The U.S. Securities and Exchange Commission’s (SEC) Office of Investor Education and Advocacy (“OIEA”) recently issued an Investor Alert warning investors about “fraudsters who may attempt to manipulate share prices by using social media to spread false or misleading information about stocks.”
The Alert was issued in response to a number of instances in which advisors and/or others used various social media outlets to spread false or misleading information about a stock and influence its share price.
At issue for the SEC is the growing number of investors using the Internet in general and social media in particular to gather information. Investors, the OIEA notes, “may use social media to research particular stocks, look up background information on a broker-dealer or investment adviser, find guidance on investing strategies, receive up-to-date news, and discuss the markets with others.”
Information is power…when it’s accurate information
Social media is cheap and friendly. Friendly in that it feels like a homey way to gather information from “friends, family, and people in the know…” And…sometimes it is!
However, it’s also the wild, wild west, full of not-so-friendly folk who rely on Twitter, Facebook, LinkedIn and other even less formal digital tools to spread false or misleading information about a stock to large numbers of people with minimum effort and at a relatively low cost. The virtual world makes it possible for anyone to conceal a true identity, act anonymously or impersonate credible sources of market information — in some instances even creating a webpage that uses a legitimate company’s logo and even link to that firm’s legitimate website.
Bad actors frequently use social media and online bulletin boards, or “chat rooms” to spread false and misleading information to manipulate the market, or a stock, positively or negatively. In a “pump-and-dump” scheme, for example, promoters “pump” up a stock’s price by spreading positive rumors to provoke a buying frenzy. They then quickly “dump” their shares and reap their profits just before the hype fades. The market normalizes, the stock price drops, and remaining investors lose money.
Others post negative rumors goading investors to sell their shares. When the stock price tumbles, the instigators get to buy shares at an artificially deflated price.
In SEC v. Craig, the SEC accused Scottish Advisor James Alan Craig with manipulating the share prices of two publicly traded companies by tweeting false and misleading information. He allegedly tweeted rumors that federal law enforcement was investigating a technology company for fraud, and that a biopharmaceutical company had tainted drug trial results so a federal government agency had seized its papers. The SEC says these deceptive tweets were made from Twitter accounts mimicking established securities research firms and the hoaxes are alleged to have cost investors more than $1.5 million.
In SEC v. McKeown and Ryan, the SEC obtained judgments against a Canadian couple (Carol McKeown and Daniel F. Ryan) who used their website (PennyStockChaser), and Facebook and Twitter accounts, to pump up the stock of microcap companies. The stock prices rose and they profited by selling those companies’ shares. They are alleged to have received millions of the companies’ shares as compensation and sold them off at nearly the same time their website predicted the stock prices would soar (a practice known as “scalping”). Because they failed to fully disclose their compensation for touting the stocks, the court ordered the couple and their companies to pay more than $3.7 million in disgorgement for profits gained as a result of the alleged conduct, and ordered the couple to pay $300,000 in civil penalties.
What this means for you and your firm?
In the case of the SEC v. Craig, it was an individual advisor behaving badly. He could have been anybody at any firm…even your firm. And this kind of bad actor is hard to track. But not impossible.
The regulators and their enforcement arms demand that RIA, broker-dealer, and FCM compliance professionals implement appropriate compliance policies and procedures to track and archive their members’ digital communication — their tweets, their posts, their emails — and produce that data on request. Execution, increasingly, is outsourced to independent, third-party, regulatory and compliance specialists, like us.
So, let’s talk about how outsourcing the burden of tracking and organizing data and documents to independent regulatory archival and compliance solutions specialists, can ensure your non-trading compliance processes and procedures run smoothly and compliantly. Ask about Patrina’s cost-effective and comprehensive regulatory archival and compliance solutions specifically designed for Broker/Dealers, RIAs, and FCMs.
Let’s talk: 212-233-1155.