Tag: Scalping

Twitter Pump and Dump

It should be obvious that some random twitteratti handing out investment advice is going to be a shady character. Right? There are lots of them. I’m not sure any get dragged before the Securities and Exchange Commission on charges.

@AlexDelarge6553 made thousands of tweets encouraging his numerous followers to buy stocks. No surprise that the man behind @AlexDelarge6553 held a bunch of those stocks he encouraged his followers to buy. The SEC named Steven M. Gallagher as the man behind the twitter handle. He bought a bunch of the stock, encouraged his followers to but the stock. The price went up and @AlexDelarge6553 sold out of positions as the price rose.

Classic pump and dump scheme or scalping scheme. Of course the stocks involved were penny stocks at tiny prices and tiny volumes. That made it easier to manipulate the stock price.

Kudos for the SEC for bringing the case. Bigger kudos to @AlexDelarge6553’s broker who tried to shut him down and, I assume, alerted the SEC to the problem.

“Despite repeated, written warnings from his brokerage firm (“Broker A”) that he appeared to be engaged in manipulative trading in violation of securities laws and regulations, Gallagher continued to engage in manipulative trading and scalping. On September 9, 2021, Broker A informed Gallagher that it was closing his trading account effective October 9, 2021, and that it would immediately prevent him from making new stock purchases, restrict his account to just liquidating transactions, and not allow him to open a new account in the future.”

Of course, since he was still allowed to liquidate his holdings, he could keep flogging his followers to buy as he sold out of his positions.

The fun part for the SEC is they have the transaction data from @AlexDelarge6553’s broker and his public tweets. It’s really easy to match the timing of the tweets to the timing of the transactions.

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Scalping as a Fraud


Today, it’s fairly well establish that an investment adviser should not be buying positions on their own behalf shortly before recommending that position to its clients. Fifty years ago, there was some question as whether the Securities and Exchange Commission could take steps to prevent this or require disclosure.

The test case came against Capital Gains Research Bureau. The firm produced a monthly newsletter recommending securities. In 1960 the firm purchased securities before recommending them in its report for long-term investment. On each occasion, there was an increase in the market price and the volume of trading of the recommended security within a few days after the distribution of the Report. Immediately thereafter, the firm sold its position at a profit.

The SEC sought an injunction to stop that practice unless the firm disclosed that it may be trading in the securities mentioned in the report. The firm challenged the injunction by saying the SEC has to show an intent to injure clients or an actual loss of money. The trial court and the appellate court agreed with the firm. The SEC continued the fight and the case ended up in the hands of the Supreme Court.

The justices of the high court came to the rescue of the SEC.

The high standards of business morality exacted by our laws regulating
the securities industry do not permit an investment adviser to trade on the market effect of his own recommendations without fully and fairly revealing his personal interests in these recommendations to his clients.

Experience has shown that disclosure in such situations, while not onerous to the adviser, is needed to preserve the climate of fair dealing which is so essential to maintain public confidence in the securities industry and to preserve the economic health of the country.

And so, the SEC gained the ability to expand the types of activity that could be considered fraudulent, deceptive, or  manipulative. And to do so without having to show an intent to injure clients or an actual loss of money.

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Image is The scalping of Josiah P. Wilbarger

This image is in the public domain in the United States. This applies to U.S. works where the copyright has expired, often because its first publication occurred prior to January 1, 1923.