Pump and Dump Schemes: SEC Enforcement Actions.

The SEC’s investigations into pump-and-dump schemes fall under its broader enforcement category for “Market Manipulation.” In a pump-and-dump scheme, deceptive promotions create artificial demand for securities held by the perpetrators of the scheme (or their associates). The insiders then sell their securities holdings, and once the promotional support ends and the insiders’ holdings are gone, the price typically crashes, leaving innocent investors holding a worthless asset. These cases can involve penny stocks, cryptocurrencies, and both domestic and foreign market participants, and they can be coordinated across various markets and jurisdictions.

Along with the SEC’s Office of International Affairs and Enforcement, FINRA, the CFTC, the PCAOB, and the U.S. Attorney’s Office for the Western District of Texas, as well as various other state regulators and federal agencies and prosecutors may conduct related inquiries. Many of these agencies work with the SEC under Joint Task Forces. On September 5, 2025, the SEC announced the formation of a new Cross-Border Task Force. Formed in coordination with the SEC’s Office of International Affairs and International Enforcement, the Cross-Border Task Force focuses on cases involving foreign companies and foreign-based investment advisors as well as cases that cross national borders.

An SEC securities investigation can take several forms. It may start as an inquiry, and it may result in a Wells proceeding. In some cases, it may end in litigation, which can involve a trial and an appeal.

To mitigate the potential for civil remedies, it is imperative to engage counsel immediately. At Spodek Law Group, we have successfully advised numerous companies, individuals, and other clients in the securities industry. Our team of attorneys includes former SEC enforcement attorneys and senior federal prosecutors who understand what regulators look for and what needs to be done to resolve cases favorably.

What must the SEC prove in a pump-and-dump case?

In addition to any alleged fraudulent communications, a pump-and-dump case may involve coordinated purchases designed to artificially amplify the price increase and trading volume. To establish securities law violations in such cases, the SEC may rely on a number of sections of the Securities Act and Securities Exchange Act and Rule 10b-5, and may allege violations involving:

1. Fraud in Connection with the Offer or Sale of Securities

The Securities Act contains substantive prohibitions on fraud and other prohibited acts in connection with the offer or sale of securities. Section 17(a) of the Act provides, “it shall be unlawful . .. to obtain or use, or to attempt to obtain or use, any means or instrument of transportation or communication, or any securities exchange, or any interstate or foreign commerce, . .. with respect to any security, to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person . .. or which . .. would operate as a deception in connection with the offer or sale of any security.”

2. Fraud in Connection with the Purchase or Sale of Securities

The Securities Exchange Act also contains prohibitions on fraud in connection with the purchase or sale of securities. Section 10(b) of the Exchange Act states, “it shall be unlawful . .. to use or employ, in connection with the purchase or sale of any security, any manipulative or deceptive device or contrivance, or any scheme or artifice to defraud.” Rule 10b-5, promulgated under Section 10(b), provides, “It shall be unlawful for any person . .. to: (a) Employ any device, scheme, or artifice to defraud, or engage in any act, practice, or course of business which operates or which would operate as a fraud or deceit upon any person in connection with the purchase or sale of any security; (b) make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, in connection with the purchase or sale of any security; or (c) engage in any act, practice, or course of business which operates or which would operate as a fraud or deceit upon any person in connection with the purchase or sale of any security.”

3. Scienter, Negligence, and Materiality

Securities law cases often involve complex and fact-specific questions regarding scienter (i.e., knowledge or intent). With respect to the conduct of offering and selling securities, establishing scienter is required to demonstrate a violation of Section 17(a)(1) of the Securities Act and Rule 10b-5. When the SEC is seeking to establish liability under Section 17(a)(2) or Section 17(a)(3), it need only prove negligence. An important factor in these cases will also be the materiality of the relevant communications or the significance of the relevant omissions. If information would significantly alter a reasonable investor’s assessment of a company, then it is material.

4. Market Manipulation

Market manipulation generally refers to intentional conduct designed to create an artificial price for a security or artificially inflate the volume of securities traded. The SEC may pursue a variety of claims to pursue charges for market manipulation.

What evidence does the SEC use to prove coordination?

