Cryptocurrency (& NFT) pump and pump scheme fraud

How does it work?

Pump and dump schemes in the context of NFTs (or ‘non-fungible tokens’) typically involve artificially inflating the price of a specific token, or coin, often through coordinated efforts by a group and/or through social media hype. First, these groups identify or even create a particular NFT. They then use social media platforms such as Twitter, Instagram and Facebook to create ‘hype’ and promote the NFT to potential buyers. As more people start buying the NFT, the demand for it increases, causing the price to rise.

Once the price has been ‘pumped’ up to a certain level, the individuals behind the scheme will then sell their holdings of the NFT at a profit, causing the price to crash and leaving others who bought in at the inflated price with major losses.

A similar process can occur with new forms of cryptocurrency. These coins will often be introduced and publicised by famous celebrities/influencers which causes many people to purchase and the price to inflate as a result. Once the price is high enough, those propagating the currency sell it off at a massive profit, lowering the value for all of the other holders.

One reason investors may be attracted to a new NFT or cryptocurrency is when the person promoting it promises that investors will not be able to sell large amounts of their holdings in the asset until a certain date. However, those promoters sometimes then have the blockchain code rewritten so that they can sell or dump their holdings. This part of a crypto scam is called a ‘rug pull’.

In 2022, 24% of all new cryptocurrencies that gained traction (i.e. experienced a significant amount of purchase) were regarded as ‘pump and dumps’ as their price dropped by at least 90% within the first week of their launch.

Pump and dumps are abnormally dangerous because it is especially easy to launch new tokens. The social media-driven nature of crypto investment news and discussion allows individuals such as influencers to control a currency market in an unprecedented way. A lack of regulation only serves to create a free platform for them to try to get away with it.

What legislation covers Pump and Dump Fraud

Offences of this nature are likely to be prosecuted under the 2006 Fraud Act. They could be considered as a modern version of ‘investment opportunity’ fraud offences, often referred to as ‘boiler room’ frauds. This would involve a product being promoted as an exciting and valuable commodity when in reality it is almost worthless. The ‘pump and dump’ scam has been popular among fraudsters in the finance sector since the 1990s, but social media has made this type of fraud accessible to anyone with an online following.

Section 2 of the Fraud Act covers Fraud by False Representation. A false representation is a thing that someone says or does dishonestly. The person committing the fraud has to be doing it so that they gain something, or hope that someone else loses. The false representation would be promoting the NFT or cryptocurrency as higher in value or potential totally is.

The law says in these cases that a person is dishonest if they know or suspect that they are over-inflating its value, as opposed to being under the misconception that it is a valuable product. Someone who genuinely believes in the ‘investment’ would not be guilty in law.

The intent to gain something is the main aim of a pump-and-dump scheme. The purpose is to over-inflate the value, and then sell shares at a huge profit for those who have set up the scheme.

What are the successful defence strategies in cryptocurrency cases?

The regulation of NFTs is practically non-existent in the UK. Parliament has requested an inquiry into NFTs and Blockchains, but there has been no definitive decision on whether new laws will be passed or not. Until then, the strategy that crypto defence lawyers need to use will work around existing fraud law.

If a defendant can show that any component of the offence of fraud does not apply, the prosecution’s case automatically weakens, and the nature of a ‘pump and dump’ allegation means that misrepresentations and false promises are at the centre. This means that the prosecution must prove that the promises or enticements made were dishonest. It doesn't matter if the defendant claims that they didn't know or believe that they were acting dishonestly. A jury in a trial would have to consider the defendant’s knowledge or belief as to what going on i.e. what made the defendant act as they did. They will then apply the standards of ordinary reasonable people to judge that behaviour.

Some people who attract the attention of investigators or prosecutors ally been lured in by the promise of social media exposure and might have simply shared the scheme’s message with their following. This is a trap many celebrities have fallen into for example in the case of sports stars Mike Tyson and Tom Brady. While there is arguably a degree of naivety and of course a want to gain, it may not be true to say they were acting dishonestly by the standards of ordinary reasonable people. However, for those accused of creating the schemes, the preparation of a defence is more complex and anyone facing the prospect of a court case or investigation should contact a specialist cryptocurrency fraud lawyer as soon as possible.

What are the sentences for pump-and-dump frauds?

Anyone convicted of fraud under Sections 1 and 2 of the Fraud Act will be subject to the sentencing guidelines. These guidelines are split into culpability and harm. Culpability means your involvement/role in the scheme and the harm is the monetary loss to the victim(s).

It is important not to lose hope simply because there may be many defendants involved or a lot of money lost. Your role must be taken into consideration and you will be sentenced for your involvement only.

The sentences available to the court include prison time (of varying lengths), confiscation orders, meaning you must repay whatever money you obtained illegally, also known as Proceeds of Crime (“POCA”) and compensation. Again, the court can look at your assets and available monies and order you to pay compensation to the victim(s).

Whilst the above may seem daunting, these are just a few of the options available to the court when sentencing someone for their involvement in a pump-and-dump scheme. The law concerning sentences is complex. However, it is important to know that a Judge must consider the following factors when sentencing someone. Usually, it is that person’s first time in a courtroom and so their lack of previous convictions is a huge advantage. Other main factors to consider include your role in any scheme and the loss to the wider community. A Judge must also consider how you came to be involved in such a scheme and what your circumstances are.

We instruct specialist barristers to ensure any Judge has the full picture when sentencing and that a defendant's role in any scheme ly identified so that they are not dragged in with others.