A dummies guide to spotting a PUMP AND DUMP on AIM

Anyone who has seen The Wolf of Wall Street movie will be familiar with Jordan Belfort (played by Leonardo de Caprio) and his exploits in ‘pump and dump’ boiler room scams involving US Penny Stocks. The movie is sadly based on a true story which took place in the late 80s and eventually let to Mr Belfort’s downfall, rewarding him with a 22 month custodial sentence for his scheming. The events may have taken place some time ago but the sophistication of these schemes has not changed much in the almost 20 years since, these schemes are very much still alive and kicking on many international markets, including the UK’s AIM market.

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A SUMMARY OF THE AIM PUMP AND DUMP

The AIM pump and dumps come in all shapes and sizes, from the well organised boiler room scheme scams to a very loose and decentralized pump. Many of the ‘pump and dumps’ now operate exclusively online rather than through the traditional cold calling method used during Mr Belfort’s heyday in the late 80s. I will focus today on the typical social media promoted ‘pump and dump’, which tend to be low level and unsophisticated, but that is not to say significant financial loss does not occur. The typical schemes have some some or all of the following symptoms and follow a certain pattern:

Which companies are targeted for the pump and dump?

Some market commentators tend to exaggerate the extent to which stocks are pumped and dumped on AIM. It is actually a very small minority of the 973 companies quoted on AIM. My own experiences would suggest there are only a handful of stocks under the complete control of the P&Ders at any one time. These stocks though are almost always micro cap ‘penny stocks’, i.e. stocks with a market capitalisation of less than £30m. This tends to mean that with limited shares in existence that the price will jump quickly with any liquidity.

The other criteria is a stock in a sector which lends itself to speculation, this means junior resource stocks, junior biotech and other blue sky technology stocks. These sectors are the ones that capture the imaginations of gullible private investors, the ‘willy wonka’ effect where investors dream of the hallowed ’10 bag’ i.e. returning 1000% or 10x your initial capital. Two recent stocks that fell victim to these schemes were African Potash (Booted off AIM to the limited liquidity ISDX market) and Cloudtag (Booted off, private and I would guess soon to be in liquidation). There typically also usually needs to be expected news flow to drive interest and speculation.

Stage 1 – The Pump Takes Hold

It usually starts by one or a few experienced ‘pumpers’ purchasing stock in a company. The experienced pumpers will have a large following on the bulletin boards and increasingly also on twitter. The pumper will normally go by an ‘alias’ and often have pictures of flash cars, money and other tacky photos as part of his/her profile avatar or wallpaper. You can spot them a mile off.

The pumper will write confirming they have bought the stock and usually post some ludicrous claims about the company concerned. I will invent one, company XXX:

Screen Shot 2017-04-21 at 15.34.15Rocket emoticons or a similar GIF is normally posted for dramatic effect.

The statements usually have some ‘tie back’ to official company news. For example, the 1bn barrels could be the gross oil in place and this figure multiplied by current oil price gets to £100bn. The pumper has though conveniently forgotten the resource recovery factor, the CAPEX needs, the OPEX and critically that the company XXX owns just 10% of the licence, let alone commercial chances of success for this pre drill prospect.

The other method is to quote ‘a rumour in the city’ to imply they have inside knowledge, which may or may not be true.

Stage 2 – The Pump is Maintained

The next step is for ‘Sub Pumpers’ to join in, they have probably already had reasonable success on other stocks just hanging off the coat tails of big pumpers. Sub pumpers will typically have a reasonable following too, perhaps 300 or so followers on twitter. They will also use rocket emojis…

Screen Shot 2017-04-21 at 15.35.34A common tactic of sub pumpers is to outline how difficult it is to buy shares, comment on the Buy price being about to move up based on the Level 2 order book or they might instead post charts prophesying how the share is about to breach a key resistance level. This plays on the human phycology that you are about to miss out on the golden ticket. Simple but very effective.

