Avoiding fraudulent schemes on Twitter

Screen shot 2013-04-12 at 3.35.52 PM      by Rob Swystun, Pristine Advisers

Social media sites like Twitter have become a go-to place for investors to get information about companies and stocks they’re interested in knowing about, but they can also be used for spreading outright lies and false information to affect stock prices and sales, too.

While Twitter does verify the accounts of big organizations and famous people, focusing, according to its website, on “highly sought users in music, acting, fashion, government, politics, religion, journalism, media, advertising, business, and other key interest areas,” it cannot verify every account.

And that’s how nefarious Twitter users can swoop in, create an account that looks like it might be associated with a knowledgable person or company, and proceed to try and influence the price of a stock.

Case study

As reported by Reuters’ Ryan Vlastelica recently, someone created a fake account on Twitter under the handle of @Greenlightcap and sent out the following tweet regarding Herbalife; “The $HLF tug of war will in the end come down to who has more money to play with. I wouldn’t want to be in Bill’s shoes right now #TeamIcahn.”

It appears what the Twitter faker was trying to do was to create an account that people would mistakenly associate with investment management firm Greenlight Capital and associate the tweet with Greenlight’s founder and noted short seller David Einhorn (who is on Twitter under @davidein where he does not tweet about stocks). The Twitter faker was apparently trying to make it seem like Einhorn was taking sides in a battle between well-known investors Carl Icahn and Bill Ackman, who are at odds over Herbalife. (Einhorn did take to Twitter to disavow the tweet sent out by the fake account.)

This is just one of many cases of these so called Twitter “pump and dump” schemes, where anonymous users create accounts with names that sound like they could be associated with prominent market players (like @Greenlightcap for Greenlight Capital as noted above) and then send out negative comments about a company or stock hoping to cause massive declines in stock price.

These fraudsters rely on the rapid spread of information on social media coupled with people not bothering to verify the sources of the information to make these schemes work. And the rampant selling that goes on after some of this misinformation is shared is testament that it does work at least some of the time.

It’s so bad that the FBI monitors both Facebook and Twitter and told Reuters in November that social media plays a big part in securities fraud.

The website of the U.S. Securities and Exchange Commission (SEC) also carries the warning that fraudsters will use social media “to appear legitimate, to hide behind anonymity, and to reach many people at low cost.” That anonymity doesn’t always work, as the SEC charged an advisor with attempting to sell fictitious securities through LinkedIn in January of 2012. Some swindlers seem to forget that the internet almost always has an electronic trail to follow just like the paper trails of yore. (If you’re under 30, go Google “paper trail,” the rest of you can pause for a moment to reflect on how old you’re getting.)

For its part, the Financial Industry Regulatory Authority has also issued social media guidelines to broker-dealers, which require them to keep records of social media usage.

How to avoid getting duped

For starters — and this is admittedly very obvious — only rely on trusted accounts on sites like Twitter that you know are legitimate.

Although Twitter does act pretty quickly to catch fake accounts — having shut down the Einhorn impersonator’s account shortly after it was opened — finding those accounts and shutting them down will take at least some time. However, you can do your own due diligence by spending some extra time seeing if there is any way to independently verify a tweet or other information you’ve garnered online.

As mentioned previously, Twitter verifies the accounts of notable people and organizations while Stocktwits (basically Facebook for investors and traders) does not allow discussions of penny stocks since they are the most vulnerable to being “pushed around,” according to the company’s CEO.

Another way people can avoid shams online is to rely on analytic firms for a heads up about false information. These firms will send out warnings to investors and brokers about any stock alerts or information they deem to be potentially nefarious.

New York based Dataminr, which monitors Twitter for stock information, sent out one of these warnings on Jan. 29 of this year.

At 8:44 a.m. NY time, a fake tweet was posted by someone pretending to be short-seller Carson Black of Muddy Waters Research about audio-visual manufacturer Audience.

Based on the fake tweet, share declines for Audience picked up dramatically after 2 p.m. that day, with more than 300,000 shares traded in a two-minute period. That little two-minute span of trading trounced the stock’s daily average trade volume of about 186,000 shares.

Dataminr sent out its warning about the fake tweet at 12:28 p.m. (presumably NY time) and the firm was — in its CEO’s own words — “able to warn its clients of a market rumor far in advance of the market-movement, along with providing context on the veracity of the message.”

The analytics company said its alert conveyed skepticism of the fake tweet based on the originating account’s past activity.

You might think that these analytics firms have automated computer software to help weed out tweets as fake as a $3 bill and you’d be wrong. They rely on good ol’ manpower.

Social media analytics firm Eagle Intel, based in Dublin, has alerts evaluated by a research team composed of former portfolio managers and analysts.

The London-based analytics firm Knowsis runs alerts past market professionals who look at who is sending the information and take into account the person’s location, whether they are an established market professional, and how shares react to the alert.

Even with these safeguards in place, though, people will still succeed on occasion and will still be able to kickstart big share reactions based on false information.

The most important thing to remember is to not jump the gun as soon as you see a piece of information. You might just be the smart one for not acting too quickly. Verify, verify, verify.


3 responses to “Avoiding fraudulent schemes on Twitter

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