New-age stock scams and how to spot them

The bull market since Covid has brought a new generation of starry-eyed investors into the stock market. This has spawned a new set of scamsters too, keen to part them from their money. With YouTube, Telegram, Twitter et al offering convenient platforms to acquire large masses of followers, age-old stock manipulation methods have been given a new makeover.  

The Securities and Exchange Board of India (SEBI) has been kept very busy in the last three years, detecting these scams and bringing their perpetrators to book. Reading through its regulatory orders offers insight into the modus operandi of such scams. We highlight five broad types of new-age stock scams prevalent today, based on SEBI’s findings, that investors need to be wary of.

Portfolio Podcast | New-age stock scams to be wary of  Portfolio Podcast | New-age stock scams to be wary of  

Telegram tips

Pump-and-dump schemes — where an operator who has personal positions in a stock talks up its prospects and dumps it on the public — are as old as the market itself. Earlier, scamsters used word-of-mouth to spread fanciful tales about companies. New-age ones rely on YouTube, Telegram, Whatsapp and Twitter to do this on a viral scale.

SEBI passed a final order this April against two brothers and a friend for being administrators of a Telegram channel named Bull Run Investment Education (@bullrun2017) devoted to plugging micro-cap stocks. With over 49,000 subscribers, it claimed to be run by four research analysts with an experience of 40 years.

For instance, Total Transport Systems was recommended as a ‘Jackpot delivery call’ at ₹65-70, with suitable emojis of moneybags, rockets and balls of fire with a target price of ₹100. Investors were told to acquire 5,000 to 7,000 shares.

The Telegram channel kept repeating such posts from April to July 2021 . The operators bought large quantities of the stock before each post and dumped it just after. SEBI has listed out over 30 pages of micro-cap stocks that were recommended on the channel. Far from experienced analysts, the calls were given by a person who had studied tourism management without any SEBI registration. When hauled up, operators of @bullrun2017 argued that they were merely sharing free ‘academic research’ on stocks.  

What to watch:Take your stock advice from Research Analysts (RA) or Registered Investment Advisors (RIA) with a SEBI registration number. Even registered analysts and advisors can be scamsters, so look for known names with a track record of managing public money.

Paid advice is almost always superior to free advice, which has hidden costs. No genuine analyst will tell you what quantity of stock to buy or sell, as that will depend on the size of your portfolio. Use of disclaimers such as ‘educational’ or ‘not advice’ or ‘do your own due diligence’ is not a sign of honesty or humility, but attempts to cover the operator’s tracks in case SEBI comes calling.  

Stock influencer marketing

Thought only film stars had fan clubs? Nowadays individual stocks have dedicated Telegram, Whatsapp and YouTube channels too, to help followers cheer them on. A recent SEBI order created ripples after naming actors Arshad Warsi and Maria Goretti as ‘volume creators’ in a stock manipulation scheme. The two actors were later granted relief by SAT, which held that they only traded in the stock and did not rig it. But this case highlights the role that social media platforms can play in drumming up interest in an obscure stock.

SEBI investigated two YouTube Channels — The Advisor and Moneywise having 7-8 lakh viewers — registered in the name of one Manish Mishra, which regularly circulated positive news about Sadhna Broadcast.

Between April and September 2022, videos on these channels went gaga about the company being ‘taken over by Adanis’, bagging ‘a ₹1,100 crore American contract’, etc. Mishra paid ₹4.7 crore to Google Adsense to promote these videos, fetching a 3-crore viewership. He was related to the company’s promoters and others who put through trades in the stock before each promo. Sadhna Broadcast promoters used this surge to quietly sell their holdings.

What to do: Influencers who plug stocks or financial products on YouTube, Twitter and other social media often do so for money. They can be unwitting and sometimes willing participants to pump-and-dump schemes. Be wary of any stock where promoters are unduly interested in the stock’s performance, and stocks with a large social media following.   

Options price rigging

In the olden days, when market operators wanted to make a quick buck, they picked a thinly traded share and put through pre-agreed trades between themselves at inflated prices. When novice investors got sucked in, they exited. Of late, though, with retail investors migrating en masse to options trading, the theatre for price rigging has moved to options.

SEBI has been passing a string of orders in the last two years relating to a mega-price rigging racket that it uncovered on BSE. In 2014-15, it found that over 80 per cent of the stock option trading volumes on the BSE were in rigged contracts, with as many as 14,720 operators involved. SEBI’s orders cite two types of trades. An operator bought large volumes of a poorly-traded option from a counter-party and sold it within seconds to the same party, at prices that were 50-100 per cent higher. At other times, selling contracts at low prices was followed by buys at high strike prices.

Such pre-agreed ‘reversal’ trades had two purposes.