These posts may also be genuine and relate to good shares too, so it is not always easy to sort the wheat from the chav (chaff). The surefire way though is to ensure ‘sceptical’ is always your default mindset when investing in small caps. For example, the easy way to test whether it is indeed difficult to buy the share is get a quote on the stock from your broker, don’t go in blind. IG Stockbrokers are particularly good as they allow you to get quotes from the market makers irrespective of whether you have funds in your account. Try obtaining a £10,000 BUY and SELL quote. It is normally very easy to buy these stocks at any level but very hard to sell with any size. This implies there is limited real demand for the shares and sub pumper is lying.

Stage 3 – Peak Pump is reached

Once critical mass is gained a whatsapp or twitter private group will typically be created where all bulls will be invited to join. This is where naive and inexperienced investors begin to think they have the golden ticket, as in these forums they will only hear as to how fantastic the company’s prospects are. As a result they begin to tell the ‘offline’ friends, family and may even place large sums of their savings into the share. Significant volume is generated which can see sometimes 10-100x the average volume of shares changing hand in a day.

The bears will beginning to take note at this stage too, this includes experienced bearish investors such as Waseem Shakoor, Tom Winifrith, Gary Newman and many others. These guys usually highlight the flaws, or in the case of Waseem declare a short position. At this point the pumpers and ordinary investors who have far too much at stake will become aggressive and attempt smear campaigns. Any bearish posts will usually be reported on bulletin boards or twitter. This combined with ‘bulls only private groups’ means it is very difficult to receive any bearish commentary on the stock on question. At this stage the stock is likely to have achieved a valuation well in excess of fair value. This is the final stage of the pump and now it we are ready for…

Stage 4 – The DUMP.

The typical catalyst for the dump will be some sort of funding, usually a heavily discounted placing or other quasi equity issue. The price may have already come off a little ahead of the announcement as some participants in the placements (which may even be the same original pumpers) forward sell stock (sell stock with a delivery date in the future).

The dump can be horrific, for example the CloudTag Pump and Dump, dropped 40% on the day when the financing was announced. Those investors who bought into the Pump late could be nursing extreme losses over a very short period of time.

Once denial is overcome the usual reaction will be anger towards the various stakeholders in this order 1) The bears, 2) The board and 3) The broker. The individuals who actualy pumped the stock don’t get much flack. Quite often a lot of the social media accounts disappear often after the dump has landed and the cycle just repeats again…. Same tactics, different stock…..

REFLECTIONS

Pumping is grey area, how is it defined?

There is often a grey area with stock promotion, particularly for those in wave 2 or 3 of the pumping. The acid test for market abuse is ‘deliberate dissemination of false or misleading information’.

The issue is that some involved in distribution of information on bulletin boards and twitter might well believe what they are writing. The FCA Market Abuse Regulation does though not require the person engaging in such market abuse to actually intend to commit market abuse, however the FCA does define the below in MAR 1.8 as a factor to be taken into account in determining whether behaviour amounts to dissemination:

A normal and reasonable person would know or ought to have known in all the circumstances that the information was false or misleading, that indicates that the person disseminating the information knew or ought to have known that it was false or misleading.

It is though natural to be bullish on the stocks you own, I post positively about the stocks I own on twitter and on my own blog. The difference between blogers and other commentators such as I and the pumpers is that I genuinely believe in the investment case for the stocks I own and make considerable effort to verify what I post. I also have a financial background and post a transparent history of all my tips. On top of this I also outline the downside risks and make it clear to followers that this is not a recommendation to buy.

The FCA is not prescriptive on what is ‘false’ and ‘misleading’ but I believe the following factors are likely to be relevant if a case is bought:

  1. Posting content which you know to be false or misleading, which are deliberately designed to to make profit. As mentioned above.
  2. Correspondence proving intent to create a flase market. e.g. emails showing collusion between ‘pumpers’ and other documentation showing an organised ‘effort’.
  3. Your ability to impact the share price. If you have a significant following on social media or twitter then you have a higher degree of responsibility to verify your content in my opinion. Also important is the size of the company, with my 700 or so followers on twitter I can pump a FTSE100 company all day long, but it would not have a material impact on the share price. This does not make that activity moral though, as it still has the ability to cause financial loss to others.
  4. Selling your position whilst encouraging others to buy. It is natural to derisk some positions but to sell a large proportion of your holding substantially around the same time as promoting the share could be decisive factor as provide evidence as to whether there was an intention to make profit from the ‘false and misleading’ information or whether you had a genuine belief of the company as a long term investment.
  5. The level of financial gain made.

