On 6 June 2022, the user of a popular Australian share trading forum “HotCopper” pleaded guilty to 23 charges of manipulating ASX listed stocks and an additional 19 charges of disseminating information about the illegal manipulation.
Gabriel Govinda orchestrated an elaborate ‘pump and dump’ scheme between September 2014 and July 2015 where he carried out illegal trades and propped up the price of selected shares. Mr Govinda then took to HotCopper with his username ‘Fibonarchery’ and posted about his scheme. Mr Govinda is the first person to be convicted under section 1041D of the Corporations Act, which makes dissemination of information about illegal trades, of the kind he was making, an offence.
Mr Govinda’s guilty plea is evidence of ASIC’s increased regulatory interest in social media posts which may have the effect of breaching the various provisions of the Corporations Act 2001 (Cth).
What are ‘Pump and Dump’ schemes?
A ‘pump and dump’ scheme occurs when misleadingly positive information about a stock is spread in an attempt to create a buying frenzy so as to “pump” up its price. Once the stock price has been sufficiently inflated, the stock is “dumped” by the fraudulent trader who will also stop promoting the trading frenzy. This will usually result in the share price plummeting so that uninvolved investors experience significant losses.
In Australia, pump and dump schemes amount to market manipulation in breach of the Corporations Act.
The Manipulation and HotCopper
Between September 2014 and July 2015, Mr Govinda used 13 different share trading accounts that were in the names of his friends and family to inflate the prices of 20 listed stocks. By trading between these accounts, in an activity known as wash trading, and by making false dummy bids to create the illusion of high interest in his chosen shares, Mr Govinda manipulated the market by illegally creating a false and misleading appearance of active trading. This conduct amounted to a breach of section 1041B of the Corporations Act for market rigging.
In addition to inflating the prices of the chosen stocks using fake accounts, Mr Govinda posted about his exploits on HotCopper. In one post, Mr Govinda stated that “dummy bids are all part of the fun and games and cat and mouse of the stockmarket!” The spreading of information about illegal transactions is an offence under section 1041D which provides that a person must not circulate any statement or information relating to a transaction that manipulates or rigs the market, is misleading or else induces a person to deal in a particular share.
Mr Govinda now faces a maximum penalty of 10 years imprisonment or a fine of up to $765,000 for each charge. The matter has been adjourned to 29 July 2022.
ASIC’s broader approach
While pump and dump activity has long plagued the Australian share market, ASIC has observed that its prevalence has risen during the pandemic as new investors have entered the share market for the first time. In addition to these new investors, the rise in pump and dump schemes have been attributed to a greater reliance on financial-influencers and social media.
ASIC is now actively warning retail investors and other market participants to be on the lookout for potentially manipulative activities. In addition, ASIC has published an information sheet INFO 269 for social media influencers setting out their responsibilities when discussing shares or other financial products online so that their content complies with law.
In 2021, ASIC Commissioner Cathie Armour stated that “ASIC has been working closely with market operators to identify and disrupt pump and dump campaigns, and we will continue to target actions that threaten the integrity of markets and to take enforcement action where appropriate”.
This case serves to highlight ASIC’s current policy directive and increased focus on regulating online financial discussions, including by bringing charges against individuals who are engaging in misleading conduct or providing unlicenced financial advice.
McCabes has extensive experience in advising and acting for individuals and companies on their obligations under the Corporations Act 2001 (Cth). Please contact our Litigation and Dispute Resolution or Corporate team if any of the issues raised in this article apply to you.