Under Section 21(b) of the Exchange Act, the SEC has broad authority to issue subpoenas for both testimony and documents. This gives them immense power to gather information from individuals and entities, and it plays a central role in its investigations involving pump-and-dump schemes. In these cases, the SEC may rely on various forms of evidence to prove coordination between participants, including:

• Trading records can provide evidence of coordinated purchase and selling activities, similarities in trading timing and volume among co-conspirators, and the profits derived from the scheme.
• Communications, such as emails, text messages, social media posts, and call records, can show promotional coordination, knowledge, intent, and plans to execute the scheme.
• Beneficial-ownership evidence can connect nominee or trust accounts used to conceal ownership or execute trades back to the scheme insiders and other relevant parties.
• Bank and cryptocurrency transaction records can trace payments to promoters, transfers between co-conspirators, and the proceeds of illegal securities sales.
• In cases involving foreign market participants, the SEC may rely on cross-border evidence gathered through mutual legal assistance treaties, letters rogatory, or cooperation from foreign regulators and authorities. This can include requests for information from foreign banks, brokerage firms, and other financial institutions.

Each of these types of evidence can play a crucial role in establishing the SEC’s case. For companies and individuals under investigation, it is imperative to work with experienced securities defense counsel to effectively navigate the investigative process. Our attorneys at Spodek Law Group have significant experience representing clients in SEC investigations and litigations. We have developed a deep understanding of the regulatory landscape and have a proven track record of achieving successful outcomes for our clients.

When can promoters and gatekeepers face SEC liability?

In cases involving pump-and-dump schemes, individuals and companies that acted as promoters or gatekeepers (i.e., individuals who knowingly or recklessly helped execute or cover up the scheme) can also face SEC liability. Examples of potentially liable parties include:

• Compensated Promoters who have promoted securities in violation of Section 17(b) of the Securities Act or engaged in fraud or other activities that warrant civil enforcement.
• Securities traders who have knowingly or recklessly participated in a pump-and-dump scheme as promoters or co-conspirators.
• Corporate executives who have knowingly or recklessly participated in a pump-and-dump scheme as promoters or co-conspirators.
• Stock brokers, investment advisers, brokers, dealers, transfer agents, and other intermediaries who have aided or abetted the scheme.
• Underwriters who have helped facilitate the issuance and sale of securities in connection with the pump-and-dump scheme.
• Auditors and other professionals who have aided or abetted a fraudulent scheme or who have helped facilitate a fraud by certifying false registration statements.
• Companies that have acted as promoters or provided substantial financial support for fraud, market manipulation, or other illegal activities.

1. Compensated Promoters

Section 17(b) of the Securities Act imposes affirmative disclosure requirements on compensated promoters. It states, “it shall be unlawful . .. to publish . .. any communication that describes a security that is the subject of a transaction with a publisher . .. unless the communication also includes, clearly and conspicuously, the following: (1) the nature of the compensation received or to be received by the publisher from the issuer of the security; and (2) the amount of any compensation received or to be received by the publisher in connection with the transaction.”

2. Underwriters and Gatekeepers

3. Others Involving Fraud, Market Manipulation, and Criminal Activity

Along with issuers and insiders, the SEC’s pump-and-dump investigations may also target:

• The promoters and other parties that are alleged to have actively participated in the scheme.
• Registered stock brokers, investment advisers, brokers, dealers, transfer agents, and other intermediaries (including both domestic and foreign intermediaries) that have allegedly aided or abetted the scheme.
• Traders, executives, and other parties that have allegedly actively participated in the scheme.

The SEC’s Cross-Border Task Force also has special authority to conduct investigations into U.S. auditors and underwriters that have helped foreign issuers engage in pump-and-dump schemes and other similar fraudulent schemes.

If any of this describes your situation, it is worth talking it through with counsel. Spodek Law Group can be reached at 212-300-5196.

When can pump-and-dump allegations become a criminal case?

If the SEC finds evidence of securities fraud involving a pump-and-dump scheme, it will refer the case to the U.S. Attorney’s Office or the Department of Justice. In some cases, the SEC and DOJ will conduct parallel investigations; while the SEC’s investigative process focuses on civil liability under the Securities Act, the Exchange Act, and Rule 10b-5, the U.S. Attorney’s Office and DOJ will generally limit their investigative process to focus on criminal liability under the Exchange Act and other federal statutes.

While the SEC pursues civil enforcement to punish fraudulent actors with civil remedies, the U.S. Attorney’s Office and DOJ pursue criminal prosecution to hold individual defendants criminally accountable. The SEC pursues civil claims based on a preponderance of the evidence, meaning a defendant can be held liable in an SEC civil case if it is more likely than not that the defendant committed securities fraud. In contrast, a defendant can only be convicted in a criminal case if the evidence proves criminal liability beyond a reasonable doubt.

