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Shares Pump and Dump Schemes - Legality

Business Regulations, Law & Practice	2634 VIEWS
Business Regulations, Law & Practice
2634 VIEWS

Wednesday, July 18, 2018 04:55PM / Oserogho & Associates

Introduction

The fraudulent practice of artificially pumping up the price or value of the Shares or Stock of a company, whether a private company or a public company, which artificial increase in value is not reflective of the forces of demand and supply, with the penultimate objective of dumping such Shares or Stock at their highest unrealistic price, on members of the public to purchase, is again on the rise.

Unbeknown to members of the investing public and the perpetrators of Shares Pump and Dump Schemes, there are various statutory legislations which criminalise Shares Pump and Dump Schemes. Some of these legislations are considered below.

CAMA – Shares Pump and Dump Schemes

The Companies & Allied Matters Act (“CAMA”) vests the day-to-day direction, management and administration of every limited liability company, whether private or public, on each company’s Board of Directors.

The Directors of a company therefore serve as Trustees and Fiduciaries of their company when dealing with the company, and with members of the public.

Under the provisions of CAMA, where the Directors of a company breach their fiduciary duties, by for example publishing false and misleading statements about their company’s financial affairs, injured parties who relied on such mis-information and suffered losses, have civil and criminal reliefs that they can claim against such a company and its Directors.

Criminal Liabilities – Shares Pump & Dump Schemes

The Criminal Code makes it a criminal offence for any person or corporation, with the intent to defraud another person, to obtain, steal, conspire or induce another person to deliver anything that is capable of being stolen. Terms of imprisonment ranging from three (3) years to seven (7) years; with punitive monetary fines, apply where an alleged offender is found guilty of obtaining anything under false pretenses.

The Advance Fee Fraud and Other Fraud Related Offences Act also criminalise obtaining anything under false pretenses with the intent to defraud another person. The penalties on conviction for offences such as this include a term of imprisonment not exceeding twenty (20) years and not less than seven (7) years. No option to pay a fine is provided in this Statute.

The Economic and Financial Crimes Commission (Establishment, etc.) Act (“EFCC Act”) in its interpretation Section 46 defines Economic and Financial Crimes to be crimes that are of a non-violent, criminal and illicit in nature, committed with the objective of obtaining wealth illegally. Examples of Economic and Financial Crimes include any form of fraud, open market abuses, money laundering, foreign exchange malpractices, tax evasion, etc.

The penalties on conviction, for Economic and Financial Crimes under the EFCC Act include a term of imprisonment of not less than two (2) years and not exceeding three (3) years; with the forfeiture of the proceeds of the crime to the Federal Government.

The Investments and Securities Act (“ISA”) empowers the Securities and Exchange Commission (“SEC”) to among other things suspend and or prohibit the unlawful trading on any publicly quoted shares/stock that is suspected of being affected by any Shares Pump and Dump practices. Examples of the latter include the publication of false, misleading, fictitious or insider statements which statements are/were intended to maintain, inflate, depress or cause any artificial manipulication or fluctuation in a share/stock price.

The ISA also provides for criminal liabilities for individuals and corporations in the form of stiffness in the terms of imprisonment where insider dealings, false, misleading and fraudulent statements regarding publicly traded shares, or the Prospectus for such shares, are knowingly, recklessly, dishonestly or negligently undertaken.

Conclusions

Shares Pump and Dump Schemes do not only cause massive financial losses to the investing members of the public; they also significantly undermine public trust and confidence in the financial services market.

Regulatory bodies, as financial watchdogs, need to be more aggressive in protecting the investing public and the financial services market. Offenders of the various statutory provisions highlighted above need to be publicly and proactively prosecuted in a more expeditious and timely manner.

Increased and more regular public education and enlightenment are also required so that Shares Dump and Pump Schemes are more easily recognised by members of the public; at the time of the incubation of such Schemes; as opposed to at the time of their completion with the resulting damage.

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NB: This Legal Alert is a free educational material, for your general information and enlightenment ONLY. This Alert, by itself, does not create a Client/Attorney relationship. Recipients are therefore advised to seek professional legal counselling to their specific situations when they do arise. Questions, comments, criticisms, suggestions, new ideas, contributions, etc are always welcomed. This Legal Alert is protected by Intellectual Property Law and Regulations and is reproduced by Proshare Nigeria Limited under permission, for the Proshare online investment community, from Oserogho & Associates [ contactus@oseroghoassociates.com ]