Hack, pump and dump
-Abhay Rao
“Fraud and falsehood only dread examination. Truth invites it,” said the late 18th century poet Samuel Johnson. Yet, to date, most frauds seem to be out of the scanner, and remain undetected. And, this is not referring to back alley crimes and muggers, but modern thefts that occur under our very noses. Small and ingenious techniques are now being used by scamsters to avoid being noticed and rid you of your wealth. Some of these new age scamsters lurk behind the murky shadows of the cyber world and some use age-old greed baits to lure investors to make a fast buck.
While one may always feel that Indian systems are relatively slack and backward, it took Thirugnanam Ramanathan, a 35 year old originally from Chennai, barely any effort to pull off a high-tech stock fraud scheme that involved hacking into US brokerage accounts to make unauthorised purchases of thinly traded stocks to drive up the price.
Once the prices began to rise, he and his colleagues then dumped their own shares in the same stocks for a profit. At least 60 customers of nine brokerage firms were victims to this scam before Ramanathan was cuffed in Honk Kong and extradited to the US. He slipped up once when one of the instances of stock manipulation was traced to an IP address used by a Bangkok hotel where he was staying at that time. Welcome to the new scam, hack pump and dump.
Such hack, pump and dump scheme hit 60 online stock traders and nine brokerage firms, including TD Ameritrade, ETrade Financial, Firstrade Securities, ChoiceTrade, OptionsXpress, TradeKing and Terra Nova Financial. It was also the first time that such a case was tried, and the guilty, namely Thirugnanam Ramanathan and his accomplices were sentenced to two years in prison. However, by then the damage had already been done, with over $300,000 lost.
A blog at wired.com , a leading technology magazine and website, recently described hack, pump and dump schemes as “stealing candy from a child,” and while India seems to have stayed relatively clear of traditional pump and dump involving spasm instances of pump and dump by way of false rumours, tips, price manipulations and hacking still loom large over all our heads. India, the centre of activity, buzz and financial deals round the clock, now stands firm amidst crumbling financial systems worldwide. A volatile Sensex that has had most guessing in recent times, has been fairly stable as far as safety norms went, ever since the famous “Harshad Mehta” scam of the 90's.
Yet, today, surprisingly so, stock market manipulations, price manipulations, frauds and even pump and dump schemes are rampant. The only difference is, many of these have not gotten into the limelight yet.
“We have the statutes and laws in place to curb these frauds from occurring. Yet, due to lack of implementation, scam gyp investors of their wealth, within the stock market itself,” says Vijay Kevalramani, a chartered accountant and stock market enthusiast for many years now.
As per complaints made by investors at the Cyber Crime Complaints and Resolution Assistance Center of naavi.org , a reputed brokerage firm has been allegedly involved in large-scale investment frauds and there are several other brokers as well. Naavi Vijaya Shankar, cyber law consultant and co-founder of the Cyber Society of India feels, “Hacking and modifying online accounts to dupe investors of their wealth is rampant in India. There are many such instances, which have taken place over the years in various parts of the country.”
What is pump and dump?
Pump and dump scams revolve around illegal activities carried out by an investor, broker, a group of investors, brokerage firms or even promoters at times, to promote a stock they hold.
They try and manipulate the price of the stock, so that it rises due to increasing trade volumes and interest generated. Once the stock is on its upswing, the scammers sell the stocks they hold and make a handsome short-term profit.
These stocks are usually lesser-traded stocks, maybe of some small- or mid-cap companies. These are promoted via tips, rumours and scam messages often claiming the stock to be the next big thing, whose prices will shoot through the roof, based on a pending news announcement, with details to the same.
Each such pump and dump scam has different tactics and information used. However, the general idea behind the scam is the same. The reason why small- and mid-cap companies are the preferred choice is due to the illiquid nature of the stock, allowing the prices to fluctuate easily with an increase in trade volumes.
Once the scammers notice a spike in the demand of the stock, and the steady rise of price that follows, they will wait till the price gets to their estimated level, before selling their positions and holdings in the stock, enabling them to walk away with a handsome short-term profit. The only losers, happen to be the investors who now hold a bunch of worthless shares, as immediately post the big exits made by the fraudsters, and on no “supposed news” ever being broken, panic sets in and the price of the share falls again.
