Ramp-and-dump schemes on the rise, FINRA warns

Initial public offerings by foreign small-cap issuers are increasingly being used in a sort of pump-and-dump scheme, the Financial Industry Regulatory Authority Inc. (FINRA) warns.

The U.S. self-regulatory organization issued an alert about an elevated fraud threat involving small-cap IPOs being used in manipulative trading schemes, also known as ramp-and-dump schemes.

“FINRA has observed significant unusual price increases on the day of or shortly after the IPOs of certain small-cap issuers, most of which involve issuers with operations in other countries,” it said.

In particular, the SRO said it’s concerned about “apparent manipulative limit order and trading activity” in brokerage accounts that invest in small-cap IPOs.

These cases typically involve small IPOs (less than US$25 million) that issue a relatively modest (less than 20 million) number of shares. Many of the issuers are based in China, using Hong Kong–based broker-dealers that receive the bulk of the IPO, limiting the publicly available shares.

“Some of the investors harmed by ramp-and-dump schemes appear to be victims of social media scams,” FINRA said.

The SRO recommends that brokerage firms be alert to the red flags for these sorts of scams, given their increasing prevalence.

It also said firms should consider whether they need to engage in added due diligence to guard against these schemes, and to ensure that they comply with both their regulatory obligations and other requirements, such as anti–money laundering rules.

“As these ramp-and-dump schemes evolve, there may be varied attempts to inappropriately influence the IPO process,” FINRA said. “Underwriters, as gatekeepers, must continue to be vigilant in this regard, particularly when dealing with offshore participants in the underwriting and foreign broker-dealers receiving allocations of shares.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.