By Dave Michaels

Braden Lindstrom had only dabbled in investing when he was encouraged by someone impersonating a financial adviser to buy shares in a small Chinese company listed on the Nasdaq Stock Market. A few clicks later, he was on his way to being scammed out of $80,000.

Lindstrom, a college professor in Utah, invested in Jayud Global Logistics, a small Chinese shipping company whose price rose for months, then crashed 96%, just after Americans like him were told to buy it. Wall Street veterans say the pattern has been repeated dozens of times in recent years, and feeds on tiny Chinese stocks that are vulnerable to manipulation and easily bought by U.S. investors.

Traders and investigators say it has become an epidemic of fraud, frustrating U.S. regulators who typically can't get access to evidence in China, even though the companies market their stock to investors in the U.S. The Justice Department is now involved with fighting the fraud, which resembles a pump and dump, declaring it a priority of the Trump administration's white-collar enforcement program.

The department "has stood up a team to identify and root out these bad actors, deter misconduct, and, where possible, recover victim funds," said Matthew Galeotti, the head of the Justice Department's criminal division.

Victims are typically recruited through social-media ads or messages on WhatsApp advertising investment advice. Unlike as in many other online scams, they are told to buy shares in real companies, often obscure Chinese firms that fizzled after going public on U.S. stock exchanges.

The investors are duped into believing the company is on the verge of something big, perceptions that are reinforced by short-term gains in share prices engineered through manipulative trading. The sellers are often a ring of traders who bought the stock at much cheaper prices, sometimes directly from the companies, and want to dump it on the unsuspecting victims.

Nearly 60 China-based companies have conducted initial public offerings on Nasdaq since 2020 that each raised $15 million or less. More than one-third have experienced sudden one-day price drops of 50% or more over the past two years, according to FactSet data. Another 17 listed companies based in Hong Kong have lost half of their market value in a single day.

The Financial Industry Regulatory Authority warned in 2022 that small IPOs involving such companies were often a prelude to fraud. Such offerings were supposed to broadly market shares to new investors. But they could instead be placed with insiders or affiliates of the company, and manipulative trading often appeared soon after the IPOs, according to Finra.

"We're seeing this across the landscape," said Bryan Smith, a senior vice president for complex investigations at Finra, which supervises stock brokerages.

One recent criminal case, involving China Liberal Education Holdings, illustrates how an alleged fraud occurs.

China Liberal, which said it ran international-study programs for Chinese college students, disclosed in December that it raised almost $21 million from 30 big investors, who agreed to purchase 160 million shares for about 13 cents each, according to securities filings.

But some of those investors were involved in a pump and dump that defrauded 600 victims, according to an indictment issued in March.

Seven of the big buyers quickly moved their shares to U.S. brokerage firms. Recruiting investors through Facebook ads and WhatsApp texts, they unloaded over 50 million shares, earning over $480 million, according to the indictment.

The Chicago U.S. attorney's office in March seized about $214 million, or under half of the allegedly illegal proceeds, after a brokerage firm alerted Finra of potential fraud. The seven traders, five from Malaysia and two from Taiwan, were charged with wire fraud and securities fraud over their sales of China Liberal Education Holdings stock.

Nasdaq suspended China Liberal's stock from trading on June 3.

Lindstrom, the college professor, is one of five people interviewed by The Wall Street Journal who said they were fooled by advertisements on Facebook or Instagram that told them to buy Jayud Global Logistics.

The promoters sometimes referred to Jayud as "Cash Cow 5" and said its price would skyrocket after it was acquired by a bigger shipping company, Matson.

Lindstrom invested $82,000 in late March. The price touched $8 on April 1. After the market closed that day, Jayud's stock price crashed to under $1.

The administrator of Lindstrom's WhatsApp group told him he could make up his losses by buying more shares of a different Chinese company, Nasdaq-listed Lixiang Education Holding. He didn't fall for the second swindle, but some did.

Lixiang's price fell on April 17 from $23 to $7. It trades now at $2.

"It just kind of puts a dent in your faith in human nature," Lindstrom said.

Another investor in Northern California, a 45-year-old commercial property manager, said he lost $320,000 betting on Jayud. A different investor from Missouri lost $54,000. He said he believed that Meta, which owns Facebook, would block stock scams from advertising.

Meta said it is experimenting with new tools, such as facial-recognition technology, designed to block complex scams. "Addressing this crime requires collaboration between banks, governments, law enforcement and telecoms," a spokeswoman said.

Lindstrom and the others formed a support group of about 96 Jayud investors who collectively lost about $9 million, he said.

Nasdaq says it has made it harder in recent years for risky companies to remain listed on its exchange. In January, for instance, Nasdaq accelerated the process for delisting some companies whose share price falls under $1.

"Nasdaq takes its regulatory responsibilities seriously," Nasdaq said in a statement. "Where Nasdaq does not have principal authority, such as cross-market trading activity, we proactively work with other regulators and enforcement agencies to help address instances of market manipulation."

Authorities have recently focused on suspicious trading in the shares of several other China-based companies, including Lixiang and NetClass Technology, according to people familiar with the matter.

A spokesman for NetClass said the company can't explain recent volatility in its share price but is committed to providing investors with information they need to assess the company's performance and future outlook.

NetClass went public in December, pricing its shares at $5 and raising about $10 million, according to securities filings.

The share price rose steadily until early May, when it reached an intraday peak of $51 on a frenzy of trading. The price collapsed a few days later. It now trades just above $2.

Such volume spikes attract new buyers -- and short sellers, who bet that the price will have to fall, said Nathan Michaud, a professional trader who has called attention to the schemes on social media. But the short sales, he said, can inadvertently further fuel a fraud. If the promoters push the price higher, short sellers scramble to buy shares to replenish the ones they borrowed, boosting the price even more.

"I think they realized it is harder to fool people into buying stock, and easier to trap people into shorting stock," Michaud said. "The only way you can absolutely kill your career is by trading these."

Write to Dave Michaels at dave.michaels@wsj.com

(END) Dow Jones Newswires

June 16, 2025 08:00 ET (12:00 GMT)

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