The growing use of social media applications and exchange of information through these forums has provided platforms to investors that may enable the coordination of their actions to manipulate the stock market in the short-term. In January 2021, the sudden rise in shares of an American company, GameStop Corp., made headlines. Several hedge funds were short selling the shares of this company. A group of traders through a Reddit thread, encouraged other retail investors to buy shares of GameStop Corp. This led to a surge in the share price of the company and the hedge funds who were short-selling the shares of the company among other investors faced huge losses.
In a similar case of stock price manipulation by the use of messaging applications, Telegram and Whatsapp, the Securities and Exchange Board of India (“SEBI“) has held 6 individuals guilty of contravening provisions of the Securities and Exchange Board of India Act, 1992 (“SEBI Act“) and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (“PFUTP Regulations“) in its order dated January 12, 20221 (“Order“).
Facts of the Case
SEBI initiated investigation into the matter on January 01, 2021 and examined the Telegram channel “bullrun2017” for a period of 11 months. The said channel had a substantial number of subscribers and as on the date of the Order, the subscribers were noted as more than 49,000. The channel claimed to provide recommendations to its subscribers for trading in cash and derivative segments and both intra-day as well as positional trades. It was noted that the channel only provided one-way communication which enabled the administrators alone to send messages. Upon further investigation, it was revealed that the 3 administrators of the Telegram channel were also members of a connected Whatsapp group called “Stock Gujarati 3”. The other 3 individuals implicated in the Order are the family members of these 3 administrators whose trading accounts were also used to purchase shares for unlawful gains.
SEBI observed that the modus operandi of these individuals was that their trading accounts were used to first buy the shares of the concerned companies, followed by making positive recommendations on those scrips through the Telegram channel. This would induce thousands of subscribers to deal in those shares and eventually, after making such recommendations to the subscribers, the individuals would sell the shares in the market so accumulated by them for a profit. Thus, SEBI observed that when recommendations were made on the channel, that particular scrip witnessed an increase in price fluctuations. The 3 individuals who were found to be the administrators of the Telegram channel also made patently false claims that the channel had a team of 4 research analysts who were in the process of seeking registration with SEBI as research analysts.
Thus, SEBI held that the commission of such deceitful acts by the individuals by engaging in the scheme discussed above, with a dubious intent to make money at the cost of the interest of innocent investors in the securities markets are prima facie in glaring violations of Sections 12 A (a), (b), (c) of the SEBI Act read with Regulations 3 (a), (b), (c), (d), 4 (1), 4 (2) (a), (d), (e), (k), (o) and (r) of the PFUTP Regulations.
The relevant sub-sections of Section 12 A of the SEBI Act inter alia discuss that no person shall directly or indirectly use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance, or employ any device, scheme or artifice to defraud or engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in contravention of the provisions of the Act or the rules or the regulations made thereunder.
Regulation 3 of the PFUTP Regulations discusses the prohibition of certain dealing in securities and Regulation 4 discusses the prohibition of manipulative, fraudulent and unfair trade practices. The relevant manipulative, fraudulent or unfair trade practices under Regulation 4 used in this case are the following:
- knowingly indulging in an act which creates false or misleading appearance of trading in the securities market;
- inducing any person for dealing in any securities for artificially inflating, depressing, maintaining or causing fluctuation in the price of securities through any means including by paying, offering or agreeing to pay or offer any money or money’s worth, directly or indirectly, to any person;
- any act or omission amounting to manipulation of the price of a security including, influencing or manipulating the reference price or bench mark price of any securities;
- disseminating information or advice through any media, whether physical or digital, which the disseminator knows to be false or misleading and which is designed or likely to influence the decision of investors dealing in securities;
- fraudulent inducement of any person by a market participant to deal in securities with the objective of enhancing his brokerage or commission or income; and
- knowingly false or misleading news or information may induce sale or purchase of securities.
Holding the 6 individuals in contravention of the aforementioned provisions, SEBI has restrained them from buying, selling or dealing in securities. Further, SEBI has directed them to open an escrow account and deposit the impounded amount of Rs. 2,84,29,948/- which are the alleged unlawful gains made by them through fraudulent and unfair acts.
The Order mentions that any major technological innovation brings with it the hazards of its potential mis-utilisation by offenders who use it for performing illicit activities. Social media channels are being exploited for such fraudulent, deceitful, and unfair trade practices. Common investors should be cautious of being enticed by such schemes and it may be prudent to independently research investment opportunities.