25 May 2023
ASIC’s enduring regulatory function of targeting ‘misconduct damaging to market integrity’, which includes insider trading and market manipulation, has seen it increasingly targeting ‘misconduct that involves misinformation through social media’.
One focus area has been the practice of using social media to ‘pump and dump’ stock.
‘Pumping and Dumping’ stocks
In 2021, ASIC noted a trend of social media posts being used to coordinate ‘pump and dump’ activity in listed stocks, which they considered may amount to market manipulation under the Corporations Act 2001 (Cth).
‘Pump and dump’ describes the process whereby the holder of stock artificially inflates the stock price through false or misleading positive statements, in order to sell the purchased stock at a higher price. Once the operator of the scheme ‘dumps’ (sells) their overvalued shares, the price often falls and investors lose their money. This has been seen with cryptocurrencies.
‘Pump and dump’ activities can constitute securities fraud and may amount to market manipulation in breach of the Corporations Act 2001 (Cth). Section 1041D makes it an offence for a person to ‘circulate or disseminate. . . any statement to the effect that the price for trading in financial products. . . is likely to rise or fall. . . because of a transaction. . . in relation to those financial products’.
ASIC officers have used real-time surveillance systems to detect such activity and identify networks of connected parties.
Gabriel Govinda
In June 2022, Mr Gabriel Govinda pleaded guilty to 23 charges of manipulation of listed stocks and 19 charges of illegal dissemination of information, largely propagated through his use of online forums.
Mr Govinda became the subject of ASIC’s first successful prosecution under s 1041D of the Corporations Act 2001 (Cth) over a ‘pump and dump’ scheme. Mr Govinda was also convicted under s 1041B of the Corporations Act 2001 (Cth), which prohibits ‘false trading and market rigging’ by ‘creating a false or misleading appearance of active trading’.
Mr Govinda would buy stock and then use the online alias ‘Fibonarchery’ to create false excitement around it to raise its price before selling it to his advantage.
From September 2014 to July 2015, Mr Govinda used 13 different share trading accounts—held in the names of friends and relatives—to manipulate the share price of 20 different listed stocks. He admitted to trading between the accounts he controlled (called ‘wash trading’) and using ‘dummy bids’ to falsely increase the perceived demand for the listed stocks.
Mr Govinda once exclaimed on stock forum HotCopper: ‘dummy bids are all part of the fun and games and cat and mouse of the stock market’, which was relied upon as evidence of his unlawful conduct. A dummy bid is typically an anonymous bid for stock at a higher price, submitted and then withdrawn soon after, in order to push up a price briefly and convince others to buy, pushing the price up further. Dummy bids are one method that can be used to artificially increase a stock price in order for a stockholder to sell their shares at a higher price.
On 3 May 2023, ASIC announced that Mr Govinda was sentenced to two-and-a-half years imprisonment, to be released immediately on a 5-year recognisance. He was fined $42,840. The maximum penalty for Mr Govinda’s offending was 10 years jail or a fine of up to $765,000.
FRAA report
Although ASIC is committed to preventing this kind of conduct, given the speed at which technological change is advancing, a reasonable question is whether ASIC is ‘up to the job’?
The Financial Regulator Assessment Authority (FRAA) recently considered that question when conducting an assessment into how ASIC can gain a stronger technological presence to meet these challenges.
The FRAA report, Effectiveness and Capability Review of the Australian Securities and Investments Commission, released in July 2022, highlighted ASIC’s self-assessment of the efficiency of its enforcement operations. The report made reference to the success of a surveillance operation targeting ‘pump and dump’ trading in 2021, which resulted in the closure of multiple trading and social media accounts. The operation also identified a ring of traders suspected of engaging in misconduct, who are now subject to ASIC enforcement: [4.10]. The report noted that stakeholders widely commended ASIC’s use of social media announcements as an effective form of communication to deter ‘pump and dump’ trading: [4.74].
However, the report noted there is concern among staff that ASIC lacked expertise in technological fields such as big data, artificial intelligence and blockchain (see [4.49]), which suggests the regulator faces significant ongoing challenges in keeping pace with those who would seek to manipulate securities using technology.
While ASIC may have successfully clamped down on some social media platforms being for market manipulation, the advancement in encryption technology and increased proliferation of end to end encryption messaging services poses a real problem for ASIC.
Some staff cited cultural factors such as risk aversion, siloed teams and short-term focus as the fundamental reason for low-level technological capability at ASIC: [3.78]. This will be critical to address if ASIC’s enforcement mechanisms are to keep up with the pace of technological change.
FRAA made the following recommendations regarding surveillance, which indicates where ASIC’s focus on technological improvement will likely lie:
- There remains scope for improvement in ASIC staff members’ technical and regulatory skills capability. ASIC should continue to focus on ensuring it is adequately resourced to respond to emerging threats and harms: [4.95].
- An uplift in ASIC’s surveillance systems and data and analytical capability would enhance its effectiveness in conducting surveillances. Improved use of data and technology would enable ASIC to systematically and proactively detect emerging threats, address misconduct and minimise harm: [4.96].
- FRAA suggests that ASIC should build a sound case for law reform and additional funding to enhance ASIC’s data collection powers and its ability to process such data. ASIC intends to work with Government to secure the necessary funding and data collection powers: [4.97].
Conclusion
ASIC is making a concerted effort to target online investors attempting to manipulate the market to their own advantage.
As the Govinda prosecution indicates, amateur investors should exercise caution when promoting the virtues and benefits of stock that they hold in online stock chat forums. Although Mr Govinda engaged in an intentional and concerted effort to manipulate the market, his defence suggests he was not fully aware of the unlawful nature of his activities, being described by his defence lawyer ‘as a damaged gardener who became an amateur stock picker’. Ignorance of the law is no defence.
The message is simple for amateur and experienced investors alike. Online stock market forums can create the facade of ‘fun and games’; they often involve hyperbole and bravado. It is easy to get caught up in the excitement. Yet there are serious consequences for deliberately meddling with market platforms to obtain an advantage. ASIC is watching very closely.
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Disclaimer: The information published in this article is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.
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