SECURITIES FRAUD: PUMP-AND-DUMP SCHEMES IN CRYPTO SPACE

Pump-and-dump schemes are an old, well-known securities fraud phenomenon in the financial markets. With cryptocurrencies, this illicit scheme has found a new playground to thrive. The pseudonymity of the crypto-space has made it a fertile ground for cybercriminals and their unlawful activities. With hundreds of new coins and tokens produced via ICOs, pump-and-dump schemes have risen in popularity in cryptocurrency markets. In this context, social media groups on Telegram, Reddit or Facebook developed into a sort of next-generation boiler rooms.


Reports on Pump-and-Dump in Crypto

Jiahua XU and Benjamin LIVSHITS at Imperial College London studied pump-and-dump schemes in cryptocurrency markets and published a detailed report on this subject. They traced more than 300 Telegram channels from July to November 2018 and identified 220 pump events orchestrated through those channels. The study analyzes features of pumped tokens and market movement of tokens before, during, and after pump-and-dump. In a detailed report, they published their results.

Already in August 2018, the Wall Street Journal found that cryptocurrency price manipulation was largely conducted by organized “trading groups” using services such as Telegram. The WSJ suggested that in the first six months of 2018 alone, those trading groups generated illicit revenues of $825 million.

The Anatomy of a Pump

A pump is a coordinated, intentional, short-term event orchestrated in the demand of a market instrument. It’s a form of securities fraud. Thanks to encryption and anonymity market movement by chat applications such as Telegram, various forms of misconduct in cryptocurrency trading is burgeoning on those platforms. A pump organizer,  an individual or an organized group, typically deploys those social media tools to coordinate pump events. Those pump organizers create Telegram channels and recruit as many members as possible by advertising their channel in Bitcointalk, Reddit, Steemit, or Facebook.

  1. Time and Exchange announced: The pump organizers (the channel admin) announces details of the next pump a few days ahead. The admins broadcast the exact time and date of the announcement of a coin to pump. The admins advise their members to deposit sufficient funds those crypto-exchanges were the pump will be performed.
  2. Target token announced: At the pre-arranged pump time, the channel admin discloses the target coin, i.e. the coin to pump. The admin urges the channel members to buy and hold the coin.
  3. The Pump: A few seconds or minutes after the pump starts, the coin price will reach its peak while the admin guys sell their coins into the pump.
  4. The Dump: Other channel members follow to sell their coins and finally the coin price declines to the pre-pump level.

It is generally known to the participants that admins benefit the most from a pump. Nevertheless, they participate in the pump hoping that they might get their share and other fools will take the loss.

According to the study, Telegram channels are the primary medium for pump-and-dump activity and announcements. The focus of these schemes is junk tokens with no project and/or community behind them to back it. Shit tokens with low trading volumes and a low market capitalization can be easily manipulated. Typically, those boiler room groups have thousands of members:

  • BigPumpGroup: 27,000 members
  • Binance Pump Signal: 19,700 members
  • Official McAfee Pump Signals: 12,550 members
  • Signal Express: 12,350 members
  • Safe  Bunker Signal: 4,700 members
  • Yobit Pumps: 4,000 members

Some pump groups such as the BigPumpGroup entertain their own websites counting down to the next pump. This securities fraud is done in the public and seems to be accepted by a large part of the crypto community.

Participating Exchanges

The study found that some exchanges directly associated with these pump-and-dump exercises. Yobit, for example, has organized pumps multiple times via Twitter and Telegram:

These exchanges benefit from transaction fees and front-running in the illicit pump activities. The 220 pump-and-dump activities identified by the study took place on the following exchanges:

  • 148 or 67% in Cryptopia (New Zealand), and
  • 40 or 18% in Yobit (Russia).
  • 24 or 11% in Binance (China)
  • 8 or 4% in Bittrex (U.S.)

According to the study, pump-and-dump-schemes substantially contributed to the exchanges’ trading volumes. They account for about $7 million worth of trading volume per month.

The ICO Legacy

During the ICO-Hype in 2017 and 2018 more than 2,000 public-listed coins and tokens have been produced. According to different studies, more than 90% of those tokens may be qualified as junk tokens or dead tokens, i.e. they have no substance and no future. Junk tokens may be compared to penny stocks in the traditional securities markets. Penny stocks have always been the target of such pump-and-dump schemes. Securities fraud artists aggressively pushed selective penny stocks via boiler rooms and email campaigns. The report concludes that pump-and-dump activities in the crypto- markets have a persistent nature. They the “driving force of tens of millions of dollars of phony trading volumes each month”. The study reveals that pump-and-dump organizers can easily use their insider information to take extra gain at a pump- an and-dump event at the sacrifice of fellow pumpers

PUMP AND DUMP MADE EASY WITH CRYPTO

In 2015 the Israeli Gery SHALON was arrested as the head of such a pump-and-dump scheme. He and his co-conspirators hacked large U.S. financial institutions such as JP Morgan, stole more than 100 million customer data and used it for their email campaigns to push penny stocks.  IT was one of the largest thefts of financial-related data in history.

SHALON and his team bought large quantities of the respective penny stocks before the campaign launch and sold them in the course of the pump. The manipulated the price and trading volume of dozens of publicly traded penny stocks in order to enable members of the conspiracy to sell their holdings in those stocks at artificially inflated prices. According to the indictment, SHALON and his guys made many million dollars profit from their schemes. They allegedly used fake IDs for bank and broker accounts and dozens of companies all over the world to perform their manipulation.

The people in the US division of Geri Shalon's enterprise
The people in the US division of Geri Shalon’s enterprise

It’s dramatically simpler to operate token-based pump-and-dump schemes. The necessary ingredients are available to almost anybody with hardly any costs:

Stocks Tokens
a bank account with ID check wallet with no ID check
broker account with ID check no broker account necessary
no exchange registration possible easy crypto-exchange registration
regulatory supervision no regulatory supervision
traceable payments of illicit profits crypto-payment of illicit profits are hardly traceable
KYC/AML checks hardly any KYC/AML for crypto-only transactions
registered & reporting issuers no registered issuers

The organization of and/or participation in a pump-and-dump scheme can be done from any computer or smartphone from any place on this planet with any costs. That said, it’s evident that cryptocurrencies (tokens, coins) are perfectly designed for such fraudulent schemes.

The Post-ICO Schemes

Token-based pump-and-dump schemes are o sort of post-ICO hype phenomenon. Looking at the graphs below, one can see that those schemes started to take off while the ICO hype collapsed. The ICOs with their more than 2,000 freshly squeezed tokens laid the grounds for the next-generation securities fraud. These token-based securities manipulations are a global and multi-jurisdictional phenomenon.

Up until the crypto-era, most people in Eastern European countries and other emerging regions had no access to stock exchanges and dealer-brokers. Hence, pump-and-dump with penny stocks was pretty much restricted to North America. Now, all people even those without bank accounts have access to the new the new asset class coins and tokens – and to crypto-exchanges.

It’s Securities Fraud, Stupid

Given the report’s findings, it cannot come as a surprise that the U.S. SEC has not yet approved crypto-ETF’s. One of the SEC’s criticisms in this context was that cryptocurrency markets are prone to manipulation and fraud. The report confirms SEC’s assumptions. Moreover, those crypto-markets not only allow manipulations but even promote them.

The agency has pointed several times already that it regards most tokens as security tokens and thus securities. Consequently, pump-and-dump schemes with tokens are to be qualified as securities manipulation schemes and thus securities fraud. All participants in such a scheme are perpetrators and frausters. It’s not only the organizers of such schemes but also the participants in these “boiler room” groups on social media.