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Suppose I regularly profit from other people's pump and dump scams (assume that this is possible). I don't organize these scams (they are illegal); I merely hop on and hop off at the right times (assume that this is possible). If I am regularly profiting from pump and dump scams, will I get investigated by the SEC for market manipulation? Is there a chance of going to jail? I understand that buying into a pump and dump may be considered unethical even if not illegal, but here I'm asking about regulations rather than morals.

(I don't intend to buy into a pump and dump. I am just curious about the regulations.)

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  • I think an important premise to the question is how frequently and aggressively does the SEC notice and investigate pump&dump scams? – Freiheit Oct 15 '20 at 13:12
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    SEC: "Look at all these seemingly unconnected pump and dumps, but Flux over there is buying into all of them and regularly jumping out at just the right time. He must know something." I can definitely see how that could lead to an investigation, once the statistical odds of success move past a reasonable threshold. Even if you're proven innocent every time, they're going to be keeping an eye on you, which might lead to you getting pinned for some other violation, even a minor one they don't usually bother pursuing. – Steve-O Oct 15 '20 at 13:36
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  • @Steve-O it is the compliance department of your broker but that's pretty much how it works, yeah – MD-Tech Oct 27 '20 at 15:04
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The SEC has quite a few researchers and data scientists who have implemented models to screen for suspicious behavior. If anyone regularly profits, say, on a much higher percentage of trades than usual, then they will be flagged. It won't matter if it's a retail trader or an institutional trader. Many people go to extreme lengths to disguise the thread that connects them to an inside information source:

https://money.cnn.com/2014/09/19/news/companies/post-it-note-insider-trader/index.html

However, if you are unwittingly profiting and flagged, the onus is on the SEC to build a case against you. Many cases are dropped due to lack of evidence, or having exceeded the time allowed for disgorgement. Of course, if you are not unwittingly profiting, then the SEC, in conjunction with the DOJ, can launch an investigation, and will most likely be able to find any record that links back to the pump and dump scheme. Even if you eat the evidence, like the guy did in the article.

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