Investor's wiki

Daisy Chain

Daisy Chain

What Is a Daisy Chain?

Daisy chain is a term for a financial scam conducted by a group of investors in the public equities markets or in real estate. It is like a siphon and-dump scheme. These securities market fraudsters cooperate to buy a particular security and falsely increase the value of the security. They then flip their ownership of that equity to clueless investors who are chasing a vertical trend.

Understanding a Daisy Chain

Investors who are unsophisticated and don't take a gander at a stock are typically the casualties of a daisy chain. As a stock rises due to the falsely increased volume, investors who don't get their work done are attracted to the stock since they need to participate in the rising price.

These investors are typically found possessing a stock that keeps on devaluing long after the daisy chain administrators have sold out their positions for a profit. In fact, at times these clueless investors increase their positions as the stock prices fall, thinking they are buying a dip, just to find the stock won't ever from now on arrive at its unnatural pinnacle.

How a Daisy Chain Scam Works

A group of investors collaborates to make a daisy chain by purchasing long positions in a low-priced and thinly traded small-cap stock. The group of investors, who normally impact the public markets, publicly disperse broken or deluding data that urges different investors to accept the stock is a wise investment. Public investors take the data introduced at face value and use it in an investment decision to purchase shares of the small-cap stock. This actvity increases its trading volume and demand above normal levels and accordingly increases its price.

The group of investors associated with the daisy chain then, at that point, waits until the small-cap stock arrives at top levels and sells its long position. The original investors realize a profit on the sale and afterward in this way stop the false marketing campaign, permitting the stock to return to normal volume and value levels.

For instance, Broker I will buy a stock at $50 and sell it for $60 to Broker II, who is likewise part of the daisy chain. The second broker then sells the stock for $70 to one more broker who's in the chain. Broker I will then buy the stock back by the day's end for $60. Somebody who isn't part of the chain will see that the stock sold for $60 during the day and, believing it's a wise investment due to the $10 price increase, will hop in to purchase the stock.

Disciplines for a Daisy Chain

Daisy chains in securities have become more common in recent years due to the rise of marketing on the internet. The Securities and Exchange Commission (SEC) is hence entrusted with the increased enforcement of discipline for any daisy chains. All daisy chain scams are viewed as an unlawful practice of market manipulation in the public markets. Anybody found at fault for participating in such a scheme faces heavy fines and punishments.

The SEC, the primary federal regulator for the securities industry, sees all daisy chain activities as fraud under the Securities Act of 1933 and Securites Exchange Act of 1934. At the point when it accepts that such fraudulent conduct has occurred, the SEC can look to impose regulatory punishments, including fines, restitution, and suspensions or bars, look for civil fines in court, or allude the make a difference to the Department of Justice for conceivable criminal prosecution which can bring about fines and detainment.

In real estate, daisy chains are not unlawful, yet they are disapproved of by numerous real estate investors who decline to purchased daisy-chained properties. Moreover, given the risk of being avoided with regards to the payment stream referenced below, daisy chains in real estate may not be worth doing all things considered.

Daisy Chain in Real Estate

In real estate, a daisy chain happens when a wholesaler signs a contract with a seller and afterward relegates the contract to another wholesaler, who then, at that point, does likewise. A real estate wholesaler is in the business of finding under-priced real estate, getting a contract on it, and afterward finding an intrigued buyer (generally another wholesaler), adding an assignment or locater's fee to the price.

Every wholesaler who relegates the contract to the next wholesaler likewise increases the price. The wholesaler profits when the ultimate buyer follows through on the sale cost plus the extra fees. The seller gets its sale price while the wholesalers get the fee. The risk to the chain of wholesalers is that the ultimate buyer will buy from the main wholesaler since it offers the most reduced sale price, and the deal will be fulfilled without advising any regarding the others in the chain.

Illustration of a Daisy Chain

During the 1990s, the SEC brought and settled a regulatory action against a registered representative (RR) of a registered broker/dealer (BD). The SEC claimed that for a period of around 90 days, the RR had created essentially all of the retail demand for a particular stock and controlled the supply, to such an extent that demand generally surpassed supply.

Thusly, the RR had the option to control the falsely high price at what shares of the stock traded in the market. The RR participated in daisy chain trading with market participants to fill retail customer orders, actuating BDs to enter erratic statements, and denoted the close by coordinating finish of-day trades executed at or close to the day's high price for the security.

The BD was asserted to have been engaged with the fraud by empowering its other RRs to cold call their customers to request purchases of the stock. The representative was barred for life from the securities industry by the National Association of Securities Dealers, Inc. (NASD, presently the Financial Industry Regulatory Authority or FINRA). The BD was ousted from NASD, while the SEC fined the firm $250,000 and the RR $175,000, and requested ordering restitution in the amount of $536,921. Several states additionally made a regulatory move against the BD and the RR.