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In late December the Australian Securities & Investments Commission issued a warning to investors on so-called ‘pump and dump’ operators – unscrupulous actors who start rumours about small cap securities to inflate the share price in the hope of making a quick profit.

ASIC noted there had been a notable rise in reports to it by concerned investors.

“ASIC is warning the public to be vigilant about widespread, coordinated pump and dump schemes targeting retail investors, including Australians trading in overseas markets, who can be tricked into buying thinly traded overseas stocks that are then rapidly sold down by the promoters once the price has been inflated,” ASIC said.

ASIC has also observed scammers fraudulently using the identity of Australian celebrities to lure victims into messaging apps like WhatsApp where they are directed to buy shares.

The warning came as four people involved in a coordinated scheme to pump up Australian share prices, before dumping them at inflated prices, were convicted and sentenced at the Sydney District Court.

A global problem

“The rise of pump and dump schemes was a hot topic of discussion among a meeting of key financial regulators from Australia, Asia, Europe and North America in London last month,” ASIC said.

“Among the techniques observed have been cybercriminals hacking brokerage accounts to conduct trades, exploitation of differing regulatory regimes in cross border trades, and luring in prospective traders via ad targeting on social media.”

Regulators, including New Zealand’s Financial Markets Authority (FMA) and the United States’ Financial Industry Regulatory Authority (FINRA) have also issued official warnings recently.

“Pump and dump operators zero in on small cap stocks with low liquidity, which means when a misleading announcement or rumour is made, it has an outsized impact on the share price,” said ASIC’s Amanda Zeller, Senior Executive Leader, Market Integrity.

“That then draws in traders who watch for momentum in small cap stocks, who then pile in to ride the increase. Unfortunately, those are the ones left with the losses after the pump instigators have bolted.”

A serious threat to markets

“Pump and dump schemes are a serious threat to market integrity and investor confidence. They can also result in unsuspecting investors losing money,” ASIC Commissioner Alan Kirkland added.

“ASIC is keeping a close eye on small-cap trading activity through its sophisticated real-time surveillance system and by integrating trade data with surveillance of social media and online forums, such as on X, WhatsApp, HotCopper, Reddit, Discord.

“ASIC takes market manipulation very seriously and we will not hesitate to take enforcement action where appropriate.”

By Vanguard
21 January
vanguard.com.au