Finra warns of Pump and Dump Scams on US Exchanges

The Financial Industry Regulatory Authority, Wall Street’s self-regulator, has warned its members of a “heightened threat of fraud” associated with unusual price increases in small-cap IPOs on the US stock exchange.

The regulatory notice published Thursday warned that certain small-cap issuers, typically those that have raised less than $25 million, may be subject to schemes such as pumping and dumping, which appear to be linked to social media scams on their called “pig butchering. “

These schemes often begin with a misleading online message that leads to a relationship between victims and perpetrators, sometimes romantic in nature. “After establishing a relationship, the bad actor will recommend to the victim to place limit orders in certain securities at a specific time and price,” Finra said.

Many of these issuers’ operations are based in China, and a significant portion of the IPO’s shares are being allocated to brokers in Hong Kong, sometimes as much as 90% or more of the public float, according to Finra. Due to the concentration of shares held in a few hands, these listings are vulnerable to price manipulation.

The regulator also raised concerns about the role of nominee accounts held mainly by foreign nationals. He noted that these individual accounts are often controlled by an undisclosed person or group, and can be traced back to similar IP addresses, bank account information, as well as trading history.

Thursday’s warning follows the volatility seen in many new listings in recent months. A fintech company based in Hong Kong, AMTD Digital Inc.

jumped more than 320 times briefly after listing in July, while Chinese clothing maker Addentax Group Corp.

it rose more than 130-fold on its first market in August. Both stocks have since lost more than 99% of their value.

The Nasdaq Stock Market has quietly halted listings of Chinese small-cap companies since late September and demanded more information about related parties in markets, The Wall Street Journal previously reported.

The New York Stock Exchange and the Nasdaq Stock Market issued separate announcements Thursday highlighting some of their concerns about recent small-cap IPOs. Both exchanges said they would continue to investigate underwriters and other exchange members involved in fraudulent and manipulative practices. Nasdaq has been scrutinizing these markets for the past two months, but had not previously issued a public notice of bookbuilding standards.

In a recent communication with attorneys, Nasdaq raised the requirement that companies from restrictive markets, including China, raise at least $25 million in their IPO, or more than a quarter of their former market capitalization -listed, said Daniel McClory. , head of equity capital markets at Boustead Securities. “The idea is that when there are enough shares in the market, the likelihood of a large price increase is reduced,” he said.

The Securities and Exchange Commission has begun requiring potential issuers to include “the potential for rapid and substantial price volatility” as a risk factor for companies with relatively smaller public floats, and the stock’s value may be unrelated to performance operating and financial condition,. according to comment letters reviewed by The Wall Street Journal.

Douglas S. Ellenoff, a partner at the law firm Ellenoff Grossman & Schole, said Finra’s alert sent a clear message to the brokerage industry that they should be aware of certain foreign trading dynamics. “This should allow people to feel more comfortable going forward with the transaction as long as they don’t get carried away,” Mr Ellenoff said.

Meanwhile, Mr McClory has taken steps to diversify away from China by focusing on domestic and European markets, as US regulators continue to step up scrutiny of Chinese IPOs. “We were probably two-thirds to three-quarters weighted towards Chinese markets about four or five years ago, it’s only 15 to 20% now.”

Write to Michelle Chan at

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