Inside Financial Markets

Stock ‘Gurus’ using Social Media to rob Investors

Stock-Guru-Scam-–-Lesson-to-LearnStock ‘gurus’ using social media to rob investors

KARACHI: A whole new breed of ‘gurus’ and ‘investment advisers’ have sprouted on social media — mainly on Facebook and WhatsApp.

These so-called ‘gurus’ claiming to have made millions or billions in stock investing, sometimes also in other major emerging and developed markets, assure small investors that they know the capital markets inside out and are also gifted with the vision to see the future.

The mouth-watering returns of well over 30 per cent on average in the last three years provided by the Karachi Stock Exchange (KSE) and lack of more profitable investment avenues have attracted tens of thousands of new investors to the equity market in the last three years.

As the KSE-100 index goes up and up multiplying investors wealth, first-time greedy investors with no knowledge of the pitfalls dabble in stocks — in the fashion of what the millions of Chinese small investors, to their regret, did in the Shanghai Stock exchange — trading on rumours and speculations.

Many of those who burnt their fingers in the several stock crises since 2000 at the KSE have also re-entered, confident as incorrigible gamblers — “this time it would be different”.

For the investment ‘advisers’ on the web, these are the soft targets. The youth in particular are easily lured by the unverifiable past records of immensely successful investing. The investment advisers on the web operate singly or in groups.

“It is indeed a very profitable business,” says one fund manager who is watching the phenomenon with a mixture of interest and concern.

He said that such investment advisers recommend low-priced stocks which have the prospects of going higher in an intensely bullish market, regardless of the company fundamentals.

The investment advisers on the web make money by dishing out ‘free’ investment advice to the public until enough investors have been attracted on his ‘friends’ list or ‘groups’ on Facebook. They then start a ‘premium’ investors’ group, who are charged ‘fees’ for access to the gurus ‘tips’ on a ‘hidden value scrip’. Such knowledge is not provided to non-fee paying investors.

But the ‘fee’ is not really the primary objective of the investment gurus. It is the ‘front running’. The modus operandi is as simple as can be. Buy a stock in large quantity of generally a low-priced stock at rock bottom and then give a ‘strong buy’ signal to the investors. As small, unsuspecting, devoid of research-based knowledge investors fall over each other in the quest for the stock, the price would inevitably surge. At his target level, the adviser would surreptitiously dispose of his holdings making a bagful of money, leaving the ‘member’ investors in the lurch.

The Securities and Exchange Commission of Pakistan (SECP) issued ‘Research Analyst Regulations, 2015’, under the newly promulgated Securities Act on Tuesday aims at “regulating the area of investment recommendation and research analysis, addressing potential conflict of interest and ensuring impartiality of the reports and recommendations made by research analysts”.

It also stipulates minimum qualifications and experience requirements for research analysts. However, the investment advisers on the web have been ignored.

“We are aware of this activity on the social media: Facebook, WhatsApp and other networks,” a senior official at the Commission said while requesting anonymity.

The official assured that several measures are under consideration to curb the unfair practice, including bringing it within the realm of ‘criminal offence’.

He argued that while the regulator would do his best to safeguard small investors, the ultimate responsibility for making an investment decision rests with the investors themselves under the widely accepted rule of ‘caveat emptor’ (buyer beware).

Published in Dawn, July 31st, 2015

Ahsan Baig

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Inside Financial Markets was a joint publication of Pakistan Stock Exchange (PSX)and Society of Technical Analysts Pakistan (STAP)