As the name implies, market manipulation is when someone deliberately attempts to interfere with the market. Generally, the intent is to deceive investors and reap profits from the act. This undermines public confidence to invest in the stock market. For those who choose to invest, they are placed in an unfair advantage.
Common Practices of Market Manipulation
Essentially, market manipulation occurs whenever companies or individuals decide to:
• Create a false demand for a security by distorting trades or prices
• Use inside information that is not available to the public to make stock trades; commonly known as insider trading
• Limit the number of available shares in a stock to the public
• Spread information about a company that is misleading or completely false
When is Market Manipulation Legal?
Not all actions of market manipulation is illegal, resulting in a securities violation. Actually, many organizations and groups participate in market manipulation. When the federal government engages in market manipulations, it is called intervention. The purpose for this “intervention” is to keep interest rates low and influence the value of the U.S. dollar.
The quality of information disseminated by groups who manipulate the market separates legal activities from illegal activities. As long as certain groups or individuals make truthful and accurate information available to the general public, no laws have been violated.
An example is when a group of investors decide to buy shares of a company that appears to have growth potential and a low stock price. After the purchase, the group may begin actively advertising the company with truthful information about the company in an attempt to encourage other investors to also buy stock.
Once interest causes the price of the stock to increase significantly, the original group of investors will sell its stock shares and pull a profit. Eventually, the stock price will hit a peak that will not be sustained long. When this occurs, the price will begin to decrease naturally once investors’ interest in the company recedes. Basically, this is the legal way bull and bear markets function.
When Is Market Manipulation Illegal?
Illegal market manipulation occurs when a group of investors or one investor spread untruthful information about a company. Falsely misrepresenting the company just to drive its stock prices up or down with the intent to increase the investor’s gain is against the law.
When market manipulation occurs, regulators will bring civil cases that bring about monetary penalties, but not jail time. A lower burden of proof exists in civil cases, which is why they are a common tool for illegally manipulating the market. Therefore, the courts could require that you pay a large sum of money even if your involvement was not proven beyond a reasonable doubt.
Proving a criminal case is much more difficult, even though there are different laws that could be used to prosecute an alleged market manipulation scheme. For example, 7 U.S. Code Section 13 (Violations generally; punishment; costs of prosecution) makes manipulating the market a felony that is punishable with up to 10 years in prison and a fine up to $1,000,000.
Factors That Can Affect Defenses against a Market Manipulation Charge
To avoid a conviction that leads to prison time and a hefty fine, your lawyer may discuss different criminal defenses that may work for your case. However, certain factors can impact any defense you present.
• Whether your intent was to persuade others to trade the stock when they would not have if given accurate information.
• Whether your intent was to create market conditions that were misleading.
• Your ability to manage risks associated with fully executed orders.
• You did not make sure there was a safe harbor for the duration of the order being exposed to the market to show it was not a disruptive trade practice.
• You continued to permit participants to make changes or cancel orders with the intent to enter a genuine transaction when the order was originally submitted.
What to do if You are Facing Illegal Market Manipulation Charges
If you have been accused of illegal market manipulation, you should call a criminal defense lawyer from Raiser & Kenniff, PC, who specializes in this area of the law. He or she will advise you of your rights to defend against these charges. Your lawyer will also highlight possible defenses as he or she guides you through the complex criminal justice system.
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