At this time, the internet is the one answer to all the questions. Everyone considers the internet a primary source for searching for anything, and investors/traders are not different. Traders and investors use the internet for trading and researching. Numerous people are opening their trading accounts every year. Investors can get tons of information from the internet just with a few clicks of a mouse whether they want to buy or sell a stock. Online trading makes the process more feasible where there is no need to step out of the home. Just sit at home, look at the charts, and start trading. But, with the help of the internet, it is also easy for the fraudulent to fool people and take their hard-earned money.
Stock Market Fraud: Introduction
SEBI (Securities & Exchange Board of India) describes stock market fraud as a criminal activity that can include pyramid schemes, high-yield investment fraud, foreign currency deceit, Ponzi schemes, advanced cost schemes, and brokerage embezzlement, related fraud. In many cases, fraudsters try to deceive investors through representation errors and manipulate financial markets in specific ways.
This crime includes providing cutting primary information, false information, offering bad advice, and act on insider information.
How to Identify a Stock Fraud?
- Guarantee Avoid persons who guaranty that investment will do a certain way. All investments have several levels of risk.
- Unregistered Products Many investment frauds involves non-licensed individuals who sell unregistered securities - ranging from stocks, bonds, notes, hedging funds, oil or gas agreements, or fictitious instruments, such as the Bank’s main investment.
- Too Consistent Returns Any investment that consistently rises month after month - or which provides a very stable return regardless of market conditions - must cause suspicion, especially during turbulent times. Even the most stable investment can experience hiccups occasionally.
- Pressurizing No leading investment professional shall encourage you to make direct decisions about investment or tell you that you have to “act now.” If someone presses you to decide on sales or purchase of shares, stay away. Even if no fraud occurs, this type of pressure is inappropriate.
Types of Stock Market Frauds
- Market Manipulation The most common fraud scheme is market manipulation that involves misleading and fake news about a specific stock to increase its price. The investors read this information, starts believing the news and starts buying the stock of that company. This heavy buying of the particular stock makes the price go higher and higher. Now, the owner who made up all this fake information starts to sell the stocks once the stock price touches the peak and makes a great deal of profit. When innocent investors find this information to be false, it is too late for them. Till the time the stock price falls, and everyone who has purchased that particular stock loses money. This scheme is also known as the “pump and dump” schemes.
Example: An owner of a lower-priced stock spreads fake news and highly positive announcements about the shell companies and stock on various media platforms. The owner spread it through internet securities information sites, newsletters, message boards etc.
- Touting Touting is also malpractice which is done by an individual or a group of people. In the investment community, a stock advisor has a good reputation and is considered a trusted person. But when this person is paid to “tout” or, in other words, paid to highly recommend a particular stock exaggerating it as an excellent investment, the touting takes place.
These individuals or groups of people know the reality of the stock, but they do not reveal this information as they are paid to tout the stock. Investors who do not cross verify the information and invest their money in these stocks thinking they are receiving correct information from their sources. But they do not know that they are the victims of a scheme called “bought and paid for”. Now they are part of a scheme for which an advisor was paid out to spread highly positive information about the stock that resulted in a booming price of undeserved stocks.
- Bogus Stock Bogus stock is another technique to make fools of innocent investors and get their hard-earned money. In this technique, fake stock dealers offer non-existential stock to the investors. He lures the innocent investors by showing them the great potential of the stocks and offers them these phony stocks that the dealer created by his imagination.
Example: Suppose a stock dealer offers some phony stocks to you, but you do not have any idea that these stocks do not exist. You do not know that the stock dealer is unregistered and has a criminal record. By seeing the great potential of the stocks, hundreds of people buy those fake stocks and keep filling the pockets of bogus stock dealers. Once the dealer has significant deposits, he transfers all the money in a foreign bank account and either leaves the country or hides somewhere.
- Microcap Fraud In microcap fraud, shares of small companies deceptively promoted and then sold to unobservant investors. They choose the company whose market capitalization is under $250 million. These fraudsters use boiler rooms and pump and dump techniques to scam the investors. Most of the stocks involved in microcap are penny stocks that trade for less than $5 per stock, but in reality, the price of these stocks are less than a dollar.
The stock manipulators and promoters make these stocks their target. First, they buy huge quantities of stocks and then boost the price of stocks by spreading misleading positive false statements and with good fake images of those penny stocks, buying pressure increases in the market that pushes the stock price. And this rise in price makes other people believe that stocks are doing well genuinely.
Popular Cases of Microcap Frauds
- 50 Cent’s use of Twitter cause the price of a penny stock (HNHI) to increase dramatically and made $8.7 million in profit
- Lithium Exploration Group’s (LEXG) was a lithium company that did not have any assets. All the revenues and assets of the company were zero at that time. But it acquired lithium development properties and ended up making over $350 million profit.
This microcap fraud has brought up names of so many well known, public personalities in the sight of regulatory authorities. There are tons of cases like this; some of them are:
Best Tips to Avoid Stock Market Scams
- Ask Questions Fraudsters rely on not to get investigated before you invest. It is not enough to only ask for information or reference from them - fraudsters do not have an incentive to set you straight. Take time to do your independent research also.
- Research Unsolicited emails, post-board posts, and company news releases should not be used as a single base for your investment decisions. Understanding the company’s business and its products or services before investing is necessary. Look for the company’s financial statements available on the internet.
- Know the Seller Take time to check the person touting investment before you invest - even if you already know the person socially. Always determine whether they are even licensed to sell securities in your country and whether their company has experienced a run-in with other investors or regulators. Your country’s securities regulator may have additional information.
- Be Careful with Unsolicited Offers Be very careful if you accept unsolicited tones to invest in the company or see it praised online but cannot find current financial information about it from independent sources. This can be a “pump and dump” scheme. Be careful if someone recommends foreign investment or “off-shore”. If an error occurs, it is more challenging to know what happened and found the money sent abroad.
- Protect Yourself Online and social marketing sites offer many opportunities for fraudsters.
- Knowledge Make yourself knowledgeable about various types of fraud and red flags that can indicate investment fraud.
The advancement of technology and excessive use of the internet has made these penny stock scams much more accessible than before to penetrate. Penny stock companies generally have shallow liquidity. The investors can face problems while selling their positions after the buying pressure has been decreased and the promoters and manipulators have escaped.
What to Do if You Suspect a Fraud?
Don’t let shame prevent you from getting help. The investment fraudster is a skilled professional criminal. They often hire a team of people to manipulate victims emotionally. Here are the ways you can adopt when suspecting a fraud:
- Inform Your Bank
- Contact Law Enforcement
- Contact Regulator (SEBI or Your Broker)
So, this was all about stock market fraud in India, & SEBI (Securities & Exchange Board of India) works to prevent these scams. Still, with hundreds and thousands of companies registered, it becomes difficult for government bodies to make sure that this type of scam will not occur in the future. So, the only advice for investors is, always invest with care and diversify.