A recent federal district court decision is making waves in the white-collar bar for dismissing a securities fraud indictment charging several defendants with participating in a pump-and-dump scheme. As alleged in United States v. Constantinescu, 4:22-CR-00612 (S.D. Tex. Mar. 20, 2024), a case in the Southern District of Texas, the defendants committed securities fraud by posting messages on social media platforms with false positive information about stocks while at the same time selling their own shares into the market at a profit. The dismissal raises critical questions about what the government must prove to convict a defendant for engaging in a “scheme to defraud” with “intent to defraud” under the federal fraud statutes.

Constantinescu’s dismissal relies upon two recent cases, one from the U.S. Supreme Court and the other from the U.S. Court of Appeals for the Fifth Circuit both interpreting the “scheme to defraud” and “intent to defraud” elements under the federal fraud statutes. As interpreted by case law, a “scheme to defraud” means a plan, pattern, or course of action intended to deprive another of money or property or bring about some financial gain to the person engaged in the scheme. An “intent to defraud” requires a conscious, knowing intent to deceive and cheat someone. These critical elements of any fraud claim are hotly contested in many fraud trials and the state of the law on their interpretation continues to be subject to dispute. The securities fraud charge in Constantinescu thus required, in the court’s view, a showing that the defendants intended to harm victims’ traditional property rights by causing them to buy the stock at allegedly inflated (pumped up) prices.