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Pump and dump scheme: What is it, how it works and how it is monitored?

03 Mar 2023 Zinkpot 182
Pump and dump scheme: What is it, how it works and how it is monitored?

 Business Standard -  On Thursday, the Securities and Exchange Board of India imposed a penalty on Bollywood actor Arshad Warsi, his wife Maria Goretti and 29 others for their YouTube-run pump and dump operation. Reports have suggested that Warsi made a profit of ₹29.43 lakh and his wife ₹37.56 lakh between April 27 and September 30 last year using this operation. Read more

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  •  What is 'pump and dump' in stock market?  It is a manipulative scheme to boost the price of stock through fake recommendations based on false, misleading or exaggerated statements. When the price rises, the operators sell the stock. 
  • Pump and dump operation are illegal but due to people's greed to make quick money and lack of market knowledge, such schemes are flourishing. Such operations are common in small companies stocks which have less volumes.
  •  How does this work?  There is a 3 step process in pump and dump scheme. First, a person buys a significant holding in any stock.
  • Next, he makes exaggerated claims about the company, encouraging people to "pump" their money into it and buy more.
  • Lastly, as the stock prices go up, he "dumps" it and pockets the gains. However, as the significant stock volume is dumped, its price falls and other investors lose money.
  • In order to propagate the fake information, social media platforms or email are used. Unsuspecting small investors are also lured into investing in small and mid cap stocks using banners and social media messages.
  • Under Sebi guidelines someone who spreads this information is called MMD or misleading message disseminator.
  •  How are these scams identified? Sebi uses its 'Data Warehousing and Business Intelligence Systems' to identify such scams. It provides 'pattern recognition algorithms' to monitor trading. It then throws up data on who might be violating securities laws.
  • Sebi then looks into the stock and seeks clarification from the company. If it receives an unsatisfactory response, the regulatory body cracks down on the MMD.
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Tags Pump an dump scheme Arshad Warsi Maria Goretti
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