Scam business
No, this is not hinting towards another scam, but the business of scamming itself. Yes, scamming is a business, with plans, profits, targets and all the jazz one can think of. And, one of the prime methods used for scamming these days are the email, which when used for pump and dump schemes, try their level best to promote one company's shares.
Before the email came, such rumors were spread in pubs, trains, Dalal Street and other ingenious ways were used.
One such way that comes to mind is the famous pump and dump scam in the US a few years ago. This involved leaving people messages on their answering machine about a supposed hot stock pick. This message was left in such a way that it appeared to be for someone else and has gotten to that person by pure chance.
Excitedly, most people bought this stock and within hours the price rose by almost 300%. The scammers then sold the shares of that company, which they had previously gotten and managed to make sizable profits. Yes, we Indians are a lot smarter and are unlikely to fall for some lame scam trick most may feel. Yet, all these incidents that have occurred all over the world have little to do with people's intelligence, for it is their greed that has been preyed upon.
Instances of stock price manipulation and investors losing their shirts are very much real and such threats need to be understood, studied and most importantly be aware of.
These days one has to be on their feet and twist the age old adage to, “If its too good to be true, it probably isn't”, for a more up-to date approach to life in the fast lane, especially in the cunning stock markets arena. A simple fact about scams and the easiest way to avoid them is, if it looks like a scam, feels like a scam and sounds like a scam, it probably is a scam.
All the person who wants to start a rumor and “phish” for innocent victims today, is to hit the send button, and boom, millions of emails have been sent, heavily promoting a stock. This stock, which is suppose to be bullish in the short-term based on some inside information, which will soon come to light, or which to view one has to click to link, which in all likelihood does not take you anywhere, is the basic gist of most such messages.
However, these days, a secondary method of stock spamming is used, one that makes it much harder to track down the criminals behind the operation, as well as identifying those who actually profited from the market manipulation.
These spams include the usage of highly sophisticated career spammers, who work on behlaf of the “stock sponsor” or stock owner, for a certain commission, which he makes, based on the rise in that stock’s price. The time of sending the mails is often after the stock has hit a certain point in it's downtrend, post which, the spammer can send almost 120 million messages a day from various infected computers, after which the price often starts rising and the stock owner starts raking in the profits.
India, stocks and frauds
Kevalramani says, “Non financial and manufacturing sectors often see stock price manipulations and inflations, since their assets are harder to keep a track of. Insider trading, especially in many small- and mid-cap firms is also a growing concern, especially when the prices of a particular stock is suddenly seen to rise with increasing trade volumes out of the blue.
While laws are there to protect investors against this, enforcing them effectively is a major challenge. The Securities & Exchange Board of India (Sebi) has robust systems in place to track huge price spikes the Integrated Market Surveillance System (IMSS) is in place as well to monitor market manipulations. So instances of market manipulation have dropped down drastically. But small- and mid-cap stocks, especially thinly traded stocks, often escape the scrutiny.
So while the instances of outright pump and dump have reduced, instances of hacking and account manipulation are on the rise.
Shankar says, “It is an up-hill struggle with sub brokers and brokers of many brokerage firms also often being involved and the police very reluctant to book cyber law and fraud cases.”
With similar thoughts on the issue and presenting a recent instance of the same is Manan Thakkar, chartered accountant and cyber law professor based in Ahmedabad, Gujarat adds “One of my clients only recently suffered from losses due to his dormant d-mat account being used to purchase risky futures. On receiving a SMS of the same, the client inquired with the brokerage firm who were not sure how this happened but promised to sell of the futures immediately. There was still a loss of Rs 14,000 or so made, but stranger still was what happened next.” There are more instances.
He mentions about a client who had some Rural Electrification Corporation shares lying in a dormant account. Suddenly one day out of the blue he gets an alert, via which he founds out that these shares were sold off without his authorisation or proper notification. In reality, the problem with such cases is getting the police to conduct an investigation is rather hard, Thakkar adds.
Also, since very often when traders themselves use their client's accounts to trade without their knowledge, if they have made money for them, they do not crib.
However, once there is a loss the cat is out of the bag.” Naavi also recalls an instance in which he says “Three people who held accounts with a leading brokerage firm were victims of something similar.
However, in their case they did not receive any email notifications or any alerts of transactions being done using their money from their accounts, as the email id's provided in the form signed by the client were faked.
