Anatomy of a Chinese pump and dump | USAEMALL.com

We’ve written a few times about some rather fishy price swings involving China-based, Nasdaq-listed stocks and US regulators’ seeming inability to get to the root of the problem.

So credit where it’s due — on Friday, Chicago federal law enforcement seized $214mn in an alleged “pump and dump” fraud investigation. They indicted seven defendants in China, who, it is claimed, spent January manipulating the shares of a penny stock taken public by one of FT Alphaville’s favourite US bilge-bracket banks.

It’s perhaps noteworthy that it was the DOJ rather than Finra or the SEC that initiated proceedings (speedily, too). But let’s not split hairs: few of those responsible have been held to account since the pump and dump problem re-erupted during 2021’s bizarre bull market — when barely a week went by without an unprofitable micro-crap surging and crashing on no obvious news.

The civil action brought by an attorney for the Northern District of Illinois last week provides a great look at how one alleged scam involving China Liberal Education Holdings (which traded on Nasdaq under the ticker CLEU) unfolded earlier this year.

Incorporated in 2019, CLEU offers “a wide variety of education services and products to address the needs of schools and our students”.

The company IPO’d in the summer of 2020 — issuing 1,333,333 shares at $6, with Boustead Securities . . . 

. . . . as the sole underwriter. In unaudited financial statements filed with the Securities and Exchange Commission in October, CLEU reported a net loss of $4.7mn in the first half of last year.

In August, Nasdaq notified CLEU that its share price had fallen below the minimum bid of $1, meaning a delisting would follow if the stock did not eventually rise above this threshold for a minimum of 10 consecutive business days.

Four months later, the court docs state, CLEU issued 160mn additional shares for a total of about 438mn priced at around $0.162 apiece. Days before Christmas, it executed a 1-for-15 reverse stock split — a tried and tested way to circumvent exchanges’ flimsy compliance rules — leaving about 29mn outstanding shares priced at $2.695. (In October the SEC approved a Nasdaq rule change to stop reverse stock-splits arranged to boost a company’s minimum bid price.)

Things started to get interesting soon after, when CLEU is said to have issued 240mn additional shares to “certain individuals” without filing this with the SEC.

Here’s a quick overview of how the whole thing went down:

Between approximately January 10, 2025, and January 15, 2025, Subject Accounts 1-4 collectively received deposits of 33,906,975 shares of CLEU, which purportedly were issued from CLEU at a cost of $0.60 per share. Subject Accounts 1-4 subsequently participated in what is commonly known as a “pump and dump” scheme to fraudulently manipulate the price of stock in CLEU. During the time individuals in China, who were impersonating successful US-based investment advisers, advised numerous victims throughout the United States to buy CLEU at inflated prices, Subject Accounts 1-4 sold 31,484,573 shares on or about January 22, 2025 and January 23, 2025, for a total of approximately $176,104,984. 

On January 23, 2025, Company A [a US broker] restricted further activity in these accounts, so that Subject Accounts 1-4 were not able to sell any more CLEU stock. After these accounts were restricted, Subject Accounts 1-4 manipulated the CLEU market by submitting “buy” orders and then quickly cancelling the orders, which artificially inflated the volume of trades in CLEU and made it appear to the open market the demand for CLEU stock remained high.

Some victims were told by WhatsApp accounts used by people in China to buy at $5.37 per share with an expected return of up to 380 per cent over 20 to 30 trading days . . .

45. According to records from [brokerage B] on January 17, 2025, 4,936,410 shares of CLEU were deposited into Subject Account 7. On the morning of January 22, 2025, Subject Account 7 began selling CLEU shares. Prior to selling CLEU shares, Subject Account 7 had an account balance of approximately $40,142.10. Within a half hour of when Subject Account 7 began selling its CLEU shares, it had sold all 4,936,410 shares in the account, for a total of $26,186,430.61

The dump came on January 22nd and 23rd.

Five days later, CLEU came clean-ish to the SEC, admitting a month after the fact that it had exchanged 320mn warrants “for newly issued 240mn outstanding shares purchased at a cost of $0.60 per share, and that as of January 27, 2025, the total number of CLEU outstanding shares was 269,325,176”.

The stock promptly plunged to $1.02 from $7.75 at the open on January 30, when the new information was finally revealed to the market. Shares ended the session down 98 per cent at $0.148. Around 600 US retail investors were left holding the bag.

The alleged scammers used their gains to purchase shares of what the court document describes as three “Investment Fund[s]” on January 31 — and they may well have gotten away with it, too, were it not for a handful of victims who went to the FBI and the SEC with everything they knew.

Scammers have been impersonating famous US investors for years, luring countless retail investors on to WhatsApp groups through ads on Facebook and Instagram with the promise of huge returns.

FTAV joined several of these WhatsApp groups last year, and was sent screenshots from a person embedded in one that pumped CLEU. The group’s profile picture, we were told, is identical to the one used by people who last year posed as associates of Cathie Wood to pump and dump stocks including “AI-powered” car insurance group U-BX Technology.

CLEU is the tip of the pump and dump iceberg, in other words, and we know for a fact it was being touted as far back as 2022.

But although these sorts of scams seem random and hard to prevent, InvestorLink Capital Markets’ founder Matthew Michel says most can be spotted ahead of time if you know what to look for.

On January 22, just as subjects one to seven were dumping their shares, Michel shot us an email with “CLEU today” in the subject line, noting the troubling capital structure, a massive increase in negative social media sentiment as well as multiple delisting notifications the issuer had received since its IPO in 2020.

Issuers, companies and exchanges “allow a trading pattern that creates significant operational risks for the broker dealer community due to opaque corporate actions, aberrational trading patterns and volatility halts”.

“If you don’t have the operational expertise to evaluate the idiosyncratic risks these issuers present, you’re asking for trouble” he told us. “For example multiple reverse splits cause lower floats which in turn makes it harder to sell short . . . creating short squeezes that inflate [the] share price.”

Skulduggery of this sort obviously isn’t limited to Chinese stocks, however. Yesterday morning InvestorLink emailed us to flag unusual activity around MicroAlgo (MLGO), a US small-cap that surged on Monday but fell sharply earlier today.

Since December 2023 there have been 48 cases of a >$5mn market cap stock going up 250% in close one day-to-close next returns. MLGO has been 4 of those cases, [Monday] is threatening to be the 5th. No other symbol has done it more than once.

We contacted MicroAlgo to find out more about what’s going on, and will update this post if we get a response. “If there’s smoke, there’s usually fire,” said Michel.