So Surely Convictions every week then?

Sadly there are limited convictions for ‘pumping and dumping’ on AIM. The FCA has limited  resources and simply does not have the time to investigate every case and naturally focuses on the market abuse at the higher end of the scale.

Unfortunately the best you can do for now is raise awareness of the ‘pump and dump’, which is the reasoning behind this blog post.

Are the companies concerned complicit?

There are four types of companies who find themselves those on the end of a pump and dump.

  1. Those directly responsible.
  2. Those indirectly responsible.
  3. Those who tolerate it.
  4. Those who extinguish it.

At the bottom end of AIM it is one of the CEO’s key roles to be able promote the company to enable it to raise money. The company leaking inside information directly to stock promoters is extremely rare though, two cases centre on African Potash and Cloudtag where both have been accused of lying in RNSs and therefore creating a false market. The information in these cases, if proven, also relates to deliberate dissemination of false information, albeit this is via the company directly rather than through a boiler room scam or a ‘pump and dump’

A source of inside information can also be from the city advisors of the company, i.e. indirectly. The broker arguably has the biggest conflict of interest in this context, they have an incentive to generate volume to enable the company to raise finance, and take a hefty commission as part of that process. This is of course is not sanctioned by the broker as a corporate but individual sales traders can lack the integrity and leak select information to known stock promoters.

Many companies tolerate the pump and dump, a single day pump and dump occurred on Fitbug where the company released a non regulatory news release (see article for details) which led to pumpers to propel the price to 550% in a single day. Rather than FITBUG immediately extinguishing and clarifying the news the company allowed the shares to trade most of the day before the NOMAD towards the end of the day pulled the plug and forced a clarification. The company followed up with a fund raise the following week on the back of this volume.

Some companies though immediately issue ‘speeding tickets’ when the share price rises on the back of no news – the right thing to do. Unfortunately though this is fairly rare and companies often let the share price get well ahead of fair value before taking any action.

Is this a victimless crime?

No. Some individuals recklessly promoting or pushing stocks on social media do not believe they are committing a crime. Ultimately though, selling stock in a false market to another punter is not a victimless crime. I don’t deny riding the momentum created by a ‘pumper’ can make you a lot of money, but there will always be someone left ‘holding the baby’ and the process is ultimately transferring wealth from the ‘Mugs’ to the ‘Pumpers’. For example, according to posts on bulletin boards some individuals who bought stock in Cloudtag at peak ramp have lost entire life savings. Think about that for a moment…

SUMMARY

The last year has seen some incredible gains on some small AIM stocks and whilst some of this has been as a result of renewed sentiment towards junior resource stocks on the back of a recovery in commodity prices, some I believe is as a result of an increase in the ‘pump and dump’ method.

Hopefully this piece though has given you an ability to spot when a stock is in the midst of a ‘pump and dump’. It should equally give you some insight into what is Market Abuse so you don’t inadvertently become a pumper yourself.

The pump and dump is not a victimless crime, it is a transfer of wealth from naive new investors to experienced pumpers.

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FITBUG – A rollercoaster week for the share price. Lessons need to be learnt.

