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Tackling the Proliferation of Pump & Dump Schemes

Market manipulation schemes referred to as ‘pump and dump’ are not new. In fact, concerns were being raised in the US Senate as early as the 1930s, but what is new are some of the ways in which these fraudulent schemes are now being run.  But before we get into the details, let’s get back to basics….

What is a ‘Pump & Dump’ scheme?

‘Pump and dump’ (also referred to as ‘ramp and dump’) schemes essentially have two parts.

Firstly, the perpetrators orchestrate a campaign to inflate (‘pump’) the price of a stock with false or misleading information.

Secondly, once the price has been artificially inflated, the perpetrators sell their own holdings (‘dump’) reaping the profits.  Of course, the other investors ultimately become exposed to a drop in the market price as a result of the sale activity.  In addition, once the fraudsters stop their market manipulation campaigns, the remaining investors are left with unsellable, cheap stock with no demand from new buyers.

How big is the issue?

The short answer is that this is a global issue.

Pump and dump schemes have proliferated in the day trading boom we’ve witnessed during the COVID-19 pandemic.  In fact, in September 2020, the Hong Kong Securities and Futures Commission (SFC), estimated that 20% of the market manipulation cases it was investigating were pump and dump schemes. Warnings have been issued by everyone ranging from the US Federal Bureau of Investigation to the UK’s Financial Conduct Authority.

It’s perhaps little wonder that more and more people have fallen victim to this type of fraud during the pandemic when so many have lost their jobs, or frankly, simply suffered extreme boredom in what felt like endless lockdowns.  Many have been tempted to seize ‘opportunities’ promoted to them as being an easy way to make money.  Add to this the tangible fear of missing out when friends, or indeed influencers, are apparently making profits through trading activity (whether stock or crypto) and it’s a perfect storm.

But there’s another factor that is concerning regulators and that is that these schemes are increasingly being operated via social media platforms – Facebook, Instagram, WeChat, Whatsapp, Telegram – and even online dating platforms.

Who do you turn to for investment advice?

Social media platforms are, of course, the perfect vehicle for the effective and targeted dissemination of false and misleading information urging followers to buy a certain stock or crypto asset.  They are also, and increasingly, the venues for people to access insights and opinions over mainstream media and other trusted sources.  In a world of ‘fake news,’ doing research on an opportunity promising quick and easy returns, is more critical than ever.

The rise of influencers actively promoting ‘investment’ opportunities is also concerning regulators.  When the CEO of the UK FCA name-dropped Justin Bieber, J Lo, and the Kardashians in his September 2021 speech, you know there’s an issue.  In the words of Phineas T. Barnum, the 19th-century American showman ‘there’s no such thing as bad publicity,’ but I doubt that receiving an honourable mention in a speech by the FCA was in the marketing plans of those celebrities!

But it’s not just the bona fide influencers that people need to be concerned about.  Some schemes are employing other sophisticated tactics including impersonating well-known investment advisors and market commentators to lure victims into their schemes.  Perpetrators often also offer inside information or investment tips to their followers to further entice them to trade.

Are perpetrators being prosecuted?

Yes, there are a number of cases currently in the courts.  Here are details of just two:

In the first case, the perpetrator, using the alias “Alex DeLarge,” used a Twitter account to promote certain stocks and to disseminate false and misleading information to encourage his over 70,000 followers to buy certain stocks.  The defendant netted over $1 million in profits through the scheme.

In the second case, a Florida man allegedly defrauded investors out of over $19 million over a 7-year period via the use of fraudulent press releases, fraudulent securities disclosures filed with the U.S. Securities and Exchange Commission, as well as manipulative stock trading.  If convicted, the defendant faces a $12.5 million fine and a maximum possible sentence of 245 years imprisonment.  Yes, you read that correctly, 245 years!

What actions should firms be taking?

Firstly, firms should be actively identifying groups of clients who trade in the same stock, in the same direction, and around the same time.  These clients may have opened accounts at a similar time or have the same account contact details.

Secondly, and to support the first action, firms should have in place, or should be implementing, technologies and expertise to correlate ‘Know Your Customer’ information with surveillance and market data, alongside expected trading behaviours and client credit limits to enable effective investigations, and

Finally, firms must file Suspicious Activity Reports (SAR) / Suspicious Transactions & Order Reports (STORs) and especially where there is a sudden and unexplained price movement.

Are warnings and the threat of enforcement action enough?

We’ve already discussed some of the actions that regulators are taking – from issuing warnings through to enforcement.  In addition, real time monitoring of market activity enables regulators to analyse trading patterns, determine networks of connected parties and to ascertain the details of underlying clients involved in the networks of concern.

But of the myriad of actions underway to tackle pump and dump schemes, my personal favourite is the novel approach adopted by the Australian Securities and Investments Commission.  In a bold move, ASIC is infiltrating chat groups operated on messaging apps to engage directly with – and disrupt – the people involved in pump and dump activity.  Talk about taking the fight against market manipulation to the front lines!

Emma Parry

Founder & CEO

NovaFin Consulting Ltd

NovaFin provides conduct risk and culture advisory services to firms through-out the financial services ecosystem.


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