Zerodha warns investors of 'pump and dump' fraud

India's largest online brokerage Zerodha has cautioned investors about one of the oldest scams in the stock market.

Alerting investors about the "pump and dump" scam, Zerodha said operators who hold most of the shares move the prices by spreading messages through SMS, social media and then dump the shares once the price rises.

"SMS, Telegram, & WhatsApp, were the most popular channels to spread these stock tips for a long time. But of late, people with large followings on social media and YouTube are being paid to promote stocks through tweets and videos," the brokerage tweeted.

This comes a month after India's capital market regulator, SEBI, carried out search and seizure operations in various cities as part of its efforts to unearth social media stock tips fraud.

"A lot of investors, unknowingly or driven by greed, fall for these tips. They jump in when they see a stock hitting upper circuits, but are stuck once the operators dump the stock. In pretty much all the cases, these stocks end up crashing 90%+ and become worthless," Zerodha said. "Though this is a well-known scam, a lot of people still fall for it."

While there are thousands of channels about trading and investing, for every sensible channel, there are hundreds that are downright scammy, Zerodha warned. "Ironically, the scammy ones tend to have the most subscribers."

The brokerage advised investors not buy or sell based on random stock tips on Twitter, YouTube, WhatsApp, etc. "You're investing your hard-earned money. There are no easy ways to get rich quick in the stock market. If something is too good to be true, it almost always is!" it said.

Zerodha said it has a "Nudge" on its platform to warn users when they are about to buy these dubious stocks. "But not all of these pump and dumps can be known, so it's impossible to warn users 100% of the time," it added.

Last month, the Securities and Exchange Board of India (SEBI) directed Ruchi Soya Industries to give the investors who participated in its follow-on public offering (FPO) the option to withdraw their bids due to "circulation of unsolicited SMSes advertising the issue".

SEBI had earlier cautioned about bulk SMS frauds where investors were induced to invest in stocks of certain listed companies. SEBI had also collaborated with the Telecom Regulatory Authority of India (TRAI) to reduce the vulnerability of the securities market to manipulation through misuse of services like bulk SMS.

However, the perpetrators of such frauds are now adopting new methods and technologies to defraud the investors. In December 2021, SEBI officials conducted a search and seizure operation on persons carrying out similar manipulative activities through Telegram channels. Admins of these channels had built substantial positions in these stocks prior to the circulation of recommendations and offloaded their positions soon after the rise in price of these scrips, making significant profits at the expense of gullible investors.