The client had not filled an email id and hence someone else within the organisation must have, who later had access to their accounts. In fact, on tracing the investments made from that account later, it was found that the money had been used to buy shares of that brokerage firm itself, a clear case of insider trading over everything else. A case with Sebi has been filed for the same and is being currently looked at by the arbitration committee.”
The above cases are not isolated in nature and with money being accessed by so many people within the stock markets, frauds and price manipulation are common occurrences. While such instances have led to stocks being bought, maybe in some cases prices inflated as well, the end result remains that some people have been making money using various ingenious methods, while others who have fallen prey to these have lost a lot.
Solutions
“Fraud isn't just a cost of doing business, it also undermines consumer confidence. With the new Stock Trading Module, we have extended the existing functionality of the fraud detection services to proactively identify fraud before damage can be done. Preventing pump and dump types of schemes makes a huge difference and we are hopeful to provide for this now,” said Fran Rosch, vice president of Identity and Authentication
Services at VeriSign.
Today, newer and better software's are being made to help protect investors and brokerage firms from falling easy prey to such schemes. These software’s run on intelligence systems that catches things out of the trend and alerts people before it's too late and while the scam is actually occurring. This is definitely one solution to safeguard one’s self.
Kevalramani also warns, “When you notice a sudden major rise in a company's stock price you should check its growth pattern. Secular rise is good. However, a non-linear or un-secular rise is a warning sign to investors”
Stock scams are of various types and so many that one may feel vulnerable in this survival-of-the-fittest-environment. However, “There is no such thing as easy money,” so please stop chasing it. Get a broker you can trust completely or open a d-mat account with a reputed bank where chances of misuse are fewer. Do not fall for spam mails, stock tips or rumors, for basic investing based on fundamentals is still the safest form of investing, and is the best way to beat all such scams, no mater how advance and ingenious they get.
And the most common mistake is to leave a d-mat account unattended. Many times, a d-mat account is offered to you as an additional perk when opening a bank or a broking account and you could end-up having two or more d-mat accounts, of which one is the active account and the other dormant.
Do close these accounts and keep your eyes open to changes in your broking and active d-mat accounts as well. For every firewall created by the technology experts there are thousands working overnight to break them and even if a few are successful, they could damage your wealth.
Source: The Financial Express
“Fraud and falsehood only dread examination. Truth invites it,” said the late 18th century poet Samuel Johnson. Yet, to date, most frauds seem to be out of the scanner, and remain undetected. And, this is not referring to back alley crimes and muggers, but modern thefts that occur under our very noses. Small and ingenious techniques are now being used by scamsters to avoid being noticed and rid you of your wealth. Some of these new age scamsters lurk behind the murky shadows of the cyber world and some use age-old greed baits to lure investors to make a fast buck.
While one may always feel that Indian systems are relatively slack and backward, it took Thirugnanam Ramanathan, a 35 year old originally from Chennai, barely any effort to pull off a high-tech stock fraud scheme that involved hacking into US brokerage accounts to make unauthorised purchases of thinly traded stocks to drive up the price.
Once the prices began to rise, he and his colleagues then dumped their own shares in the same stocks for a profit. At least 60 customers of nine brokerage firms were victims to this scam before Ramanathan was cuffed in Honk Kong and extradited to the US. He slipped up once when one of the instances of stock manipulation was traced to an IP address used by a Bangkok hotel where he was staying at that time. Welcome to the new scam, hack pump and dump.
Such hack, pump and dump scheme hit 60 online stock traders and nine brokerage firms, including TD Ameritrade, ETrade Financial, Firstrade Securities, ChoiceTrade, OptionsXpress, TradeKing and Terra Nova Financial. It was also the first time that such a case was tried, and the guilty, namely Thirugnanam Ramanathan and his accomplices were sentenced to two years in prison. However, by then the damage had already been done, with over $300,000 lost.
A blog at wired.com , a leading technology magazine and website, recently described hack, pump and dump schemes as “stealing candy from a child,” and while India seems to have stayed relatively clear of traditional pump and dump involving spasm instances of pump and dump by way of false rumours, tips, price manipulations and hacking still loom large over all our heads. India, the centre of activity, buzz and financial deals round the clock, now stands firm amidst crumbling financial systems worldwide. A volatile Sensex that has had most guessing in recent times, has been fairly stable as far as safety norms went, ever since the famous “Harshad Mehta” scam of the 90's.
