"Today’s pump-and-dump scheme has now been turbocharged by social media’s predominance in contemporary life.
Historically, the pump phase has been performed through techniques like the boiler room ... this basic scheme is alive and effective; however, by leveraging social media and new technology, manipulators are no longer constrained by staffing.
A 2020 study showed that - despite contravention of basic principles of due diligence - 38% of investors took their primary source of investing information from social media platforms such as YouTube, Facebook, Reddit, and TikTok ... However, that skews to 51% for the 25-34 age group.
Windeln.de, a German diaper company, experienced wild social media-fueled price swings due to information shared across the Reddit network, "information" that ultimately turned out false ..
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We have also witnessed the rise of the “finfluencer,” a person who uses social media to provide information and advice on various financial topics and can ultimately influence financial decision-making. A study published by the Dutch Authority for the Financial Markets (AFM) summarizes the risks and conflicts of interest that finfluencers represent, including recommending risky products and providing investment advice without proper licensure. These factors have created a breeding ground for new social media pump & dump schemes.
Sadhna Stock Manipulation Case
India’s Securities and Exchange Board (SEBI) investigation revealed a case that mixed all these ingredients. Sadhna experienced a sudden rise in its share price in 2022. A group of individuals, which will be referred to as “promoters,” and which included people in senior management roles, existing ownership stakes in the company, and those with direct relationships such as family members, executed a significant portion of the trade volume from April to July 2022, a period where the stock saw a significant price increase. The promoters also traded among themselves, creating the impression of a price increase and healthy overall activity in a very illiquid stock historically. So far, this is a standard start to a pump-and-dump scheme.
Then, in late July 2022, a YouTube finfluencer put out a series of videos aggressively promoting the stock with what are now known to be false and misleading statements. The videos stated that the company would be acquired, and they were about to sign a big contract with an American corporation.
At the same time as this misleading promotion, the finfluencer was selling the stock being promoted, and during that period, the promoters also heavily sold down their existing positions. Overall, the influx of new investors didn’t heavily push up the price but instead brought in volume, allowing the promoters to exit. ***
A U.K. FCA report identified that 16% of 55-64-year-olds used social media for investment advice, and that figure shoots to 69% for 18-24-year-olds. As a new generation ages into investing, their habits will mold future schemes. What is certain is that the well-worn pump-and-dump scheme will continue to alter and mutate in the coming years."
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