Introduction
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.
Decision
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.
Applicable Law
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.
Conclusion
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.
Footnote
1.
https://www.sebi.gov.in/enforcement/orders/jan-2022/interim-order-in-the-matter-of-stock-recommendations-using-social-media-channel-telegram_55305.html
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.