Hawking, pump and dump - new rules, new warnings

The first trouble spot to attract ASIC’s attention has been so-called ‘pump and dump’ share campaigns. This is where a person, or group of people, buy shares in a listed company for a low price, then spread the word on social media about how great the share is, or push fake news about the company’s fortunes. That’s the ‘pump’, which is meant to encourage others to buy the same share, thereby pushing the price up.

When the share price reaches a certain level, the original ‘pumper’ sells out – or ‘dumps’ the shares. They score a juicy profit while recent investors are left watching from the sidelines as the share price tanks.

ASIC says it has recently seen “blatant attempts” to pump share prices, using social media posts to announce a target stock, a designated time to buy and even a target price or percentage gain to be reached before dumping the shares. However, pump and dump isn’t unique to Australia.

The meteoric rise and fall of GameStop shares that we saw earlier this year has been called out as a pump and dump by some commentators. Shares in the US video game company had been soldiering along at less than $US20 for much of late 2020. By the end of January 2021 the share price had skyrocketed to $US347 – almost 20 times its earlier value, reportedly driven by comments on online forums. Just a month later, in February, the GameStop bubble had well and truly burst, with the shares plunging to $US44.

In case you’re wondering, pump and dump schemes are illegal. They come firmly under the category of ‘market manipulation’ and can attract fines of $1 million and up to 15 years jail time. ASIC has put trading platforms on high alert to watch out for signs of pump and dump schemes.

For individual investors, the old rule ‘if it sounds too good to be true it probably is’, applies in spades. Do your own research on shares before you invest (GameStop had announced it planned to close several hundred stores, which definitely isn’t a sign of prosperity). And don’t make investment decisions based on a stranger’s comments on social media.

In other news, October marks the start of a ban on hawking financial products. It follows recommendations from the Banking Royal Commission, and was driven in part by concerns around unsolicited phone calls selling life insurance. A survey found two out of five people feel under pressure to buy products when contacted this way.

Happily those ‘out of the blue’, high pressure  phone calls should be a thing of the past – at least among reputable Aussie companies that are regulated. But it’s a fair bet the high pressure offshore share floggers won’t be put off. Bottom line, watch out for strangers who call trying to pressure you into investing. You could be talking to a scammer. 

Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.