Introduction

The Securities and Futures Commission (the “SFC”) has recently issued Restriction Notices to various brokers to prohibit them from dealing with or processing certain assets held in 32 trading accounts, which are related to a suspected social media ramp-and-dump scam involving the manipulation of the market in the shares of a company listed on The Stock Exchange of Hong Kong Limited. We have previously discussed about Restriction Notice in our January 2021 newsletter. In this newsletter, we explore the features and recent actions taken by the enforcement authorities with regard to the scheme of “ramp-and-dump”.

Based on the extensive investigations conducted by the SFC, it has discovered an increasing number of investors fallen prey to ramp and dump scams conducted through social media platforms. A ramp and dump scam is a form of stock manipulation where fraudsters usually pose as investment coaches to provide investors with “tips” and “inside information” via social media platforms, “ramp” up the share price of their target stocks, and then “dump” the shares to other investors at an exceptionally high price.

Typical features of ramp and dump scams

Ramp and dump scams typically involve the following three stages:

1.       Cornering and ramping:  At the first stage, scammers usually purchase a large portion of shares of listed companies with small market capitalisation as these stocks are more easily manipulated.

2.       Offloading:  At the second stage, scammers attempt to gain trust of investors and spread false favourable information about the target company via social media platforms to entice investors to buy the shares.

3.       Dumping: At the final stage, after the share price of the target stock has been manipulatively pumped up and the demand has flattened off, the scammers “dump” all their shares in the target company, which would lead to a significant drop in the share price and the victim would suffer significant investment losses as a result, and the fraudsters gaining wrongfully out of the deceived investors.

Actions taken by the SFC

The SFC has warned the public about the alarming increase in the use of social media platforms to defraud investors since 2020. In September 2020, the SFC issued an enforcement report (the “Report”) to highlight the typical features of and the legal and regulatory provisions in relation to ramp and dump scams.

More recently, in February 2021, the SFC issued restriction notices against brokerage firms to prohibit them from dealing with or processing assets in certain trading accounts which are linked to suspected social media ramp and dump scams.

Furthermore, the SFC and the Hong Kong Police have conducted a joint operation against an active and sophisticated syndicate suspected of operating ramp and dump manipulation schemes. Multiple syndicate members were arrested during the joint search of 27 premises across Hong Kong by the SFC and the Police. The case was referred to the Police by the SFC because of the scale of suspected fraud and money laundering offences, in addition to specific market misconduct offences under the Securities and Futures Ordinance (the “SFO”). Earlier, the SFC and the Anti-Deception Coordination Centre of the Police also created a video to explain a typical ramp and dump scheme.

In view of the intensive operations of the Hong Kong enforcement authorities, there is no doubt that the SFC is keen and determined to crack down these scams. This also falls part of the SFC’s commitment to eradicate serious misconduct to protect the public and maintain the integrity of the market. Various market misconducts associated with the ramp and dump scams are as follows:-

Possible offences and charges

Ramp and dump scams may constitute market manipulation under the SFO. In particular, the market manipulative activities may be regarded as market misconduct under Parts XIII and XIV of the SFO, which includes (i) false trading under sections 274 and 295 of the SFO; (ii) stock market manipulation under sections 278 and 299 of the SFO; (iii) disclosure of false or misleading information inducing transactions under sections 277 and 298 of the SFO; and (iv) fraud under section 300 of the SFO.

False trading

Ramp and dump scams may involve false trading pursuant to sections 274 and 295 of the SFO, which takes place when a person commits an act with the intention to create a false or misleading appearance of active trading in securities. This corresponds to the first stage of a typical ramp and dump scam where fraudsters may use multiple nominee accounts to conduct wash trades, i.e. offering to purchase the stock at a price almost the same as the price at which he proposes to sell without any change in beneficial ownership of the shares, to create a misleading appearance of active trading and high turnover in the market to lure investors to purchase the stocks.

Market manipulation

Fraudsters of the ramp and dump scams may contravene sections 278 and 299 of the SFO as well, where the fraudsters and their accomplices enter into 2 or more transactions in the stock of a listed company with an aim to ramp up the price of such stocks and an intention of inducing another person to purchase or subscribe for the same.

Disclosure of false or misleading information inducing transactions

At the second stage of the ramp and dump scams, fraudsters and their accomplices may breach sections 277 and 298 of the SFO for disclosing, circulating or disseminating false or misleading favourable information about the stocks via social media platforms, causing unwary investors to engage in transactions or artificially influencing the stock prices. According to the Report, fraudsters usually pose as online friends or investment experts on social media platforms and establish trust with the investors. Often times, the fraudsters claim to have inside information about the listed company and promise that there would be guaranteed profits to induce investors to purchase the stocks at an artificially high price.

Conclusion and takeaways

Ramp and dump scams account for almost 20% of the market manipulation cases that are under the SFC’s investigation in the recent days. Retail investors should be mindful to exercise extra caution when processing and analysing information relating to the stocks of a particular company before trading the same based on the information received.

In particular, relatively inexperienced and non-professional investors should avoid relying on investment tips they receive from unfamiliar and peculiar groups on social media platforms, and should always be sceptical when approached by strangers online who claim to be investment professionals offering unsolicited investment advice. It would also be prudent to report suspected cases of ramp and dump scams to the relevant authorities where appropriate. Going forward, eyes will be on the authorities to take legal actions against the wrongdoers and to further eliminate financial crime due to ramp and dump scams.