ASIC warns ‘pump and dump’ share tactics could lead to fines and jail time
ASIC has reviewed advice provided by stockbrokers believed to have sold riskier products to financially naïve clients that were ‘misclassified’ as sophisticated investors.
Australia’s corporate watchdog has issued a stern warning to local investors that indulging in illegal “pump and dump” activities could result in hefty fines or jail time.
The Australian Securities and Investments Commission (ASIC) said this week it had noted a “concerning trend” of social media posts being used to coordinate “pump and dump” activity in listed stocks.
The practice could amount to market manipulation in breach of the Corporations Act 2001 and investors that are caught red-handed could be fined more than $1 million or face a jail sentence of up to 15 years.
Pump up the price
“Pump and dump” occurs when someone (usually a scammer) buys shares in a company and starts an organised program on social media or online forums to falsely inflate (or ‘pump up’) the share price.
Scammers buy cheap shares before spreading rumours that drive the stock price higher.
They then encourage other investors to get in on the supposed windfall.
When the stock hits a high point, the scammers dump their shares and make a quick profit, leaving unsuspecting investors holding shares of a much lower value.
GameStop manipulation
A recent example has been in the US, where shares in video gaming company GameStop Corp multiplied 20 times in value during a six-month window and have been on a rollercoaster ride since.
Investors on a subreddit forum WallStreetBets went to war against shorters on Wall Street at the start of the year.
GameStop’s stock went from around $5.40 a share in mid-2020 to more than $660 a share by January 2021, leading some brokers such as Robinhood to restrict trading in the securities due to concerns about it being a “pump and dump” scam.
Blatant attempts
ASIC said it had observed “blatant attempts” by some local investors to pump share prices by using social media to announce a target stock or designated time to buy, and a target price or percentage gain to be reached, before dumping the shares.
A prime example has been the pumping up of uranium explorer Aura Energy (ASX: AEE) on Twitter this week to “next big thing” status which resulted in an immediate spike in its share price.
Eliminating posts
Commissioner Cathie Armour said ASIC had been working hard to eliminate social media posts which may incorrectly suggest pumping and dumping is legal.
“[We] have been working closely with market operators to identify and disrupt pump and dump campaigns … we will continue to target actions that threaten the integrity of markets and take enforcement action where appropriate,” she said.
ASIC monitors trading on Australian licenced markets through a sophisticated real-time surveillance system and by integrating trade data with data from third parties.
This enables it to see underlying clients, identify networks of connected parties and analyse patterns.
“Market participants, as gatekeepers, should take active steps to identify and stop potential market misconduct,” Ms Armour said of brokerage firms.
“They should consider the circumstances of all orders that enter a market through their systems, and be aware of indicators of manipulative trading.”
She added brokers should be on the lookout for groups of investors who trade in the same stock, in the same direction and around the same time.
They may have opened accounts at a similar time, been referred by the same person, have the same account contact details, or transfer funds between themselves.