How SEBI Cracked Whip On Arshad Warsi, 30 Others For Stock Manipulation Via YouTube

The Securities and Exchange Board of India (SEBI) on Thursday (March 2) issued two interim orders barring 31 entities, including actor Arshad Warsi and his wife Maria Goretti, from the capital markets for their involvement in stock manipulation schemes with the use of YouTube channels.

SEBI said that it had begun a preliminary investigation in the cases after receiving complaints that a few YouTube channels were uploading “misleading” videos with false content about two media companies – Sadhna Broadcast Ltd and Sharpline Broadcast Ltd. Backed by paid marketing campaigns worth crores of rupees, the videos lured investors to pump money in these company stocks, the regulator said.

Following the findings of the investigations, SEBI has restrained Sadhna’s promoters, including Gaurav Gupta, Shreya Gupta, Saurabh Gupta, Pooja Aggarwal, and Varun Media Private Ltd, from the securities market, along with Warsi and his wife.

SEBI classified the 31 entities into four categories – creators of YouTube channels or ‘misleading message disseminator’ (MMDs), which is Manish Mishra, ‘net sellers/promoters’ and profit makers (NSs), ‘volume creators’ (VCs), and ‘information carriers’ (ICs).

The entities involved in the case seemingly used a pump-and-dump scheme – a financial fraud which typically involves spreading false information about a company to inflate the volume, pump up the stock price. Following the rise in price, the entities involved in the scam start dumping the shares at an inflated rate, causing losses to the investors.

“Prima facie, across the MMDs, NSs and VCs, the noticees have collectively helped create trading volumes and interest in the scrip, spread false and misleading YouTube videos, and hence induced unsuspecting investors to buy the Sharpline scrip at elevated prices, thereby prima facie violating the provisions of the SEBI Act and PFUTP (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations,” said the regulator in its notice.

Collectively, the NSs and some of the VCs booked extraordinary profits as a result of this scheme, it added.

According to SEBI, Warsi and his wife Goretti acted as VCs and made illegal gains worth INR 29.43 Lakh and INR 37.56 Lakh, respectively. The market regulator’s report suggested that together, the entities made a profit of INR 41.85 Cr by manipulating the stock price of Sadhna, while the manipulation in Sharpline scrip resulted in the involved entities making profits to the tune of INR 12 Cr.

However, Warsi took to Twitter to deny his involvement in this stock manipulation. “Please do not believe everything you read in the news. Maria and my knowledge about stocks is zero, took advice and invested in Sharda, and like many other, lost all our hard earned money,” he said in a tweet. 

SEBI issued the interim orders after a year-long investigation into the matter. 

As per the interim orders, the entities have been restrained from selling or dealing in securities, directly or indirectly. The proceeds of the transactions under scrutiny have been seized and the market regulator directed the entities to transfer the requisite sum in an escrow account within 15 days. 

How The Scam Was Orchestrated 

In its order, the market regulator explained in detail how the entities employed the pump-and-dump technique to make illegal gains.

First, there was a spurt in the price and volume of shares of Sadhna between April 2022 and mid-July 2022. Interestingly, a significant portion of this volume was the result of the trades executed by some of the entities involved in the case.

Next, in the latter half of July last year, “false and misleading” YouTube Videos about the company were uploaded on two YouTube channels – The Advisor and Moneywise, SEBI said. 

They disseminated misleading news, recommending investors to buy shares of Sadhna in order to make extraordinary profits. Some of the claims made by these channels included Adani Group taking over Sadhna going ahead and the media company moving from TV production to movie production. 

In its investigation, SEBI found that there was an increase in the price and trading volume of the Sadhna scrip following the release of the videos. 

Similarly, in the case of Sharpline, SEBI noted that the company got listed on BSE on September 07, 2021, but the first trade in the scrip took place only on March 15, 2022. Following that there was a spurt in the price and volume of Sharpline between April and mid-May of 2022.

During the second half of May 2022, two YouTube channels – Midcap calls and Profit Yatra – uploaded misleading videos about the company. Soon, there was an increase in the price and trading volume of the Sharpline scrip. 

The markets regulator said that the YouTube Channels involved in the cases had lakhs of subscribers and the said videos had viewership in crores through paid advertising campaigns. However, subsequently, those videos ceased to be available for public viewing. 

During the period of the rise in volume in the shares of Sadhna, some promoter shareholders, key management personnel, and non-promoter shareholders with over 1% of shareholding in the company started offloading a significant part of their holdings at inflated prices to book significant profits, it said.

SEBI established the connections between all the entities across the MMDs, NSs and VCs based on call data recordings, fund transfers, and more such details.

Consequently, the regulator has restrained all 31 entities from buying, selling or dealing in securities either directly or indirectly, in any manner, until further orders. 

“If the noticees have any open position in any exchange traded derivative contracts, as on the date of this order, they may close out/square off such open positions within three months from the date of this order or at the expiry of such contracts, whichever is earlier. The said entities are permitted to settle the pay-in and pay-out obligations in respect of transactions, if any, which have taken place before the close of trading on the date of this order,” the market regulator said.

SEBI Sets An Important Precedent

Appreciating the market regulator’s order, Aayush Mohata, partner, capital markets team at Khaitan & Co, said that SEBI’s investigation, including the review of call data records to establish the nexus of entities involved in the trades, is commendable from an investor protection perspective and for the development of the securities market. 

According to Mohata, stock manipulation activities via digital media platforms have become common these days. Ahead of any well-publicised security offering like an IPO, influencers on various social media platforms or through YouTube channels disseminate unverified information to solicit interest in the scrip, he added. 

“SEBI’s guidelines require entities involved in the business of giving investment advice to be registered with SEBI. SEBI-registered intermediaries are required to adhere to a code of conduct and verify information before transmitting it,” said Mohata. “Distribution of unverified information through digital media platforms is a precise example of activity which could be detrimental to the securities market and therefore requires oversight.”

Since, penalty if any, shall be levied upon the completion of the proceedings, SEBI has also directed the entities involved to not dilute or sell any of their assets in the interim period and provide a full inventory of assets held by such entities, Mohata added.

Meanwhile, Zerodha’s Nithin Kamath took to Twitter to applaud SEBI’s order. “SEBI is killing it with these enforcement orders,” he said.

“Yesterday’s (order) against the pump and dump schemes peddled by selling greed and unrealistic returns through social media and YouTube should serve as a powerful deterrent. These scams had become the easiest game in town for manipulators,” he said.

“These elaborate orders should hopefully put some fear amongst unauthorized tipsters and people offering unauthorized portfolio management services. Such actors damage the sanctity of capital markets in India,” he added.