Hedge funds pool money from multiple investors and use that money to invest in a variety of investments to get good returns. But these funds have fewer regulations and requirements under the Securities Act of 1933. So, hedge funds enjoy more freedom, unlike mutual funds or other investment options. But they also have potential for greater risk of investment losses.
That’s why the Securities and Exchange Commission (SEC) has set some conditions for hedge fund investors. If you want to invest in hedge funds, you need to be an accredited investor. To qualify, you need a net worth of more than $1 million, and a sound knowledge of investing and trading.
But many times, we hear of scandals related to hedge funds manipulating the stock market. For example, you may have heard of the hedge fund scandals related to Bernard L. Madoff Investment Securities, SAC Capital, the Galleon Group, etc.
Recently, hedge funds branded AMC stocks as the worst investment option on the stock market. The hedge funds use Bitcoin to fund the spreading of misinformation and influencing stocks. The reason being, you can’t track Bitcoin like other forms of payments. As a result, the manipulators remain anonymous while trying to control the stock market.
But is it legal to manipulate the stock market?
NO! It is not legal to manipulate the stock market. The Securities Act of 1934 and the Commodities Exchange Act don’t allow market manipulation activities such as:
- Wash trading
Wash trading involves a trader buying and selling a substantial amount of security to show increased market activity. Eventually, this increases the price of the stocks too.
- Spreading false information
Hedge funds that try to manipulate the stock market want to inflate or reduce a stock price, depending on whether they plan to buy or sell the stocks. They may spread rumors through social media, email campaigns, different chat rooms, etc.
- Insider trading
People inside an organization with confidential, non-public information of a business use the information to profit or avoid loss by buying or selling shares.
Spoofing takes place when people place large amounts of buy or sell orders and cancel them before execution. For example, in January 2021, the Commodity Futures Trading Commission (CFTC) ordered JP Morgan to pay a fine of $920 million for manipulation in the precious metals futures and US Treasury futures market for eight years and canceling them before execution.
What to do if you notice stock market manipulation
If you come across stock market manipulation, you can file a complaint with the US Securities and Exchange Commission. With securities fraud, the punishment can be civil penalties, such as cancelation of licenses, hefty fines, etc. Also, it can result in criminal penalties.
According to a 2020 Harvard Law School study, if you want to allege stock price manipulation against someone, you will have to prove that they have:
- The ability to influence the stock prices.
- Already influenced the stock prices.
- Tried to influence the stock prices.
Hedge fund manipulation in the stock market is illegal and immoral. It is a conspiracy to defraud investors by artificially creating supply or demand. So, the regulatory authorities should be strict regarding stock market manipulation. Retail investors should be more aware of countering hedge fund manipulation in the stock market. For example, in January 2021, retail investors joined hands to resist a hedge fund’s short position on the GameStop stock.
By doing so, hedge funds won’t be able to create artificial price movements and profit at others’ expense. What do you think?
About the Author: Lyle Solomon has considerable litigation experience as well as substantial hands-on knowledge and expertise in legal analysis and writing. Since 2003, he has been a member of the State Bar of California. In 1998, he graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, and now serves as a principal attorney for the Oak View Law Group in Los Altos, California.