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Crypto Pump and Dump Scams: The Growing Market for Crypto Fraud

Dec 20, 2022 Articles

Crypto pump-and-dump schemes are an unfortunate blemish on the investing landscape of the 21st century. With the swell of excitement around cryptocurrency, many investors are eager to participate in the digital currency trend. In 2020, the market for cryptocurrencies generated a $100 trillion trading volume across 7,000 cryptocurrencies. One study showed that pump-and-dump manipulation in cryptocurrency markets distorts prices, on average, by 65%.

Investors should be aware that cryptocurrency is still mired in uncertainty. Regulation is also unclear, and the SEC is still deciding whether coins should be treated as securities. In general, the regulator seems to believe that crypto should be treated as a currency and not a security, but the SEC has fined certain crypto companies following allegations that their coins function as unregistered securities.

Furthermore, crypto’s utility as a currency is currently limited. Due to its lack of regulation, crypto is hugely appealing to fraudsters. Once transferred, it is difficult to recover and trace, making it the ideal currency for scam artists.

As the cryptocurrency market has grown, so has the market for cryptocurrency fraud. In June 2022, The Wall Street Journal reported on the increasing number of cryptocurrency lawsuits brought against crypto promoters. These lawsuits often go after celebrity promoters, and so far, the suits have not had much success.

What is Pump-and-Dump Crypto?

Pump-and-dump schemes are a common type of securities fraud. In a traditional pump and dump, fraudsters tell prospective investors that they are particularly excited about a particular stock – usually a thinly traded penny stock – only for the scammer to sell all their shares once the stock hits a certain price. After the scammers sell their stocks, the price of shares plummets, leaving investors with nothing.

Pump-and-dump cryptocurrency schemes create coins specifically for the purpose of artificially inflating hype around the coin, only to sell once the coin is worth a certain dollar amount. In a typical crypto pump and dump, a group of scammers and paid celebrity promoters will recommend a particular coin to a wide audience, only to sell their coin once it explodes in value. This maneuver is called a “rug pull.”

These types of scams have proliferated on platforms like Telegram and Discord. Users can create their own forums or channels on these platforms, which are free to use. Scammers can use their discord or Telegram channel to lead a coordinated effort to pump the coin’s price. Would-be crypto pumpers might pay a membership fee to join a Discord channel and learn about particular crypto pump-and-dump schemes. The members then go promote a particular coin on social media. The SEC has specifically warned investors about investment schemes promoted on social media. In fact, any online advertisement for a crypto investment should be treated with suspicion.

How to Spot a Crypto Pump-and-Dump

Pump-and-dump crypto schemes have a few basic hallmarks. Potential buyers should be wary of coins with anonymous founders, or founders who have been associated with rug pulls in the past. Experts in the field also urge investors to be cautious with celebrity endorsements. The same goes for obviously generic copy-and-paste messages advertising crypto. Scammers behind such schemes often want to put as little effort as possible into their schemes, seeking simply to cast as wide a net as possible. Rather than swindling high-net-worth investors, they seek out as many ordinary retail investors as possible. Sophisticated investors with a high net worth are also more likely to ask questions and raise reasonable suspicions – major drawbacks for a con artist.

Alleged Celebrity Crypto Pumping

Cryptocurrency pump-and-dump schemes have relied on celebrities to help make their pump a success. A class action complaint accused Kim Kardashian and Floyd Mayweather—among other defendants—of making misleading statements to investors about EthereumMax. In 2021, Kardashian posted on Instagram encouraging her followers to “join the Ethereum Max Community.” The SEC alleges that Kardashian failed to disclose she was paid $250,000 to publish the post. Kardashian agreed to pay $1.26 million to cover the penalties, disgorgement, and interest. She also agreed not to promote any crypto assets for three years. The class action suit against Kardashian, however, has so far failed to recover money for EthereumMax customers.

Stock Broker Misconduct and Cryptocurrency

Stockbrokers have faced FINRA penalties following undisclosed outside cryptocurrency business. Certain financial services companies, like Wells Fargo, have policies that specifically prohibit their brokers from participating in cryptocurrency businesses. In June 2020, a broker consented to a $15,000 fine and an 18-month suspension following allegations that he failed to disclose his outside cryptocurrency business to his firm. Brokers are required to disclose their outside businesses under FINRA Rule 3270, so that firms can evaluate whether the outside business will affect their duties as a stockbroker. If a broker solicited you for an investment in cryptocurrency not offered by their firm, you may have a case for a securities lawyer.

What Should Victims of a Crypto Pump and Dump Do Next?

If you have questions about a potential claim involving a stock broker’s recommendation of a cryptocurrency, contact Kurta Law Firm: (877) 600-0098 or Alternatively, you can contact us via our live chat and provide our team with your contact information.

If you want to report a suspected pump-and-dump scheme, contact the Federal Trade Commission.