Section 78ff(a) of the Exchange Act imposes criminal liability for violations of the Act. It states, “Any person who willfully violates any provision of this title . .. or who willfully violates any rule or regulation made under this title . .. shall be fined not more than $5,000,000 or imprisoned not more than twenty years, or both.” Under Section 78ff(a) of the Exchange Act, criminal liability depends on proof that the defendant acted willfully. This means the defendant either knew that he was violating the law, intended to violate the law, or acted with reckless disregard for the law.

What civil penalties and industry bars can the SEC seek?

The SEC’s investigation process can lead to civil or administrative charges. The SEC can pursue both types of charges in some cases. The SEC can pursue civil claims in a federal district court with the goal of securing a civil injunction. A civil injunction may include disgorgement, prejudgment interest, disgorgement interest, and civil money penalties. The SEC can seek an administrative proceeding (AP) after securing a civil injunction. In an AP, the SEC can seek industry bars.

However, the majority of the SEC’s securities fraud enforcement cases end in settlements before litigation begins. In these cases, the SEC and the relevant party or parties agree to an order or injunction that imposes one or more of the following sanctions:

• Cease-and-desist orders
• Censures
• Civil penalties
• Remedial undertakings

In some cases, a settlement with the SEC may impose sanctions beyond the monetary and injunctive sanctions imposed. In these cases, a settlement can trigger statutory consequences such as:

• Loss of Investment Company Act Section 9(a) status
• Loss of well-known seasoned issuer status
• Statutory bars for continuing or serving as a registered broker, dealer, investment adviser, transfer agent, or other person regulated by the SEC.

1. Disgorgement, Prejudgment Interest, and Disgorgement Interest

The SEC can seek disgorgement, prejudgment interest, and disgorgement interest in federal district court. Disgorgement is a civil remedy that is designed to strip defendants of the unjust profits earned from a fraudulent scheme. The Supreme Court approved the use of disgorgement as a “remedial” measure for which no scienter is required inLiu v. SEC, 591 U.S. 71, 140 S. Ct. 1936 (2020), but the Court only authorized the SEC’s ability to use the form of injunctive relief to seek disgorgement of “net profits,” with disgorgement limited to “the amount that could be returned to the victims.” With that limitation in place, the SEC has been prohibited from seeking disgorgement of gross profits, and it has been prohibited from seeking prejudgment interest and disgorgement interest.

2. Officer-and-Director Bars

Section 21(d)(2) of the Exchange Act authorizes the SEC to seek an officer-and-director bar “in appropriate circumstances, against a defendant who has violated any provision of Section 17(a) or Section 10(b) or Section 14(e) [of the Exchange Act] . . .. This bar prohibits the defendant from serving as an officer or director of a public company.

3. Penny-Stock Bars

The SEC can seek a penny-stock bar that would prohibit the defendant from participating in future penny-stock offerings and from serving as a promoter in penny-stock offerings.

What does an SEC complaint or settlement actually prove?

What does it take to shut down an SEC investigation? If your company, business, or individual are under investigation for a pump-and-dump scheme, what does it take to ensure you do not face enforcement action? What evidence will the SEC use to establish the charges against you? The extent of SEC exposure depends on the specific circumstances, the evidence on hand, and the allegations at issue.

If you or your company is the target of an SEC investigation, there are several ways that the investigation can end before the SEC pursues a case in court or at an SEC administrative hearing. These include:

• Closings without any allegations of misconduct: If the SEC does not find evidence of misconduct, the investigation can end with a closing letter.
• Closings without any charges or action: An SEC investigation may end without a closing letter, and the SEC may issue a no-action decision.
• Wells proceedings: If the SEC finds sufficient evidence of misconduct, the staff may issue a Wells notice, and the target of the SEC’s investigation may file a Wells submission, as a result of which the SEC’s commissioners may issue an order denying a recommendation to pursue enforcement.
• Settlements before litigation: The target of the SEC’s investigation may settle with the SEC before litigation begins, with an SEC settlement which does not involve admitting or denying liability, or with an SEC settlement which does not involve admission or denial of the allegations in an SEC complaint.

If you are considering agreeing to a Wells proceeding or settlement with the SEC, it is imperative that you discuss your options with experienced securities defense counsel. While a Wells proceeding or settlement can sometimes be the best path toward resolving an investigation and avoiding litigation, it can also carry substantial risks. An informed decision is critical.

