When customers want to pull out, they are threatened with violence
With the outrage on social media channels over fake stock market gurus, a big and illegal business has run into trouble.
The business consists of managing other people's money without the required licence, and after some of the trader-influencers were denounced on social media, their clients are panicking and demanding their money back.
On one of the social media handles, a voice recording of a phone conversation was shared, in which one person threatens the other with kidnapping and violence. According to the handle, it is a hired thug warning an investor who demanded his money back.
This was only one of the cases referred to the reporter. In conversations with others, some traders spoke of receiving calls from their clients demanding their money back, and other market participants told of investors being forced to withdraw complaints against such money managers.
But what is this business itself?
None of the people Moneycontrol spoke to for this story wanted to be named, but it was repeatedly said that this is widely known and a common practice for well-known traders to manage other people's money even though they are not licensed to do so.
It is now known that some of these traders are spreading illegal advice through social media platforms such as YouTube and Telegram. These advisors are accused in social media and news reports of giving stock tips even though they are not Sebi-registered research advisors or research analysts. However, illegal advisors only give trading calls. Moneycontrol has found that the involvement of unlicensed players can go one step further- such traders actually place the trades for clients. The danger is that the money is managed by people who may not have the expertise, but are simply good at selling their story, and they cannot be held accountable if the trades go wrong. Retail investors seem to be particularly vulnerable to this scam because they are working with a smaller amount of capital and are therefore easily attracted to the promises of multibagger returns.
"I know many families who have lost money this way. The trader takes a few lakhs from them and in a good market all is well. But when something goes wrong, the trader disappears and the family feels they have no legal recourse," said a respected trader.
To manage a person's money, a company in India must obtain a license as a mutual fund, portfolio management service or alternative investment fund. But to set up such a fund, the regulatory and capital requirements are staggeringly high. Therefore, the easiest way is to enter into an informal agreement with a client.
But why do clients turn to such unlicensed players? For one thing, they are promised above-average returns, and for another, alternatives have a high barrier to entry in the form of a minimum investment amount. According to one insider, compliance requirements for alternatives can also be restrictive in terms of trading practices.
Running the scam
Illegal money management can be done in two ways. Suppose a person has a lot of money but does not know how to trade or invest to make the money grow. Then he/she can give the username and password of his/her trading account to this known trader. The second option is that the client transfers the money to the trader's bank account by himself/herself and the trader manages it through this pooled account where the money of different clients is located.
This money manager can be responsible for hundreds of millions and earn a commission of about 30% on the profit. An insider said he has seen people managing an average of Rs 200 crore to Rs 300 crore and a maximum of Rs 2,000 crore.
A trader and social media influencer had hosted a YouTube live show where viewers could see Rs 200 crore in his account, which was termed as pooled money from other investors.
"This (pooled money) is dangerous as this money is completely in the hands of the trader and the trader is known to disappear with the money. So many people from low-income families have lost their money to such scammers," this person added.
According to this person, it would be safer to share the username and password with the merchant and allow him to buy and sell through the customer's account. "If you change your mind, all you have to do is change your password," he said.
In order for a trader to do this - i.e., trade for hundreds of customers - there is software that can be purchased on the market. According to one industry expert, it can be purchased for as little as 5,000 rupees.
"To do this, the trader must first register as a sub-broker and then tell the broker that he is having trouble placing trades for a large number of clients. Then the broker will put that person in touch with the software provider," said a person who requested anonymity.
While the trader receives a portion of the profit earned by the client, he/she takes the sub-broker licence to earn the brokerage fee as well.
How is the message sent out ?
In order to advertise their services, some traders regularly host live sessions of their trading. Invitations to the sessions are sent out via social media so that potential clients can see how that trader manages large sums of money and how well. The prospects then sign up via one of the social media channels where this trader is present.
Another side of this story is that many of the well-known trader-influencers do not really know how to trade well. But because of their popularity, clients may turn to them to manage their money. In this case, the well-known trader gives this job to someone who knows how to make good trades. The customer has no idea that a third party was involved.
It can also work the other way around.
Dealer groups that know how to place good trades but do not have a good social media presence can turn to a dealer influencer to entice customers. The merchant group offers the influencer the marked-to-market (MTM) accounts of their successful trades, so the influencer can use those accounts to promote their "skills." When a person with a lot of money sees this, they can contact the Influencer and ask them to manage their money. The influencer then forwards the business contact to the Trader group and the influencer receives a cut for referring business.
With social media now asking Trader Influencers to share their verified MTMs, many are reluctant to share theirs because the testimonials may include the name of their client or real Trader partner.
Therefore, it is not uncommon for Twitter users to say they have no problem sharing the verified MTM statement, but the name on the statement needs to be hidden "for privacy reasons" or "for personal reasons."
0 Comments