Social media platforms were designed to foster connections, share knowledge, and build networks. No doubt, many people are using it wisely but at the same time it has been acquired by scammers too to run their evil schemes and scams.
Among many different types of frauds originating from social media, the pump-and-dump scam has to the losses of many people, most of which remained unreported.
Let’s get into the details of the same to understand how scammers are exploiting social media platforms to execute pump & dump scams.
How Social Media Has Become the Ground of Pump-and-Dump Scams?
Social media platform works on building user engagement where content creators post appealing content to target a large audience base.
Now scammers and fraudsters use the same strategy. Once an influencer builds a substantial fan base, they may use different tactics to manipulate their audience for their benefit.
Followers, on the other hand, having blind faith in their influencers, take a long time to understand and realize the scam. Here are some of the ways by which fake finfluencers use social media for their benefit.
1. Hype Creation
Fraudsters use platforms like Twitter, Instagram, Telegram, etc to create hype around a low-value, illiquid stock to pump stock prices. They post content backed by false or misleading information and claim growth in stock by 100 or 200%.
For this, they use different tactics like:
- Posting fake trade and PnL screenshots.
- Sharing insider tips
- Spreading rumors around mergers, growth, or acquisition.
2. Aggressive Multi-Channel Marketing
They leverage and run sponsored content on different channels by paying huge amounts to influencers. Additionally, they add fake comments in the video with a lot of positive information about the stock creating hype among viewers.
This creates a FOMO among people making them act fast.
3. Spreading Fake News & Rumors
Anything can be easily spread at an accelerated speed on social media. Fraudsters reap the advantage of this and plant fake news around partnerships, growth potentials, and acquisition in the stock.
4. Strategic Dumping
Once the stock reaches a good level, these fraudsters start exiting their position making the stock fall sharply. Retail traders, often with limited knowledge, fail to grasp the technicalities behind such schemes.
Eventually, they end up losing the huge capital they invested after following their fake influencer blindly.
Pump-and-Dump Scam: Case Study 2024
In June 2024, SEBI uncovered a pump-and-dump scheme involving Svarnim Trade Udyog stock, where 11 individuals manipulated the stock price using Telegram channels.
SEBI penalized 11 individuals with ₹7.75 crore plus disgorgement of ₹92.37 lakh, along with 12% annual interest for manipulating the stock price. These people were involved in the promotion and artificial inflation of the share price of the Svarnim Trade Udyog.
As per the findings, SEBI disclosed how the group spread misleading stock recommendations through Telegram channels, creating unwarranted hype and prompting public shareholders to purchase the stock at inflated prices.
The scam was operated tactfully using the Telegram platform.
- These people promoted the stock by falsely spreading rumors of growth and lucrative investment opportunities in the stock.
- The promotion led to a significant increase in the stock price.
- Once the artificial demand increases the stock price, the manipulators close their positions by selling the stock resulting in a sharp decline.
- This left the unsuspecting investors with significant losses.
This case creates an urge among retail investors to be aware of themselves and do proper analysis before investing in the stock market.
Here are some of the key points that one must take care of:
- Critical Evaluation: Investors should critically assess stock recommendations, especially those circulated through informal channels like Telegram.
- Do Proper Validation: Conduct thorough research into a company’s fundamentals before making investment decisions.
- Awareness of Red Flags: Be cautious of unsolicited stock tips, especially those promising quick profits or based on insider information.
While SEBI has taken significant steps to penalize fraudsters, investors must take proactive measures to protect themselves.
Perform proper verification, validate information, and rely on credible sources before investing in stocks—especially those promoted on social media.
