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How Social Media Stock Scams Could Put Your Money at Risk – Money Morning

This is a syndicated repost published with the permission of Money Morning. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

Social media stock scams – the use of tools like Twitter to spread misinformation to manipulate equities – is one more thing for retail investors to worry about.

A series of incidents over the past several months have put social media stock scams on the radar screens of the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the Federal Bureau of Investigation (FBI).

While securities fraud is an old problem, stock scams conducted via social media are more capable of causing maximum damage because of the rapid speed at which information spreads over social networks.

“Fraudsters are quick to adapt to new technologies to exploit them for unlawful purposes,” Robert B. Kaplan, co-chief of the SEC Enforcement Division’s Asset Management Unit, told the Financial Times. “Social media is no exception.”

And you don’t have to act on the misinformation yourself (such as acting on a false stock tip to buy a penny stock in a “pump-and-dump” scheme) to get hurt by the bad guys.

Like any type of securities fraud, social media stock scams can influence the decisions of investors to buy or sell.

But of greater concern is the increasing weight that social media traffic has on automated trading. Many private equity firms and hedge funds now incorporate data from social media streams because news often breaks there first.

“What we’re starting to see now is people looking at Twitter to see key information,” Charlie Irish, a technology consultant in London who advises financial clients on how to use new trading platforms, told the Huffington Post. “Quite often, you’ll see data released on Twitter a few minutes before it hits the mainstream financial press.”

Two Social Media Stock Scams Use Twitter

Two incidents that occurred at the end of January illustrate how vulnerable automated trading can be to a social media stock scam.

The victims were two small-cap companies (which are more susceptible to this sort of short-term manipulation) – audio chip maker Audience Inc. (Nasdaq: ADNC) and biopharmaceutical Sarepta Therapeutics (Nasdaq: SRPT).

The attack on Audience struck on Jan. 29. Someone created a fake Twitter account intended to fool people into thinking it belonged to Carson Block of Muddy Waters Research, a firm best known for following Chinese companies and exposing their accounting problems.

Human traders ignored the series of lunchtime tweets, which suggested Audience was under investigation by the Department of Justice for fraud.

But at 2:20 pm. ADNC shares suddenly plunged 25%, which suggested that automated trading systems programmed to scan social media for negative news reacted to the tweets. The stock recovered 16 minutes later, but it shows how easily a social media stock scam can be executed.

“It’s trade and ask questions later,” Jamie Lisette, president of The Hammerstone Group, told the Huffington Post. Lisette said “tons of bots” are always on the lookout for negative news in the social media sphere, and less-sophisticated ones can be fooled by stock scams most humans would recognize.

The day after the Audience incident, someone else created a fake Twitter account for Citron Research and sent out negative tweets about Sarepta Therapeutics, causing that stock to fall 9% in seconds.

These perpetrators can get creative too.

In an episode last month, one enterprising wrongdoer used a fake Twitter account to impersonate well-known investor David Einhorn of Greenlight Capital to try to create the impression that Einhorn was siding with fund manager Carl Icahn in his very public spat with fund manager Bill Ackman over Herbalife Ltd. (NYSE: HLF).

People can even get in trouble unintentionally. In December, Netflix, Inc. (Nasdaq: NFLX) CEO Reed Hastings tweeted that Netflix users had streamed 1 billion hours of video in June and was notified by the SEC that it could be a violation of fair-disclosure rules.

Dealing with Social Media Stock Scams

While the SEC and FBI have been aware of social media stock scams for at least a year, that hasn’t made it any easier to stop them.

However, they plan to treat it the same as any other securities fraud, and those who are caught will be punished.

And there have been a few successes. In January 2012 the SEC charged a financial advisor with using LinkedIn Corp. (NYSE: LNKD) to sell fake stocks.

“As some violators have learned the hard way, using social media to defraud investors leaves an electronic trail of footprints for our investigators to follow,” John Nester, a spokesman for the SEC, told Reuters.

But ultimately, the best defense against social media stock scams is constant vigilance, both by individual investors paying attention to where they’re getting their stock news and companies reacting quickly to counteract bad information.

“Whether it’s untrue or semi-true rumors, the days where corporate press offices could sit and think things over for 24 hours are over,” Jonathan Armstrong, a partner at Duane Morris who specializes in Internet law, told FOX Business Network. “If companies aren’t prepared, a lie will travel more than the truth can.”

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