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


Just a quick comment on the roller coaster that was the FITBUG share price this week and what lessons in my view need to be learnt by companies, market participants and advisers alike. The sorry saga I refer to started before market open on Wednesday this week, when the company released this RNS Reach(RNS-R):

Fitbug Holdings Plc, the AIM quoted digital wellness technology provider for corporate organisations, today announces a customer win with a global financial services group in Asia…

Fitbug has secured an initial 1-year corporate wellness programme, which includes ongoing service revenue, together with an order for 14,000 device”

The release was brief and with no financials to support the statement, but on first glance looks impressive, a major customer and 14,000 devices, that is until you remember this was a RNS-R and by definition non price sensitive (more on this later). This statement nonetheless saw the company shares rise over 550% at their peak on the day, at one point topping out at 1.07p on an open of 0.2p. The shares were finally suspended at request of the NOMAD, but not until 3:30PM on the same day, with Fitbug being forced to clarify its trading position. This happened yesterday afternoon here. The company revealed in that update an expectation of lower revenues and continued losses, albeit slimming them modestly vs. prior year. The real crusher though was the future guidance relating to yesterday’s Contract win.

The Board expects this contract to provide in the region of £60,000 in ongoing service revenue in 2017.

So when you add in costs to service the contract the actual impact on Fitbug’s current and future earnings will be minimal, if not nil.

The market quickly adjusted and the shares are now swapping hands at 0.35p, so those who bought in at peak would be sitting on 60% losses as at today. The whole affair really in my view demonstrates the worse of the AIM market and lessons need to be learnt.

How it could have been all avoided

This all boils down to poor communication, which started with the announcement being made via RNS-Reach (RNS-R), which is a non-regulatory news service, in other words a platform used for communicating non price sensitive information. RNS-R can be used for example to communicate broker research or investor presentations, as was this case with Zenith Energy here. It can also be used by non-listed entities to communicate to the market, for example prior to IPO. You can see recent releases made by RNS-R here to give you a flavor of what it is used for. With this in mind here are three ways this sorry mess could have been avoided:

Way #1

Given this was a RNS-R, any rational investor would have limited reason to buy the shares. However herein lies the problem, AIM is dominated by retail investors and a large % of which are not familiar with the difference between RNS-R and RNS.  Hardly anyone had picked up on this subtle fact when I looked on the bulletin boards and Twitter during the peak madness yesterday. Let’s also remember that this contract/release would have had an independent review too, NOMAD’s need to review all releases to market, if it was material release then Fitbug would have been instructed for the release to go via RNS. My belief therefore is that all RNS-Rs released which contain contract news or similar should be labelled for absolute avoidance of doubt as ‘this release is not considered price sensitive’ by the company or even better by service provider LSE automatically.

Way #2

The release had limited information which lent itself to fevered speculation.  If releases are not clear and explicit this can lead to users speculating on the missing gaps, this is compounded by the increasing use of social media to comment on small caps. Fitbug knew that the contract was not material but chose to be very vague on the detail. I accept that the terms of some contracts need to be kept confidential for reasons of commercial sensitivity, but the company could have stated either that ‘this contract win does not alter guidance given to the market’ or is not ‘expected to have a material effect on the trading or financial position of the company’. Fitbug may well say this was a RNS-R so it shouldn’t need to, but then I return to my first point and I still think there is a duty of care to shareholders here.

Way #3

The shares were suspended 7 hours into the trading day. Why did it take so long? Whatever excuses the company has for putting out an unclear release, what I really fail to understand is why the brakes were not put on this as soon as the share price reacted 20%, let alone 100%, 200%, 300%, 400% and 500%. This again lands mainly in my view in Fitbug’s court, but also with the NOMAD and AIM regulation.

Wrap Up

You will probably call me Captain Hindsight or you might think I am in dreamland given how the AIM market operates at times. I’ve singled out Fitbug here but the reality is that they aren’t alone and I’m also not for a moment stating there was any deliberate intent here, but things need to improve.

I also don’t know much about Fitbug so I won’t comment further on whether this is a BUY or a SELL, one thing I will say though is that it looks like shareholders can expect a cashcall in the near future, with the cynic in me thinking this was a pre funding marketing exercise which backfired…

“The Board remains mindful of the funding needs of the business moving forwards, particularly with the Company’s corporate wellness growth strategy, and will continue to keep this position under review.”

Disclaimer – I have no positions in any of the stocks mentioned. ShareInvestors.co.uk requires me not to deal in this stock in the next two trading days from the date of the post being published.

This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.