Chinese-Linked 'Pump and Dump' Schemes in U.S. Markets: Navigating Regulatory Risks and Investor Protection in Cross-Border Equity Investments

The U.S. securities landscape has become increasingly vigilant against Chinese-linked "pump and dump" schemes, as regulators and market participants grapple with the complexities of cross-border equity investments. These manipulative practices—where actors artificially inflate stock prices through coordinated buying before selling off shares at inflated values—pose significant risks to investor trust and market integrity. Recent enforcement actions and regulatory innovations underscore a growing emphasis on curbing such schemes, particularly as Chinese-linked entities exploit jurisdictional gray areas to evade oversight.

Regulatory Crackdowns and the SEC's Cross-Border Task Force

The U.S. Securities and Exchange Commission (SEC) has intensified its focus on transnational fraud, culminating in the formation of a Cross-Border Task Force on September 5, 2025SEC Announces Formation of Cross-Border Task Force to Combat Fraud^[1]. This initiative, announced by SEC Chairman Paul S. Atkins, aims to dismantle fraudulent activities by foreign-based companies, including pump-and-dump schemes, which disproportionately affect U.S. investorsSEC Launches Task Force to Prevent Fraud Against Investors^[2]. The task force will scrutinize gatekeepers such as auditors and underwriters who facilitate access to U.S. capital markets for entities from jurisdictions like China, where opaque governance structures heighten risksUS SEC forms cross-border task force to tackle^[3].

Recent enforcement actions highlight the SEC's resolve. For instance, the agency filed a settled civil action against Canadian lawyer Sergio Damian Lopez for promoting Regulation A offerings without disclosing compensation, misleading investors about the objectivity of his recommendationsSEC Enforcement Activity in the Second Quarter of 2025^[4]. Meanwhile, Chinese-linked companies such as China MediaExpress, a major TV advertising network, have faced litigation for alleged participation in pump-and-dump schemes, with investors securing settlements through class-action lawsuitsSteven J. Toll, Cohen Milstein^[5].

Nasdaq's Listing Standards: A Market-Level Defense

While the SEC has not directly issued investor protection measures for Chinese-linked schemes, Nasdaq has proposed enhanced listing standards to mitigate risks. Notably, the exchange introduced a $25 million minimum public offering proceeds requirement for Chinese companies, aiming to reduce exposure to manipulative practices like pump and dumpNasdaq Proposes Enhanced Listing Standards to Strengthen Investor Protection and Market Integrity^[6]. These changes reflect broader efforts to strengthen liquidity and market integrity, particularly in response to cross-market trading dynamicsNasdaq Proposes Changes to its Listing Standards^[7].

Academic Insights: Portfolio Pumping and Systemic Risks

Academic research reveals that Chinese mutual funds engage in portfolio pumping—artificially inflating quarter- or year-end portfolio values to secure higher performance rankings and bonusesPortfolio pumping and fund performance ranking^[8]. This practice is most prevalent at year-ends, driven by performance-based incentives tied to fund managers' compensationNAV Inflation and Impact on Performance in China^[9]. Similarly, studies of the Karachi Stock Exchange (KSE) show that brokers in emerging markets exploit pump-and-dump schemes to generate abnormal returns of 50–90 percentage points annually, transferring wealth at the expense of less-informed investorsPrice manipulation in an emerging stock market^[10].

Effectiveness and Ongoing Challenges

The Cross-Border Task Force's effectiveness remains unquantified, but its alignment with the Department of Justice's "America First" enforcement strategy signals a coordinated approach to prosecuting white-collar crimes involving Chinese-affiliated entitiesSEC Launches Cross-Border Task Force to Combat Fraud^[11]. However, challenges persist. For example, while the SEC's task force targets gatekeepers, enforcement in jurisdictions with weak regulatory frameworks—such as China—remains limited. Additionally, the rise of blockchain-based schemes blurs the lines between traditional securities and digital assets, complicating oversightOn Global Governance, Financial/Economic Interests And ...^[12].

Investor Protection Strategies

For investors, due diligence is paramount. Strategies include:
1. Due Diligence on Gatekeepers: Scrutinizing the credibility of auditors and underwriters for foreign-listed companies.
2. Monitoring Liquidity Metrics: Avoiding thinly traded stocks, which are more susceptible to manipulation.
3. Leveraging Regulatory Tools: Utilizing the SEC's Investor Alert system and Nasdaq's enhanced listing standards to identify high-risk investmentsSEC Launches Task Force Targeting Foreign Pump-and-Dump Schemes Threatening US Investors^[13].

Conclusion

The intersection of Chinese-linked pump-and-dump schemes and U.S. markets underscores the need for robust regulatory frameworks and investor vigilance. While the SEC's Cross-Border Task Force and Nasdaq's listing reforms represent critical steps, systemic risks persist in a globalized financial ecosystem. Investors must remain proactive, leveraging both regulatory tools and market intelligence to navigate cross-border equity investments safely.