The Securities and Exchange Commission is warning investors
to watch out for fraudsters who may attempt to manipulate share prices by using
social media to spread false or misleading information about stocks, with
unregistered advisors and brokers being among the potential fraudsters.
In a recently released Investor Alert, the SEC’s Office
of Investor Education and Advocacy warns that via social media fraudsters can
spread false or misleading information about a stock to “large numbers of
people with minimum effort and at a relatively low cost,” and can conceal their
true identities by acting anonymously or even impersonating credible sources of
market information.
The SEC notes that one method fraudsters use to exploit
social media is by engaging in market manipulation, such as spreading
false and misleading information about a company to affect the stock’s share
price. The false or misleading rumors
may be positive or negative. Typically, after the promoters profit from their
sales, the stock price drops and the remaining investors lose money. In other
instances, fraudsters start negative rumors urging investors to sell their
shares so that the stock price plummets and the fraudsters take advantage of
buying shares at the artificially low price.
The SEC notes a case the agency brought against two
individuals regarding social media and market manipulation. In SEC v.
McKeown and Ryan, the SEC obtained judgments against a Canadian couple who used
their website (PennyStockChaser), Facebook and Twitter to pump up the stock of
microcap companies, and then profited by selling shares of those companies.
The SEC’s complaint alleged that the couple did not fully
disclose the compensation they received 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.
The agency goes on to cite four red flags to
help investors spot investment fraud via social media:
Limited history of
posts. Fraudsters can set up new accounts specifically designed to carry
out their scam while concealing their true identities. Be skeptical of
information from social media accounts that lack a history of prior postings or
sending messages.
Pressure to buy or sell
“right now.” Take the time to research the stock before you invest. Be
skeptical of messages urging you to buy a hot stock before you “miss out” or to
sell shares of a stock you own before the price goes down after negative news
is announced. Be especially wary if the promoter claims the recommendation is
based on “inside” or confidential information.
Unsolicited
investment information or offers. Fraudsters may look for victims on social
media sites, chat rooms, and bulletin boards. Exercise extreme caution
regarding information provided in new posts on your wall, tweets, direct
messages, e-mails, or other communications that solicit an investment or
provide information about a particular stock if you do not personally know the
sender
Unlicensed sellers. Federal
and state securities laws require investment professionals and their firms who
offer and sell investments to be licensed or registered. Many fraudulent
investment schemes involve unlicensed individuals or unregistered firms. Check
license and registration status by searching the SEC’s Investment Adviser
Public Disclosure (IAPD) website or the Financial Industry Regulatory
Authority (FINRA)’s BrokerCheck website.
Click
here to access the full article on ThinkAdvisor.