One, they created an artificial market in the chosen options, giving the impression to lay investors that there were big gains to be made in them. Two, they helped the operator evade tax by booking fictitious losses that could be set off against profits from other sources. Such was the sheer volume of these cases that SEBI, unable to pass individual orders in this racket, rolled out two settlement schemes to resolve them.

What to do: While options traded on BSE have been on SEBI’s radar, infrequent trading and irrational intra-day price spikes are very much a feature of stock options on NSE too. This creates enormous scope for rigging option prices even of well-known stocks. If you are a new hand at options trading, avoid individual stock options and stick to liquid index contracts. If you must trade stock options, use limit orders and not market orders, as the strike prices you see on screen can be both fictitious and fleeting.   

Assured returns from derivatives

From the time of Charles Ponzi, investors have come to grief by flocking to pie-in-the-sky schemes offering ‘assured’ returns. If orchard and emu breeding were the go-to schemes in the nineties, today it is derivatives trading.    

SEBI’s investigations have unearthed scores of spurious ‘advisors’ promising high double-digit returns from dabbling in stock, commodity and currency derivatives. Sometimes, investors handed over their trading accounts to them, to execute derivative trades on their behalf.

After being saddled with losses, they complained to SEBI, which found that many of these advisories were run by laymen who had neither any expertise nor the required RA/RIA/PMS (portfolio management service) licence.

When SEBI issued notices to partnership or proprietorship firms for offering illegal advice, many claimed that they could not be held liable for investors’ losses, because they had merely “lent” their firm to an acquaintance. (In one case, the owner of the firm claimed he only traded in garlic).

A long-running case has been that of Anugrah Stock Broking where SEBI issued an order in March 2023. The broker and its associate firm, Om Sri Sai Investments, were offering a ‘derivative advisory service’ to clients under two plans — Gold and Platinum — with minimum investments of ₹10 lakh and ₹1 crore each.

A client could invest the full amount in cash or 60 per cent via cheque and 40 per cent in stocks. In the case of stocks, he/she had to take a haircut of 50 per cent on market value. The Platinum plan had a 1-year lock-in with a 12 per cent ‘assured’ return and collected ₹165 crore from 677 clients.

Anugrah and co racked up a shortfall of ₹297 crore in clients’ bank accounts and ₹683 crore in their demat accounts, pointing to diversion of funds and shares. Anugrah’s registration was cancelled for operating a PMS without licence.

What to do: Promising assured returns from any market-related investment is illegal, so this is a red flag. Before signing up, check if the entity has a PMS/RIA/RA registration. Even licences, though, do not entitle RIAs/RAs to trade on your behalf. By handing over your trading credentials, passwords, email et al to a third party, you are not just putting your wealth at risk, but also your reputation. Should your account be used for money-laundering or price rigging, you could get hauled up by SEBI, fined and barred from markets.

Even SEBI-registered entities can turn out to be scamsters, so choose PMS/RAs/RIAs based on testimonials of folks well-known to you and not unsolicited phone calls from Indore or Bhopal. Ask for details of the service you’re signing up for in writing and preserve transcripts of Whatsapp messages, emails and UPI/net-banking payment receipts, as proof.

Tech-enabled front-running

Front-running, where employees of a large institution jump in ahead of its big orders, has been a scourge of the markets for long. But if front-runners of yore had to wait for a cosy chat in a cafe or landline access to tip off their friends, today’s front-runners have many devices at their disposal to instantly do this.

To prevent front-running in mutual funds, SEBI mandates restricted access to their dealing rooms and dealers are barred from accessing their cell phones during trading hours. Order flow from fund managers to dealers is recorded and execution times monitored. All conversations in dealing rooms are recorded too. But SEBI’s recent order in the front-running case at Axis Mutual Fund found that the fund’s erstwhile dealer Viresh Joshi juggled multiple mobile phones, of which he declared only one to his office.

SEBI surmises that the work-from-home relaxations during Covid allowed Joshi to work without oversight. (It alleges) he passed on unpublished information about Axis’ big trades to his accomplices via Apple Facetime and Bloomberg chats. They ‘arranged’ front-running trades on his behalf through borrowed accounts. SEBI seized electronic devices such as mobile phones, laptops, from suspected entities and built its case around Whatsapp chats and other digital records it retrieved from them.

What to do: If you’re an investor in a mutual fund or insurer where insiders regularly leak out its trades to the market, you’re likely to have some percentage points shaved off your return. But there’s precious little you can do about it. If you’re an investor/trader, don’t act on Whatsapp/Telegram/social media whispers about a big institution or big-name investor buying a stock. This could be part of an illegal front-running racket, which can put you on SEBI’s radar.