‘Pump and dump’ activities under scrutiny


The Securities Commission’s (SC) warning to investors over “pump and dump” scams over the week came about one year after Bursa Malaysia issued the same caution in a circular to the heads of dealing and compliance of stockbroking companies last March.

According to some market observers, warnings about “pump and dump” activities are timely and appropriate, considering the fact that there are now more new investors entering the local equity market.

“The regulators need to create awareness about the existence of these kind of speculative activities, particularly for new investors, many of whom are still learning the ropes of investing in shares and stocks,” one analyst with a local brokerage says.

“What’s more, some new investors tend to start with low-priced stocks – which are the main targets of ‘pump and dump’ perpetrators – in the hopes of seeing their money grow before proceeding to invest in higher-priced stocks,” he adds.

So, what is this “pump and dump” scheme all about?

Well, “pump and dump” is an age-old trick used by perpetrators to earn quick money at the expense of others through the stock market. The perpetrators can be an individual, or a group of individuals.

They begin their operation by acquiring a huge amount of shares in a company, typically one with penny shares or stocks selling for less than RM1 apiece, at a very low price, and then promoting it and creating a lot of hype around the organisation to “pump” up its share price.

They do that by spreading false or misleading information to create a buying frenzy for the stock. During the process, they will also trade in the shares of the company to create volume and upside in order to create the perception that something big is really brewing in that company.

But once the share price of the company skyrockets to a level they desire, the perpetrators will “dump” or sell all their shares to make huge profits. And that is when the share price of the company will plummet on unsuspecting investors, causing them to lose money.

Although pump-and-dump schemes have existed in the local equity market for many decades, the emergence of Internet and social media has provided a fertile new ground for perpetrators.

Pre-Internet and social media days, pump-and-dump perpetrators operated through syndicates, with members comprising selected brokers and remisiers, to promote a stock.

Now with technology, the work has been made much easier for fraudsters to reach out to hundreds of thousands of people with the click of a mouse.

As part of a crackdown on “pump and dump” activities, the SC and Bursa Malaysia over the week recently named a blog, Bonescythe Stock Watch, as one found to have published various articles that contain misleading and deceptive statements and forecasts. This is an offence under Section 178 of the Capital Markets and Services Act 2007 (CMSA).

The blog has since been removed following the SC’s intervention.

Be that as it may, pump-and-dump schemes have their supporters and opponents.

One broker, for instance, argues that such speculative activities are a “necessary evil” for a vibrant stock market.

“This is part and parcel of capital market development... it is always better to have a vibrant market than a boring one,” he explains. The onus is on the investors to trade wisely; some ‘innocent’ investors will still be able to make some money riding on the volatility created by speculative trading activities, if they are lucky ... but of course, there are many unlucky ones who will end up losing money,” he tells StarBizWeek.

Meanwhile, another analyst reckons that while the total elimination of pump-and-dump activities is not possible, some form of regulation is still needed to ensure orderly trade in the market, and wrongdoers not go scot-free.

“Ultimately, investors themselves have to do their own research.

“Use common sense and learn how to invest wisely,” he says.

As for how to spot a “pump” stock, the analyst notes that penny stocks are usually the ones most prone to this sort of manipulation.

“You will hardly find a stock in a pump-and-dump list that is not a penny stock.

“This is the number one rule,” he says.

“Another red flag is a sudden surge in volume to, say, more than one million in a day, when the counter used to be a thinly traded stock, and there’s a sudden jump in the share price, when the counter had hardly ever shown much price movement before,” he points out.

Typically, the analyst says, the company targeted for “pump and dump” does not have a good earnings track record, and has to ride on claims of offering “big upside potential” to drive up its share price.

“Anytime someone tells you there is big money to make from one particular stock, particularly one that does not have strong fundamentals, you have to beware,” he says.

In such instances, he points out, the old adage applies: If it’s too good to be true, it probably is.