ED’s Pump-And-Dump Probe: Zerodha’s Nithin Kamath Cautions Investors Against WhatsApp Stock Tips 

Zerodha co-founder Nithin Kamath has cautioned retail investors about the dangers of relying on stock market tips circulated on messaging platforms. Kamath took to the social media platform X (formerly Twitter) to caution retail investors about falling for such scams.

“investors need to be extremely cautious of stock tips shared on WhatsApp and Telegram groups as they are often traps designed to manipulate prices,” Kamath wrote in his post.

Kamath explained the risk involved for new market participants and added that the easiest way to lose money in the market is to follow unsolicited advice from unknown sources.

“The easiest way to lose money in the stock market is by following unsolicited advice from unknown sources promising guaranteed returns,” Kamath said.

Kamath’s advisory comes shortly after the Enforcement Directorate (ED) took action against a social media-based financial scam. The ED conducted search operations across 29 premises in six different cities to uncover a stock manipulation network in which the alleged fraudsters were  using social media tips to manipulate investors.

ED Uncovers Pump and Dump Scheme

According to a release by the ED, the agency launched an investigation into the manipulation of shares of two listed companies, R M Drip and Sprinklers Systems, and R&B Denims. The agency searched the offices of the two companies, residences of their promoters, and premises of individuals suspected of running a ‘WhatsApp pump and dump’ scam.

The agency said that the shares were promoted to investors through Whatsapp groups wherein investors were urged to buy them.

“It appears that the scrip of RMDSSL was promoted through various Whatsapp Groups to generate buying interest in the scrip,” ED said.

The investigating agency also revealed that the accused used deceptive methods to hide the origins of the fraudulent messages.

“The groups ran on SIM cards obtained in the names of other persons in Haryana and Mumbai, but were operated from Bhavnagar, Gujarat,” the ED said. The enforcement body added that the fraudsters profited at the expense of retail buyers who purchased the two stocks.

“The Preferential allottees took advantage of this increased buying interest and dumped a part of their shareholding to a large number of investors,” ED said. The agency has also frozen trading accounts worth about Rs 200 crores belonging to the connected entities.

What Is A WhatsApp Pump and Dump Scheme

A WhatsApp pump and dump scheme is a type of financial fraud designed to artificially inflate the price of a stock already owned by a scamster. Once the price is inflated, the scamster sells off the stock and rakes in the illegal gains.

The modus operandi begins with promoters issuing millions of shares or convertible warrants at very low prices to a small circle of connected individuals and firms. Over several months, the operators slowly push the share prices up while keeping the shares within their close network to show high returns.

Then the market manipulators launch promotional campaigns aimed squarely at retail investors. They create WhatsApp communities with enticing names like Multibagger Stocks to send daily buy tips.

The influx of retail buyers drawn in by these tips causes the stock price to surge further. As soon as the price peaks due to this artificial demand, the connected circle dumps their heavily discounted shares onto the new investors. This sudden massive sell-off crashes the stock price and leaves the retail investors with huge financial losses.

How Can Investors Stay Safe

Kamath said that such manipulative cases are likely to increase over time. This trend is likely to continue because the growing number of new retail investors entering the stock market creates a large pool of potential targets for scammers using messaging apps. Amid a potential rise in such cases, investors can safeguard themselves by following strict precautionary measures.

Market regulators like the Securities and Exchange Board of India (Sebi) advises investors against acting on unsolicited stock market tips from unverified sources. The regulator recommends relying only on Sebi-registered investment advisors (Sebi RIAs) for financial guidance.

According to Kamath’s post, one way for investors to protect themselves is by using AI chatbots to do a preliminary background check on the companies being recommended. However, investors must note that this technological check must be done in addition to thorough research on the company’s financials. Investors must also view any investment advice that promises unusually high or guaranteed returns in a short period with skepticism and steer clear of promises of guaranteed returns.