Fraud Enforcement at Stake in Influencers’ Pump-and-Dump Appeal

Seven social media influencers accused of hyping stocks online in order to sell their shares at inflated prices will try on Wednesday to convince a federal appeals court that charges against them were rightly tossed.

The US Court of Appeals for the Fifth Circuit ultimately endorsing a federal judge’s application of recent US Supreme Court precedent to the case could threaten future prosecutions of pump-and-dump schemes.

It would be an “earthquake,” said former Fifth Circuit Judge Gregg J. Costa, now a partner with Gibson, Dunn & Crutcher LLP.

It’s rare for a federal judge to dismiss an indictment. But here, the US District Court for the Southern District of Texas tossed the charges after concluding that the government’s legal theory was barred by Ciminelli v. United States.

Decided after the indictment here, the justices in Ciminelli held that a scheme to deprive victims of “potentially valuable economic information necessary to make economic decisions” isn’t fraud. Rather, the object of the scheme must be a traditional property interest.

Because the defendants here were merely accused of depriving their followers of truthful information about their personal trading intentions, the district court reasoned the indictment alleged a now-invalid fraud theory.

It distinguished typical pump-and-dump schemes—which usually involve a victim giving property to the defendant—saying the victims “surrendered their property to the stock market at market prices” and received the “benefit of their bargain.”

Yet the analysis may turn on a subsequent ruling that came down after the government appealed.

The first Supreme Court decision to affirm a white collar conviction in over a decade, Kousisis v. United States held that fraud is “complete when the defendant has induced the deprivation of money or property under materially false pretenses,” whether or not the defendant intended to cause economic harm.

The defendants—including Edward Constantinescu and Perry Matlock, known respectively on X as @MrZackMorris and @PJ_Matlock—collectively had nearly 2 million followers and co-founded Atlas Trading, a Discord-based forum with over 250,000 members.

They would tout stocks online, implying they were holding onto their shares in anticipation of gains, but were in fact selling or planning to sell, prosecutors said. They allegedly profited more than $114 million in total.

Atypical Case

Traditional pump-and-dump schemes generally involve company insiders or misrepresentations about the security itself, said Will Johnston, a former federal prosecutor and partner with Bird, Marella, Rhow, Lincenberg, Drooks & Nessim LLP.

He said the allegations here in some ways are more akin to spoofing, a type of market manipulation involving traders placing orders they intend to cancel to distort supply and demand and ultimately the price of a security or commodity.

Other circuits have upheld spoofing convictions against challenges similar to those raised by the defendants here, Johnston said.

The Seventh Circuit recently relied on Kousisis to affirm the convictions of three traders who argued their fraud convictions should be tossed because “spoofing doesn’t involve a misrepresentation about an essential element of the bargain for futures contracts.”

In Johnston’s view, Kousisis undercuts one of the defendants’ stronger arguments because it established that it doesn’t matter if the alleged victims ultimately got the economic value of what they paid for.

The defendants, however, say Kousisis is irrelevant because the judge dismissed the indictment for failure to allege any harm to any victim.

Echoes of Bridgegate

Appellate advocate Lisa Mathewson, who argued on behalf of the defendants in Kousisis, says that case is distinguishable.

Kousisis involved misleading government agencies about the involvement of a subcontractor to obtain money and property from those agencies.

The district court here said although the defendants wanted to enrich themselves, the alleged scheme was totally indifferent to its effect on the alleged victims. Many actually may have made money.

Mathewson said this case more closely tracks Kelly v. United States, which reversed New Jersey-area officials’ fraud convictions because the alleged “Bridgegate” scheme to reduce toll lanes for commuters on the George Washington Bridge as political retribution didn’t target money or property.

The scheme cost the Port Authority of New York and New Jersey in terms of employee labor, but that was incidental to the “regulatory” object of impeding access to the bridge from Fort Lee, N.J.

Similarly, while the defendants here intended to enrich themselves, any harm to their alleged victims—other investors—was arguably incidental.

Costa said he doesn’t expect the panel to issue a ruling broad enough to threaten the future prosecution of traditional pump-and-dump schemes, saying it would be a “startling” result.

Rather, he expects the panel to carefully focus on the specific language of the indictment and how the court might rule narrowly.

The argument is before Judges Stephen A. Higginson, Don R. Willett, and Kurt D. Engelhardt.

The case is United States v. Constantinescu, 5th Cir., No. 24-20143, oral argument scheduled 9/3/25.