Yet, today, surprisingly so, stock market manipulations, price manipulations, frauds and even pump and dump schemes are rampant. The only difference is, many of these have not gotten into the limelight yet.
“We have the statutes and laws in place to curb these frauds from occurring. Yet, due to lack of implementation, scam gyp investors of their wealth, within the stock market itself,” says Vijay Kevalramani, a chartered accountant and stock market enthusiast for many years now.
As per complaints made by investors at the Cyber Crime Complaints and Resolution Assistance Center of naavi.org , a reputed brokerage firm has been allegedly involved in large-scale investment frauds and there are several other brokers as well. Naavi Vijaya Shankar, cyber law consultant and co-founder of the Cyber Society of India feels, “Hacking and modifying online accounts to dupe investors of their wealth is rampant in India. There are many such instances, which have taken place over the years in various parts of the country.”
What is pump and dump?
Pump and dump scams revolve around illegal activities carried out by an investor, broker, a group of investors, brokerage firms or even promoters at times, to promote a stock they hold.
They try and manipulate the price of the stock, so that it rises due to increasing trade volumes and interest generated. Once the stock is on its upswing, the scammers sell the stocks they hold and make a handsome short-term profit.
These stocks are usually lesser-traded stocks, maybe of some small- or mid-cap companies. These are promoted via tips, rumours and scam messages often claiming the stock to be the next big thing, whose prices will shoot through the roof, based on a pending news announcement, with details to the same.
Each such pump and dump scam has different tactics and information used. However, the general idea behind the scam is the same. The reason why small- and mid-cap companies are the preferred choice is due to the illiquid nature of the stock, allowing the prices to fluctuate easily with an increase in trade volumes.
Once the scammers notice a spike in the demand of the stock, and the steady rise of price that follows, they will wait till the price gets to their estimated level, before selling their positions and holdings in the stock, enabling them to walk away with a handsome short-term profit. The only losers, happen to be the investors who now hold a bunch of worthless shares, as immediately post the big exits made by the fraudsters, and on no “supposed news” ever being broken, panic sets in and the price of the share falls again.
Scam business
No, this is not hinting towards another scam, but the business of scamming itself. Yes, scamming is a business, with plans, profits, targets and all the jazz one can think of. And, one of the prime methods used for scamming these days are the email, which when used for pump and dump schemes, try their level best to promote one company's shares.
Before the email came, such rumors were spread in pubs, trains, Dalal Street and other ingenious ways were used.
One such way that comes to mind is the famous pump and dump scam in the US a few years ago. This involved leaving people messages on their answering machine about a supposed hot stock pick. This message was left in such a way that it appeared to be for someone else and has gotten to that person by pure chance.
Excitedly, most people bought this stock and within hours the price rose by almost 300%. The scammers then sold the shares of that company, which they had previously gotten and managed to make sizable profits. Yes, we Indians are a lot smarter and are unlikely to fall for some lame scam trick most may feel. Yet, all these incidents that have occurred all over the world have little to do with people's intelligence, for it is their greed that has been preyed upon.
Instances of stock price manipulation and investors losing their shirts are very much real and such threats need to be understood, studied and most importantly be aware of.
These days one has to be on their feet and twist the age old adage to, “If its too good to be true, it probably isn't”, for a more up-to date approach to life in the fast lane, especially in the cunning stock markets arena. A simple fact about scams and the easiest way to avoid them is, if it looks like a scam, feels like a scam and sounds like a scam, it probably is a scam.
All the person who wants to start a rumor and “phish” for innocent victims today, is to hit the send button, and boom, millions of emails have been sent, heavily promoting a stock. This stock, which is suppose to be bullish in the short-term based on some inside information, which will soon come to light, or which to view one has to click to link, which in all likelihood does not take you anywhere, is the basic gist of most such messages.
However, these days, a secondary method of stock spamming is used, one that makes it much harder to track down the criminals behind the operation, as well as identifying those who actually profited from the market manipulation.
These spams include the usage of highly sophisticated career spammers, who work on behlaf of the “stock sponsor” or stock owner, for a certain commission, which he makes, based on the rise in that stock’s price. The time of sending the mails is often after the stock has hit a certain point in it's downtrend, post which, the spammer can send almost 120 million messages a day from various infected computers, after which the price often starts rising and the stock owner starts raking in the profits.
