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Stockmarket pump-and-dump scams will cost victims and cheats: ASIC warns

When Australia’s corporate cop jumped onto a social media platform this week to warn users they were breaking the law by manipulating the sharemarket, the perpetrators didn’t believe it.

But they soon will. The Australian Securities and Investments Commission (ASIC) is cracking down on pump-and-dump scammers who artificially inflate share prices of small stocks before selling out suddenly.

It says unsuspecting investors listening to online chat room talk can become victims, while those involved in manipulating share prices can receive fines of more than $1 million and jail time.

WHAT IS PUMP AND DUMP?

It’s when sneaky share traders get together to pump up the price of an individual stock, typically a small company where it’s easy to move the price with relatively few trades.

They get together on social media and online forums to create excitement about a stock or spread false good news. Once they have pushed the price higher, they sell out – leaving those who jumped on the bandwagon suffering sharp share price falls as the stock reverts to its true value.

ASIC has observed blatant attempts to pump share prices through social media, with organised campaigns telling group members when to buy and sell, and at what price to dump the shares.

“In some cases, posts on social media forums may mislead subscribers by suggesting the activity is legal,” ASIC says.

RECENT EXAMPLES

On Monday ASIC entered a 300-strong group, “ASX Pump Organisation”, on messenger platform Telegram and warned them it was watching and could see all trades and had access to traders’ identities.

ASIC commissioner Cathie Armour says the regulator will take enforcement action. “where appropriate”.

“You run the risk of a criminal record, including fines of more than $1m and prison time by being involved,” ASIC told the group, but its members labelled the message a fake and still pumped up a small company YPB Group by 50 per cent.

ASIC confirmed to The Australian that its message was genuine, and those pump-and-dump traders now have a nervous wait.

A famous pump campaign in the US earlier this year, promoted on app Reddit, pushed up the price of video game retailer Gamestop from $US17 to $US347 in January. The stock has since halved.

US cinema chain AMC Entertainment’s shares were pumped up by alleged lies in May and quadrupled in price, before falling sharply in recent months.

WHAT ASIC SAYS

The corporate regulator says it is monitoring all trading activity on a real-time basis.

Market manipulation is illegal, ASIC says, and can attract a fine of more than $1 million and up to 15 years imprisonment.

“We will continue to target actions that threaten the integrity of markets and to take enforcement action where appropriate,” ASIC Commissioner Cathie Armour warned in late September.

WHAT YOU SHOULD DO

Firstly, don’t get sucked in by social media chatrooms pumping up prices of obscure stocks.

Pump-and-dump schemes won’t work with big companies like BHP or CBA because there so many analysts examining them every day, so the scammers target tiny companies that nobody has heard about.

Share specialists say people should only invest in a company they understand.

ASIC wants investors and consumers to report any experiences they have with pump-and-dump schemes, and has also called for companies, stockbrokers and other market participants to report misconduct.