Cheating the Algorithm: The New 'Pump and Dump' Fraud
In his Corporate Securities column, John C. Coffee Jr. writes: Old frauds never die. Nor do they fade away. Rather, they mutate and morph into new configurations in response to new opportunities (which new technologies usually create). Thus, the traditional boiler room "pump and dump" scheme was a product of the widespread adoption of the telephone, which allowed high pressure salesman to reach hundreds of gullible customers in a day. Today, an analogous new technological development is inviting new forms of fraud.
July 19, 2017 at 02:01 PM
13 minute read
Old frauds never die. Nor do they fade away. Rather, they mutate and morph into new configurations in response to new opportunities (which new technologies usually create). Thus, the traditional boiler room “pump and dump” scheme was a product of the widespread adoption of the telephone, which allowed high pressure salesman to reach hundreds of gullible customers in a day. Today, an analogous new technological development is inviting new forms of fraud. The new development is algorithmic trading (which by some estimates now accounts for 30 percent of stock trading1). Computers are programmed to trade in a micro-second once they detect certain triggering quantitative data. Obviously, this is how high frequency traders have come to dominate the market.
But can the computer be duped? The answer is: definitely and sometimes easily. A pending SEC litigation shows how the contemporary financial world in its hunt for quantitative “big data” exposes itself to fraudsters. In SEC. v. Lidingo Holdings,2 a pending action in the Southern District of New York, the defendant described itself as a “social media consultant” but the SEC characterized it instead as a “stock promotion firm” that received high fees for commissioning and posting articles (and even tweets) on their client firms, written by a variety of ghost writers that they commissioned and paid. These articles were usually posted under pseudonyms (such as “Trader Maven” or “Swiss Trader”) and appeared on reputable websites, such as Motley Fool, Benzinga, and Seeking Alpha. No attempt seems to have been made to directly contact investors (as in the traditional “pump and dump” scheme), but probably far more investors can be reached today through these web sites. According to the SEC's complaint, this process generated “hundreds of bullish articles about public companies,” without ever disclosing that these articles were “paid promotions.” In one case, the SEC alleges that Lidingo drove up the stock price of Galena Biopharma, a small pharmaceutical company, by some 925 percent.3
This case is not unique, and the SEC has similarly sued more than a dozen companies, recently settling with a Florida-based company, called “The Dream Team Group LLC,” “that charged its clients $25,000 for 90 days of 'social media relations.'”4 Even before these cases, predatory traders focused on algorithm trading through the practice of “spoofing”—that is, submitting thousands of buy or sell orders and then cancelling them before execution. The goal was to induce the algorithms of high frequency traders to submit similar or higher orders with which they could transact. The strategy worked (and it only cheated algorithm traders who could respond in a microsecond). Still, “spoofing” has now been successfully criminally prosecuted,5 which tends to chill its attraction.
This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.
To view this content, please continue to their sites.
Not a Lexis Subscriber?
Subscribe Now
Not a Bloomberg Law Subscriber?
Subscribe Now
NOT FOR REPRINT
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
You Might Like
View AllClass Certification, Cash-Sweep Cases Among Securities Litigation Trends to Watch in 2025
6 minute readTrending Stories
- 1Decision of the Day: Judge Dismisses Defamation Suit by New York Philharmonic Oboist Accused of Sexual Misconduct
- 2California Court Denies Apple's Motion to Strike Allegations in Gender Bias Class Action
- 3US DOJ Threatens to Prosecute Local Officials Who Don't Aid Immigration Enforcement
- 4Kirkland Is Entering a New Market. Will Its Rates Get a Warm Welcome?
- 5African Law Firm Investigated Over ‘AI-Generated’ Case References
Who Got The Work
J. Brugh Lower of Gibbons has entered an appearance for industrial equipment supplier Devco Corporation in a pending trademark infringement lawsuit. The suit, accusing the defendant of selling knock-off Graco products, was filed Dec. 18 in New Jersey District Court by Rivkin Radler on behalf of Graco Inc. and Graco Minnesota. The case, assigned to U.S. District Judge Zahid N. Quraishi, is 3:24-cv-11294, Graco Inc. et al v. Devco Corporation.
Who Got The Work
Rebecca Maller-Stein and Kent A. Yalowitz of Arnold & Porter Kaye Scholer have entered their appearances for Hanaco Venture Capital and its executives, Lior Prosor and David Frankel, in a pending securities lawsuit. The action, filed on Dec. 24 in New York Southern District Court by Zell, Aron & Co. on behalf of Goldeneye Advisors, accuses the defendants of negligently and fraudulently managing the plaintiff's $1 million investment. The case, assigned to U.S. District Judge Vernon S. Broderick, is 1:24-cv-09918, Goldeneye Advisors, LLC v. Hanaco Venture Capital, Ltd. et al.
Who Got The Work
Attorneys from A&O Shearman has stepped in as defense counsel for Toronto-Dominion Bank and other defendants in a pending securities class action. The suit, filed Dec. 11 in New York Southern District Court by Bleichmar Fonti & Auld, accuses the defendants of concealing the bank's 'pervasive' deficiencies in regards to its compliance with the Bank Secrecy Act and the quality of its anti-money laundering controls. The case, assigned to U.S. District Judge Arun Subramanian, is 1:24-cv-09445, Gonzalez v. The Toronto-Dominion Bank et al.
Who Got The Work
Crown Castle International, a Pennsylvania company providing shared communications infrastructure, has turned to Luke D. Wolf of Gordon Rees Scully Mansukhani to fend off a pending breach-of-contract lawsuit. The court action, filed Nov. 25 in Michigan Eastern District Court by Hooper Hathaway PC on behalf of The Town Residences LLC, accuses Crown Castle of failing to transfer approximately $30,000 in utility payments from T-Mobile in breach of a roof-top lease and assignment agreement. The case, assigned to U.S. District Judge Susan K. Declercq, is 2:24-cv-13131, The Town Residences LLC v. T-Mobile US, Inc. et al.
Who Got The Work
Wilfred P. Coronato and Daniel M. Schwartz of McCarter & English have stepped in as defense counsel to Electrolux Home Products Inc. in a pending product liability lawsuit. The court action, filed Nov. 26 in New York Eastern District Court by Poulos Lopiccolo PC and Nagel Rice LLP on behalf of David Stern, alleges that the defendant's refrigerators’ drawers and shelving repeatedly break and fall apart within months after purchase. The case, assigned to U.S. District Judge Joan M. Azrack, is 2:24-cv-08204, Stern v. Electrolux Home Products, Inc.
Featured Firms
Law Offices of Gary Martin Hays & Associates, P.C.
(470) 294-1674
Law Offices of Mark E. Salomone
(857) 444-6468
Smith & Hassler
(713) 739-1250