What Is a Cryptocurrency Pump and Dump Scheme?
All of us have heard the phrase "too good to be true." And most of us know to be skeptical of any claims a company makes on its potential for growth. So, when an entrepreneur tells potential investors that value in the firm will increase by 25,000 percent, that would be enough of a red flag to scare us off.
But not big enough, apparently, for investors into rapper/actor T.I.'s cryptocurrency, FLiK Token. The currency opened at a price of about six cents per token, and was touted to hit $14.99 within 15 months. That didn't quite materialize -- FLiK Token is currently trading at less than a single cent -- and those investors are pissed. They're suing T.I. (née Clifford Joseph Harris Jr.) and cofounder Ryan Felton, looking for $5 million in compensation for what they're calling a cryptocurrency pump-and-dump scheme.
Inflation and Deflation
Pump and dump, generally, refers to artificially inflating a stock price using false information and misleading positive statements, "pumping" up the perceived value of the stock before owners can "dump" cheaply acquired stocks at a higher price. Once the owners of the scam sell their overvalued shares, the price plummets and investors are left with the losses.
Pumping and dumping is illegal under federal securities laws. Perhaps one of the most infamous cases of this scheme occurred as Enron was on its decline. In 2001, as some employees realized the company was bound to fail, Enron used fraudulent accounting practices to show profits that didn't exist, artificially boosting the stock price and allowing 29 executives to dump stock on an unsuspecting public and rake in over $1 billion before the company declared bankruptcy.
False Impressions and Securities Fraud
In this case, a group of 25 investors claim T.I. and Felton used "social media, celebrity endorsements, and well-known industry experts to create the false impression that FLiK Tokens were a valuable liquid investment." In response, they poured over $1.3 million into the company, "for now worthless securities called FLiK Tokens." The lawsuit claims "Felton explained that the devaluation was caused, at least in part, because T.I. had given FLiK tokens to members of his family and friends who had sold massive amounts on coinexchange.com causing rapid devaluation," and also alleges Felton tried to hide the dump by creating a new company that he said acquired FLiK "and speciously told investors that he had nothing to do with the new sham company."
No word from the rapper or his cohort on the lawsuit.
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