On June 19, SEBI ordered the impounding of Rs 126 crore of the illicit profits of a pump-and-dump scheme in which the alleged mastermind collaborated with 225 other persons on five scrips. The order, which runs into 246 pages and puts on notice for impounding another Rs 18 crore, presents a depressing, and yet fascinating, description of the alleged scam.
Fascinating because the scam was engineered on a much higher scale and planning, which was followed by an equally detailed investigation where SEBI turned over multiple stones to piece together the puzzle. Depressing because the alleged modus operandi is nearly identical with past schemes with just new tools and tech.
The Modus Operandi
There was the same initial volume creation with price rise in the first stage, followed by sharing widely the "news" of high prospects of this company, and when gullible investors start buying, the perpetrators sell, make profits, followed by a price slump.
To be clear, this is an interim, ex-parte order that doubles up as a show-cause notice. 226 parties, divided in various groups, have been accused. Further, SEBI has made members of each group jointly and severally liable.
Such liability is becoming shaky in law as it puts people with different guilt, involvement and gains in a common basket. The parties have yet to present their case and it is possible that findings against the persons may be modified or even set aside. But one can go beyond the specifics of this order and note some interesting aspects while also seeing the broader picture and recent developments.
The SEBI order says that one "mastermind" allegedly engaged in a scheme of price-and-volume creation in five scrips. This was followed up by mass SMS to numerous investors promising rapid rise in price. A "euphoria" was created, SEBI said, and the gullible public rushed in to buy. And the alleged perpetrators offloaded, making large profits.
SEBI’s Digital Sleuths
SEBI meticulously investigated, using techniques even more innovative than earlier. It approached the telephone companies and obtained names of resellers of SMS products. The buyer was identified and his details gathered. The promoters of the five companies and those who traded were identified. Then came the hard drudgery of compilation of details of hundreds of such persons including their call records, bank accounts, family and personal connections, etc.
Amazingly, SEBI sought data from Zomato, Swiggy, MakeMyTrip, apart from email services providers like Gmail and Yahoo. This is commendable. One can only imagine the number of legal hoops that even a regulator may have to jump through to collect details from these giant online services who are fiercely protective of customer data and privacy.
Finally, analysis was presented of the persons and their transactions at various stages of this alleged scam. The parties were grouped and profits made by each group calculated and impounded – meaning they were required to be deposited in an escrow account till these proceedings were completed. The parties are also debarred from dealings in the securities markets in the meantime and their assets frozen till they deposited the profits.
Anonymity: Tech, Hawala Headaches
Some observations can be made. This related to the year 2019 when mobile voice calls and SMSs were more prevalent. Today, as SEBI has highlighted in several recent cases, advanced messaging apps are used that give anonymity of sender, messages and even of calls. In 2019, websites were also used to publicise such recommendations. Now there are YouTube videos, Telegram channels, etc.
While, earlier, connections could be traced through banking transactions between parties, SEBI has acknowledged the presence of a thriving cash/hawala economy to move and share profits without leaving any trace. These also raise concerns about money-laundering, tax evasion and, worse, moving monies across the border and back. Stock scams and money laundering transactions seem to not only make a toxic mix, but possibly even add to the total gains.
SEBI recently acknowledged these rising difficulties and proposed that if there is basic evidence of suspicious transactions of the nature of pump-n-dump, insider trading, front running, etc, the parties should be presumed guilty. And it is the accused who would be required to prove their innocence. Time will tell whether SEBI implements this new law and whether it stands up in courts.
But what remains intractable is the greed of investors looking for easy money. This is hardly new and goes back centuries and literally books have been written on waves of such scams. And this is something which even the regulator cannot do much about. One can only hope that the guilty are deprived of their ill-gotten gains and punished in as many cases as possible, setting examples so that at least future perpetrators are discouraged.
Jayant Thakur is a chartered accountant. Views are personal, and do not represent the stand of this publication.
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