Long Read: if the microcap fits...

Contributing Editor Allan Foad writes: Readers will probably already be aware that “pump & dump” is a heinous fraud that preys on the greedy and naïve. It's a fraud which has been around for a long time but which has become particularly vicious in recent years because of the rise of information technology and social media.

I first came across this fraud in an article in the Sunday Times published in September last year, and I will refer to it throughout this piece. I have also accessed a comprehensive note on "pump & dump" produced by a market analytics organisation called Compare Currency. In essence this fraud is an exercise in market rigging that goes through three phases, as follows:

Phase one: The groundwork

The fraudster needs to identify a suitable company to play with. It needs to be obscure and ideally fall into the penny share category. It is often referred to as a microcap, which is a company with a market capitalisation of less than £250 million. It needs to be a company where there is very little financial information in the public domain.

In the case reported in the Sunday Times the company chosen was Oistin Technology Group, a company headquartered in the Cayman Islands with what I think is manufacturing facilities in Nanjing in China. It produces liquid crystal display modules and polarisers for consumer electronics and cars. Historically, its shares were lightly traded and the price ranged from 80 cents to $5.00.

With the company identified, the fraudster assembles a syndicate of investors. This is typically around fifteen-strong, and these investors go quietly into the market purchasing shares. Without scaring the horses, they acquire a significant stake and gently start to push up the share price.

Phase two: The Pump

Using the full range of social media sites the fraudster starts to put out fake news stories about Oistin drumming up investor interest. This might take the form of a rash of email newsletters or a press release ostensibly issued by the company. These are regularly picked up by financial news websites which do not have the capacity to filter material sent to them, and the stories are published unchecked.

The investor in the Sunday Times story picked up an advertisement on Facebook for an American investment management firm based in Wisconsin called Reinhart Partners. The contact name was Jennifer Mitchell. The investor searched on Google and confirmed it was a real firm and Jennifer Mitchell was one of their advisors. But in truth, he was talking to a cloned website and Jennifer Mitchell was a creation of artificial intelligence.

Mitchell offered him a free 100-day trial of her firm’s services and convinced him to invest in Oistin’s shares. He went ahead and was delighted when he saw the share price start to rise. At this point the fraudsters started to circulate the story that Oistin was in talks with an American firm about a partnership that would be game changing for both parties. The money poured in and Oistin’s share price headed towards $12.00.

Phase three: The Dump

You can guess what comes next. The syndicate offloads its shares and the price slumps. The Sunday Times investor bought at an average price of $5.50 and sold for $1.00. It is thought that the syndicate walked away with $110 million between them, about $7 million each. Possibly hundreds if not thousands of investors were conned in the UK alone.

But the story does not end there. The AI-generated Jennifer Mitchell was distraught that the investor had lost money on her advice and said that her firm was putting together a scheme that would recover his losses. Still thinking he was dealing with a genuine investment manager, the investor bought into the story and was duped again!

Compare Currency makes it clear that fraudsters face punitive action if they are caught having broken a number of laws including securities fraud, wire fraud, and market manipulation, and not only will face serious jail time but will also forfeit their assets. The problem is these fraudsters are seldom caught and are often located in jurisdictions out of reach to the US or UK authorities.

These schemes exploit investor’s fear of missing out, so interested investors should undertake as much due diligence as possible. Unfortunately, these schemes are aimed at punters who are not resourced to investigate properly. They should at least verify who their advisors are and interrogate their credentials. In the Sunday Times case the investor sent an email to the real Reinhart Partners but did not receive a reply. That was a red flag.

It's inadvisable to invest in speculative schemes with borrowed money. It only exacerbates the problem if things go wrong. And investors should always protect their personal and financial information – otherwise the fraudster will be gifted a spin-off chance to commit identity fraud.

*This is an edited and shortened version of the original article fiurst published in Leasing World edition 214

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