Our Attorneys are Ready to Fight to Recover Your Fraudulent Investment Losses
Market manipulation and trading violations can lead to significant losses for investors. While investors can mitigate their risk of loss due to these unlawful practices in some cases, in others investors won’t learn that they have fallen victim until it is too late to protect their portfolios. However, investors may still be able to recover their losses by filing claims in securities litigation or FINRA arbitration.
If you believe that you may have lost money in a market manipulation scam or as the result of a trading violation, you should speak with a lawyer promptly. At Zamansky LLC, we have decades of experience helping investors recover fraudulent losses. Located in the heart of Wall Street, we represent individual investors nationwide, and we provide representation on a contingency-fee basis for most cases.
Types of Market Manipulation and Trading Violations
There are several different types of market manipulation and trading violations. Our securities fraud lawyers represent investors who have lost money due to all types of fraudulent schemes and practices, including:
Front-running is a practice among stock brokers that allows them to profit at their clients’ expense. With front-running (also known as tailgating, forward trading and trading ahead), a broker relies on advance knowledge of market data or pending trading activity to make trades on his or her own account before making trades for a client.
The most common example of front-running involves a broker learning of a large client order. Instead of placing the client order immediately, the broker first places a trade of his or her own. If the broker’s trade is large enough, it may increase the price of the security before the client’s order gets placed. Even if it doesn’t, the broker is able to profit when the client’s order moves the market price.
While front-running is not always illegal, it is illegal in many cases. It will also frequently violate FINRA rules. Potential investor claims based on front-running include:
- Trading on Non-Public Information – As a general rule, brokers are prohibited from trading on material non-public information. If brokers receive material information about a security in advance of its public release, they may not be permitted to use the information until it is available to retail investors.
- Violating the Broker’s Duty of Loyalty – Brokers owe a duty of loyalty to their clients, and they must generally act in their clients’ best interests. If a broker breaches this duty by front-running a client’s order, then the broker may be liable for stockbroker fraud.
- Violating FINRA Rule 5270 – FINRA Rule 5270 prohibits brokers from making trades based on “material, non-public market information concerning an imminent block transaction.” When a broker’s violation of FINRA Rule 5270 is responsible for an investor’s losses, the investor can pursue a claim against the broker or the broker’s firm in FINRA arbitration.
Insider trading involves corporate “insiders” buying or selling the company’s shares based on material non-public information (MNPI). Insiders may be corporate executives or board members, employees who have access to confidential or proprietary data, family members, or other “tippees.” Outside lawyers, accountants, brokers and others can also be classified as insiders if they have access to MNPI.
Federal securities laws prohibit insiders from using MNPI to make investment decisions. Insider trading undermines confidence in the securities markets, and it harms investors who do not have access to the same information.
There are a few ways investors who lose money due to insider trading can potentially assert their legal rights. One option is to pursue a shareholder derivative lawsuit on behalf of the company. Another option is to pursue a breach of fiduciary duty claim against the insider directly. A third option is to pursue an investor fraud claim against the company. If the company lacked adequate internal controls to prevent insider trading, if it failed to disclose an insider trading event, or if it attempted to cover up insider trading or otherwise mislead investors, then it could be directly liable for investors’ losses under federal law.
Investors may also be able to pursue claims against brokers or advisors who fail to take appropriate action to protect them against losses due to insider trading. For example, if a broker knew that a company’s insiders had engaged in prohibited trading activity and still recommended the company’s stock to his or her clients, then the broker may be liable for investment fraud.
Naked Short Selling
Short selling is an investment strategy that allows investors to profit from a drop in the price of a stock or other security. To conduct a short sale, an investor or broker must typically borrow the security, sell it and then repurchase it within a three-day settlement window. If the repurchase price is lower than the sale price, the investor or broker earns a return.
Naked short selling (or naked shorting) involves selling a security that the investor or broker never actually borrowed. If this subsequently results in a “failure to deliver,” then federal regulations require the seller to purchase or borrow the security within one business day in order to close out the transaction.
Similar to front-running, naked short selling is not necessarily illegal. However, Regulation SHO establishes requirements designed to prevent abusive naked shorting, and SEC Rule 204 requires brokerage firms to close out “failure to deliver” transactions within one business day, as referenced above. FINRA also notes that naked short selling presents “substantial manipulative concerns.” If a broker violates the rules governing naked short sales, or if a brokerage firm fails to adopt internal policies and procedures that are adequate to prevent abusive naked shorting practices, the broker or brokerage firm may be liable in the event that investors suffer unwarranted losses.
Pump and Dump Schemes
A pump and dump scheme is a type of market manipulation scam that involves artificially inflating the price of a stock prior to selling. Perpetrators will spread false or exaggerated information about a company’s financial performance or prospects in order to drive interest in the company’s shares; and, once the share price hits a specified target, they will “dump” their shares resulting in substantial losses for investors.
Spoof Trading (Spoofing)
Spoof trading (or simply “spoofing”) is a type of market manipulation that involves placing a bid or offer to purchase a security with no intention of going forward with the purchase. This can create a false appearance of demand, which can in turn increase the price at which the security trades. An investor or broker who engages in spoofing will already own a long position in the security; and, when the spoof trades drive up the price, the investor or broker sells for an enhanced return.
Spoof trading is prohibited under federal law and under FINRA’s broker regulations. As a result, investors who lose money to spoofing schemes can seek to recover their investment losses. As with the other types of market manipulation and trading violations discussed above, if you believe that you may be a victim of a spoof trading scam, you should discuss your legal options with a lawyer promptly.
Speak with Our Lawyers to Discuss Your Concerns Regarding Market Manipulation and Trading Violations in Confidence
Do you believe your investment losses may be the result of market manipulation or trading violations? If so, we encourage you to contact us for a free and confidential consultation. To find out if you may be able to recover your losses through securities litigation or FINRA arbitration, call 212-742-1414 or get in touch online now.