On Thursday, the Securities and Exchange Board of India (Sebi) 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 Rs 29.43 lakh and his wife Rs 37.56 lakh between April 27 and September 30 last year using this operation.
What is a pump and dump scheme?
Pump and dump is a manipulative scheme where a person tries to increase the price of a share using fake information. The claims are false, misleading, exaggerated, and spread to make personal gains. This is often done by a person who has monetary influence over many people.
How is the scheme used?
This is a three-step process in the pump and dump scheme. First, a person buys a significant holding in any stock.
Next, they make exaggerated claims about the company, encouraging people to “pump” their money into it and buy more.
Lastly, as the stock price goes up, they “dump” it and pocket the gains. However, as the significant stock volume is dumped, its price falls, and other investors lose their money.
How are fake claims made?
In the internet age, the propagation of fake information generally occurs via social media platforms or emails. Unsuspecting small investors are also enticed to invest in small and mid-cap stocks using banners and social media messages.
In this case, the fake information was being spread using YouTube videos using two channels, The Advisor and Moneywise.
According to Sebi’s guidelines, the person who spreads this information is called MMD or a misleading message disseminator.
How does Sebi identify pump and dump scams?
Sebi uses its Data Warehousing and Business Intelligence System to identify such scams. It provides “pattern recognition algorithms” to monitor trading. It then gives data to Sebi on who might be indulging in violating securities laws.
Sebi then looks into the stock and seeks clarification from the company. If an unsatisfactory response is received, the regulatory body cracks down on the MMD.