1. What is a Wells Notice?

A Wells notice is a communication sent to the target of an SEC investigation indicating that the SEC staff has made a preliminary recommendation to pursue enforcement action. A Wells notice is not a confirmation of a Commission decision.

2. What is a Wells Submission?

A Wells submission is a letter responding to a Wells notice. A Wells submission allows defendants the opportunity to present arguments to the Commission and explain why the SEC staff is wrong.

3. Can a Wells Notice Be Used as Evidence?

A Wells notice cannot be used as evidence of liability in a trial. While it can serve as circumstantial evidence of a company’s knowledge and intent, it is not a confirmation of liability.

4. What Happens When I Receive an SEC Enforcement Settlement?

A proposed enforcement settlement requires the approval of the SEC’s commissioners, after which the SEC will issue the final settlement. However, in selected cases involving heightened concerns about issuer accountability, the SEC may require a defendant to admit the specific facts involved in the settlement, and it may require an admission of liability.

5. What Does it Mean to Admit Liability in a Settlement with the SEC?

An admission of liability in an SEC settlement means that the defendant acknowledges responsibility for the alleged misconduct. If the defendant has settled with the SEC without admitting liability, then any statement that refers to the settlement as “the admission of liability” or “the defendant’s confession” is false.

6. What Does a Filed SEC Complaint Prove?

A filed SEC complaint contains unproven allegations against a defendant, and does not prove liability unless the allegations are adjudicated in a trial or a hearing, or if a defendant has admitted to the charges by way of a settlement.

7. If the Court Enters a Consent Judgment, Does that Mean the Defendant Admitted the Truth of the Allegations?

If a defendant and the SEC have settled, a court typically enters a consent judgment that incorporates the terms of the parties’ settlement. However, if the parties’ settlement does not include an admission of liability or an admission of the truth of the allegations in the SEC’s complaint, the consent judgment does not establish the truth of the allegations in the SEC’s complaint.

Can investors recover losses after a pump-and-dump collapse?

If the SEC’s enforcement of a pump-and-dump scheme results in a recovery of funds and/or other assets, the SEC can distribute these assets to harmed investors. Section 308 of the Sarbanes-Oxley Act authorizes the creation of Fair Funds to facilitate this process. In addition to the creation of Fair Funds under Sarbanes-Oxley, courts routinely appoint receivers in securities-fraud cases to preserve and liquidate assets and administer fund distributions. In addition to pursuing recovery of funds for harmed investors, the SEC will often work with the SEC’s Office of International Affairs and International Enforcement to pursue recoveries from foreign defendants as well.

1. Rule 10b-5 Private Causes of Action

In addition to the SEC’s enforcement proceedings, private plaintiffs can seek damages for losses resulting from pump-and-dump schemes under Rule 10b-5. While private plaintiffs who establish liability under Rule 10b-5 are entitled to recover damages and attorney fees, private plaintiffs must generally prove more than just liability in order to recover damages. In particular, most private Rule 10b-5 plaintiffs must prove reliance (i.e., that they relied on the deceptive statements, omission, or other conduct at issue) and loss causation (i.e., that the fraudulent conduct at issue caused the investor’s loss).

The Securities Investor Protection Corporation (SIPC) may protect customers whose cash or securities are missing when a SIPC-member brokerage firm fails, regardless of whether those customers are institutional investors. However, the SIPC program does not reimburse investors for ordinary investment losses that result from a decline in a security’s market price.

2. Securities Fraud Statutes of Limitations and Repose Periods

The U.S. government has a five-year statute of limitations for imposing civil penalties in many cases, including securities-fraud cases (28 U.S.C. § 2462). However, Section 21(d)(8) of the Exchange Act (15 U.S.C. § 78u(d)(8)) extends the federal statute of limitations to ten years with respect to “disgorgement and prejudgment interest obtained pursuant to a final judgment in a civil action brought by the Commission.”

With respect to private plaintiffs who bring claims for securities fraud under Rule 10b-5 and the Securities Act, private plaintiffs must generally file their claims within two years of discovery (i.e., within two years after the investor discovered or should have discovered the alleged misconduct). With respect to the general statute of repose, the majority of private plaintiffs must file within five years of the alleged fraudulent conduct at issue.

Contact a Federal Criminal Defense Attorney

Nothing here is legal advice, and the details of your case matter. Todd Spodek and Spodek Law Group take federal criminal and white collar cases nationwide, from offices in New York, Brooklyn, Queens and Los Angeles. You can reach the firm at 212-300-5196.