India, stocks and frauds
Kevalramani says, “Non financial and manufacturing sectors often see stock price manipulations and inflations, since their assets are harder to keep a track of. Insider trading, especially in many small- and mid-cap firms is also a growing concern, especially when the prices of a particular stock is suddenly seen to rise with increasing trade volumes out of the blue.
While laws are there to protect investors against this, enforcing them effectively is a major challenge. The Securities & Exchange Board of India (Sebi) has robust systems in place to track huge price spikes the Integrated Market Surveillance System (IMSS) is in place as well to monitor market manipulations. So instances of market manipulation have dropped down drastically. But small- and mid-cap stocks, especially thinly traded stocks, often escape the scrutiny.
So while the instances of outright pump and dump have reduced, instances of hacking and account manipulation are on the rise.
Shankar says, “It is an up-hill struggle with sub brokers and brokers of many brokerage firms also often being involved and the police very reluctant to book cyber law and fraud cases.”
With similar thoughts on the issue and presenting a recent instance of the same is Manan Thakkar, chartered accountant and cyber law professor based in Ahmedabad, Gujarat adds “One of my clients only recently suffered from losses due to his dormant d-mat account being used to purchase risky futures. On receiving a SMS of the same, the client inquired with the brokerage firm who were not sure how this happened but promised to sell of the futures immediately. There was still a loss of Rs 14,000 or so made, but stranger still was what happened next.” There are more instances.
He mentions about a client who had some Rural Electrification Corporation shares lying in a dormant account. Suddenly one day out of the blue he gets an alert, via which he founds out that these shares were sold off without his authorisation or proper notification. In reality, the problem with such cases is getting the police to conduct an investigation is rather hard, Thakkar adds.
Also, since very often when traders themselves use their client's accounts to trade without their knowledge, if they have made money for them, they do not crib.
However, once there is a loss the cat is out of the bag.” Naavi also recalls an instance in which he says “Three people who held accounts with a leading brokerage firm were victims of something similar.
However, in their case they did not receive any email notifications or any alerts of transactions being done using their money from their accounts, as the email id's provided in the form signed by the client were faked.
The client had not filled an email id and hence someone else within the organisation must have, who later had access to their accounts. In fact, on tracing the investments made from that account later, it was found that the money had been used to buy shares of that brokerage firm itself, a clear case of insider trading over everything else. A case with Sebi has been filed for the same and is being currently looked at by the arbitration committee.”
The above cases are not isolated in nature and with money being accessed by so many people within the stock markets, frauds and price manipulation are common occurrences. While such instances have led to stocks being bought, maybe in some cases prices inflated as well, the end result remains that some people have been making money using various ingenious methods, while others who have fallen prey to these have lost a lot.
Solutions
“Fraud isn't just a cost of doing business, it also undermines consumer confidence. With the new Stock Trading Module, we have extended the existing functionality of the fraud detection services to proactively identify fraud before damage can be done. Preventing pump and dump types of schemes makes a huge difference and we are hopeful to provide for this now,” said Fran Rosch, vice president of Identity and Authentication
Services at VeriSign.
Today, newer and better software's are being made to help protect investors and brokerage firms from falling easy prey to such schemes. These software’s run on intelligence systems that catches things out of the trend and alerts people before it's too late and while the scam is actually occurring. This is definitely one solution to safeguard one’s self.
Kevalramani also warns, “When you notice a sudden major rise in a company's stock price you should check its growth pattern. Secular rise is good. However, a non-linear or un-secular rise is a warning sign to investors”
Stock scams are of various types and so many that one may feel vulnerable in this survival-of-the-fittest-environment. However, “There is no such thing as easy money,” so please stop chasing it. Get a broker you can trust completely or open a d-mat account with a reputed bank where chances of misuse are fewer. Do not fall for spam mails, stock tips or rumors, for basic investing based on fundamentals is still the safest form of investing, and is the best way to beat all such scams, no mater how advance and ingenious they get.
And the most common mistake is to leave a d-mat account unattended. Many times, a d-mat account is offered to you as an additional perk when opening a bank or a broking account and you could end-up having two or more d-mat accounts, of which one is the active account and the other dormant.
Do close these accounts and keep your eyes open to changes in your broking and active d-mat accounts as well. For every firewall created by the technology experts there are thousands working overnight to break them and even if a few are successful, they could damage your wealth.
Source: The Financial Express
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