Mar 2021

March 2021 – TVB Interview on SFC Investigations & “Ramp and Dump”Investment Scams

Our criminal litigation partner Felix Ng was interviewed by TVB television program “News Magazine (新聞透視)” on the criminal law and market misconduct implications surrounding “ramp and dump” investment scams via social media, which have been rampant in Hong Kong and the Asia region lately.

SFC Crackdown

This television interview came timely as the Securities and Futures Commission (SFC) launched a joint crackdown with the Commercial Crime Bureau (CCB) named “Operation Jadejoint” in early March 2021 to combat these scams, arresting 12 suspects, freezing 63 securities trading accounts with approximately HK$900 million in assets. According to the SFC, these scams amount to about 20% of the stock market manipulation cases currently under investigation, and the suspects may face market manipulation, money laundering and fraud charges.

Ramp and Dump Scams – An Overview

During the television program, Felix shared his SFC investigation experience on market manipulation cases, and analyzed the modus operandi of these fraudulent schemes.

Fraudsters often pose as investment gurus offering tips and insider information via popular social media platforms, and use deceptive means to “ramp” up the stock prices and then “dump” the shares to other investors at artificially high prices. These social media applications include Facebook, WeChat, WhatsApp, Telegram and Tinder.

Stage 1 – Gaining trust

1. The scammers would approach victims on social media platforms, and patiently gain the victims’ trust by texting them frequently on the pretext of friendship or networking. The fraudsters often impersonate renowned stock market analysts, “investment teachers” or listed company employees to draw victims into the scheme.

2. Once a relationship is established, the scammers would claim that they possess insider information about certain listed companies which would bring victims “swift and guaranteed profits”.

3. At the beginning, the scammers may provide “tips” on blue chip or first-tier stocks that would allow investors to earn a modest return to boost their confidence.

Stage 2 – Ramping

4. Subsequently, the fraudsters would start providing recommendations for the investors to purchase certain target stocks. It is noteworthy that such stocks are predominantly Growth Enterprise Market (GEM) stocks with the following characteristics, which make them highly susceptible to manipulation:

(i) low market capitalization;

(ii) low liquidity; and

(iii) high concentration of shareholding.

5. The prices of these target stocks would initially rise as promised, and the victims would be induced to purchase more with nominal profits in sight. However, these inflated prices are often engineered on the scammer’s end, using false trading, “scaffolding” or other fraudulent techniques.

6. In numerous cases, the fraudsters would also collude with their accomplices using chat groups to broadcast alleged insider information, or to share successful investment stories based on the tips provided. This further boosts the victims’ confidence in the scheme.

7. One peculiar feature is that victims would be required to provide screen captures of their stock purchases to prove that they have strictly followed the recommendations. This would allow the scammers to monitor the victims’ behaviour, while the accomplices could earn intermediaries’ commission.

Stage 3 – Dumping

8. The victims would then be directed to purchase the target shares in bulk at specific prices and timing, allowing the fraudsters behind the scene to dump their shares at higher price levels.

9. Eventually, the share prices of these companies plunge dramatically within one day or a few days, causing the victims significant financial losses.

SFC Market Misconduct

Felix also analyzed the potential market misconduct involved under the Securities and Futures Ordinance (“the SFO”; Cap. 571), including:

(i) Sections 274 and 295 – False Trading

The scams may constitute false trading as the fraudsters created a false or misleading appearance of active trading in a listed stock.

For instance, they conducted “wash sales” by buying and selling shares via different securities accounts with no change in beneficial ownership, while creating the appearance of high turnover and volume.

(ii) Sections 275 and 296 – Price Rigging

The perpetrators conducted washed sales causing the stock price be maintained, increased, reduced, stabilized or fluctuated at an artificial price level.

(iii) Sections 277 and 298 – Disclosure of False or Misleading Information Inducing Transactions

In these schemes, the scammers disclosed, circulated or disseminated false or misleading information, causing investors to conduct securities transactions or artificially influencing the prices.

(iv) Sections 278 and 299 – Stock Market Manipulation

The fraudsters and accomplices entered into fraudulent transaction to ramp up the prices, with the intention to induce victims to purchase the target stocks.

(v) Section 300 – Fraud: the above scams may amount to fraudulent or deceptive devices or schemes

Under Section 303 of the SFO, the maximum penalty of the above offences is a fine of HK$10,000,000 and imprisonment for 10 years.

SFC Restriction Notices & Search Warrants

Felix also shared his insight on handling the SFC’s investigative measures, including Restriction Notices under sections 204 and 205 of the SFO which prohibit licensed corporations from entering into transactions and disposing of the relevant property, and search warrants under section 191.

 

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Written by: Felix Ng, Partner & Michelle Ma, Senior Paralegal