In today’s Finshots, we explore the world of pump and dump operations and the red flags to look out for.

But before we get to the story, I have a question for you. Have your heard about the Mutual fund company whose schemes have topped the charts in 2020, 2021 and 2022? It's an incredibly story about a company whose name you may not have heard before. And in this YouTube video, we explain exactly what is happening here and whether you should consider investing in these schemes as well. Click here to watch the video.

The Story

India’s capital markets regulator has been on overdrive to clamp down on shady practices in the stock market. And on Thursday, they published two reports on how some individuals used YouTube to trap unsuspecting investors and manipulated prices. But before we delve deep into the report, a quick detour.

Jay Gould was an American businessman from the 1800s. He’d built a fortune in railroads. And people trusted that he knew his way around businesses. They often took his advice.

At some point in his life, Gould realized that he could influence people. Mould their actions to his desires. And make some money along the way. And as the story goes, one day, a pastor of the church asked Gould for money advice. So Gould told the pastor to buy stocks of Pacific Mail. He even said, “Look, if you lose money on the stock, I’ll reimburse you.”

True enough, the pastor lost money. And when he went running to Gould, the businessman handed over a cheque. As promised.

But then, the pastor asked — “What about the losses of the people in my church?”

Gould’s calm reply was, “They were the people I was after.”

Friends, you just read the story one of the first instances of a classic pump and dump!

Gould knew that the pastor wouldn’t be able to keep quiet about this ‘get rich quick stock’. He would spread the word about Pacific Mail in his church. A church frequented by the rich of New York. All Gould had to do was buy the stock himself, wait for others to buy it and drive up the price…and then dump it!

Gould was the manipulator and in today’s parlance, Pastor was the (gullible) influencer.

Now over the years, the modus operandi of the pump and dump remained the same. Only the characters have changed.

First, we had business reporters who wrote about stocks in the papers. They were the OG influencers back in the day. And they could indulge in pump-and-dump schemes.

Then came the television and business show anchors with a massive following that could also turn crooked and hatch nefarious plots to manipulate stock prices.

Finally, with the rise of social media — YouTube and Twitter — anyone, literally anyone, can turn into a master stock price manipulator.

This brings us to Manish Mishra.

According to SEBI, Mishra’s the mastermind behind a pump and dump orchestrated in two entities — Sadhna Broadcast Ltd and Sharpline Broadcast Ltd which are supposedly in the business of launching TV channels and creating films and serials. Mishra allegedly even roped Bollywood star Arshad Warsi and his family into the scheme. Yikes!

So what did they do?

Well, firstly, everyone involved colluded together and bought shares in these two companies. They then used 4 YouTube channels to create videos with egregious claims about how great the companies were. And to get eyeballs on the videos, they apparently spent over ₹10 crores just to advertise these channels.

It wasn’t just that. Apparently, Sadhna Broadcast even executed a stock split of 10:1 a month before the videos. This means if someone held 1 share of Sadhna worth ₹100, they would then have 10 shares worth ₹10. Suddenly, the stock looks cheaper. It woos investors. Coincidence? SEBI doesn’t think so.

And the end result?

The people involved pocketed a cool ₹52 crores when they sold their shares. The retail investors who got suckered into buying the stocks were left holding the bag. As usual.

So the question is — in the age of YouTube, how do you avoid a pump-and-dump scheme?

Well, some of it is very obvious. Some, not so much. But let’s still go through the bits from the SEBI orders to glean what we can.

Point 1: For starters, anyone can dole out advice on YouTube, Regulations don’t really prevent that. At least, not yet. So if you see a channel doing so, maybe look at the description first?

For instance, — ‘Midcap calls’ and ‘Profit Yatra’, two of the channels that pumped up Sharpline Broadcast didn’t have any description about the channel. Or the people behind it. That itself seems quite shady. Can you really trust something like this?

Point 2: If the channel doesn’t allow its viewers or subscribers to post comments, that’s a huge red flag. They’re doing this to prevent negative chatter and they don’t want people questioning their hypothesis.

And that’s exactly what ‘The Advisor’ and ‘Moneywise’ did.

Also, the YouTube algorithm works in such a way that when a channel engages with comments and even actively moderates it, the videos get a boost. So if a channel has lots of subscribers and views, but no comment activity, something’s fishy. You can be pretty sure that the algorithm didn’t do the hard work. The channel probably spent a lot of money promoting it. That’s never a good thing.

Point 3: Target prices!

Now everyone likes to give target prices. Analysts do it when they publish reports or they make a TV appearance. But often these prices are just 15–20% higher than what the stock is trading at. But just look at one of the YouTube videos urging people to buy Sadhna Broadcast when it was trading at ₹19. They gave a target price of ₹340! A whopping 1690% higher. Just know that if it sounds too good to be true, it probably is.

Point 4: Who’s buying and selling?

When promoters or the top management of a company are selling in a frenzy when the stock price heads north, that’s never a good sign. Sure, they may not know their stock is rigged. They may simply want to pocket some gains. But more often than not, it shows that they don’t believe in the price rally. They’re just thanking the gods for the good fortune and cashing in on the luck.

Typically, this is accompanied by a rise in retail investors invested in the stock. They’re swayed by the opportunity to make quick money and they pile in. In Sadhna Broadcast, the number of retail investors rose from just 2,100 to 55,300 in a span of 3 months. From holding just 3% of the shares to 25%. So be wary if you see that happening.

By the way, SEBI says that the promoters of Sadhna Broadcast sold off their shares after the videos were uploaded on YouTube and the price rallied. Were they in on it? We don’t know for sure. But SEBI says they’re connected to Manish Mishra.

Point 5: Stock exchanges usually monitor stock price movements regularly. They also keep a hawk-eye on whether there’s any news about a stock. If they smell something suspicious, they ask for an explanation from the company. The company responds and it’s then published on the stock exchange website.

For instance, Sharpline Broadcast published a response to BSE on 10th June 2022. They said and we quote,“…news such as Launch of new OTT platform like Amazon, Sony & Zee Tie up worth Rs. 250 crores and Adani Group to Takeover the company, etc. is being circulated in the social media…we hereby wish to inform you that whatever is circulating is false and misleading on Social Media, we have no connection/link regarding this fake news. We are not in agreement with the matter so circulated.”

Over the next month, the stock fell by 60%!

So yeah, you don’t even need to do too much due diligence for this.

Bonus tip: Some stockbrokers look out for your interests too. Zerodha* actually has a Nudge that tells you if they believe a stock is being manipulated as part of a nefarious pump-and-dump operation. Now, this isn’t 100% foolproof. But something is better than nothing, eh?

Source: Nithin Kamath/Twitter

Until then…

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*Zerodha, through its Rainmatter fund, is an investor in Finshots.