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Spreading fake news can result in fraud charges, SEC says

By BECKY GILLETTE

On April 10 the Securities Exchange Commission  issued warnings for investors to be aware of fake news designed to drive up a company’s stock price.

“When you read an article on an investment research website, be aware that the article may not be objective and independent,” the SEC said in an alert to investors. “For example, the writer may have been paid directly or indirectly by a company to promote that company’s stock. In some cases, the writer may not disclose compensation received or may go so far as to claim falsely that compensation was not received. Keep in mind that fraudsters may generate articles promoting a company’s stock to drive up the stock price and to profit at your expense.”

The SEC charged 27 parties including public companies, firms, and writers with fraud for generating articles that promoted certain stocks when some or all of the writers allegedly failed to disclose they had received payment, used different pseudonyms to publish multiple articles that promoted the same stock and/or used fake credentials.

Mercer Bullard, a Butler Snow Lecturer and professor of law, University of Mississippi School of Law, said spreading false information about publicly traded stocks is not a novel practice.

“Given the expanding role of fake news in politics and markets, we probably should not be surprised,” Mercer said. “As a general matter, investors should not be buying individual stocks. They should be investing in mutual funds. It is highly unlikely an individual investor will do a better job than expert professionals who are studying the market 24\7.”

Fake news can be used drive a stock down as well as up.

“There have been instances in which negative fake news has been posted to allow an investor to make money shorting a stock,” Mercer said.

Dr. G.W. Kelly, chairman of University of Southern Mississippi Finance Department, said this is referred to as “a pump and dump scheme” that works by buying shares in advance at low prices and selling them after the “pump up,” or by sell the shares short (i.e. without owning them) when you’re pretty sure the price is about to drop.

“They pump up expectations, make their profit, and then the price goes back to where it belongs, probably in the gutter,” Kelly said. “That is one of the reasons we have the SEC. We have the experience of this that goes back from before the 1930s prior to when the SEC was put in place. The SEC’s principal job is to level the field for the investing public. The SEC’s job is to standardize the information given to the public like the 10K and 10Q reports. The idea is the investing public should have the same information in our hands that would be valuable to anyone else like professional investors and mutual fund managers. Then you can establish, for example, if there has been fraudulent information put out that is contradicted by what been made publicly available by legal requirements.”

The SEC says it is important to check sources and be suspicious when you receive emails or text messages promoting a stock from someone you do not know, even if the sender appears to be connected to someone you know.

“Don’t believe anything you hear and half of what you see,” Kelly said. “That is from a lyric by a fabulous singer\songwriter from Tupelo, Paul Thorn. Go by the old adage, ‘If it sounds too good to be true, it probably is’.”

The SEC has warned that microcap stocks such as penny stocks may be particularly susceptible to fake news.

“Microcap stocks have always been more of a risk for fraud,” Kelly said. “They are very small firms, so they tend not to be covered by analysts. There is not a lot of news you can go to and verify with a parallel source of information.”

Kelly said fake news isn’t anything new, just the technology of its dissemination.

“We always called it lying, misrepresentation, etc.,” Kelly said. “The Internet just gave it another outlet.”

Kelly also agrees savings shouldn’t be invested in one stock, even if that is stock in the company you work for.

“If you hold all your savings in one company’s shares, that money is subject to all of the risks of that asset,” Kelly said. “With the stock market, prices go up and down. Whatever happens to that company happens to your savings. There is no diversification. For long term savings, you need diversification. There is no reason to take on all of the risks of a single firm. This is the problem of 401(k) plans where the 401(k) is invested heavily in the stock of the company for whom you work. It overexposes the savings of the folks in those accounts to the risks of that one company.”

Lee Ragland, director of public relations and vice president GodwinGroup, said it is important for companies to keep up with both good and bad “fake news” about their company.

“We have not seen a problem with that yet in our area, but sooner or later it is going to pop up,” he said. “As a former journalist, I find it deplorable when there is no journalistic integrity. From a PR standpoint, you have to keep monitoring what is being said and published about your clients. If fake news does come up as an issue, you have to be proactive and address the issues with key stakeholders. If you don’t address it, will be taken as the truth.

“From a PR standpoint, you have to keep monitoring what is being said and published about your clients. If fake news does come up as an issue, you have to be proactive and address the issues with key stakeholders. If you don’t address it, will be taken as the truth.”

False allegations about companies are nothing novel. But Ragland said social media have really escalated the potential for damage.

“Once it is posted, somebody is going to believe it,” Ragland said. “A lot of times the writer will use a pseudonym, or fake credentials, to build credibility that doesn’t exist. There are a lot of people just trying to drive agendas.”

Ragland said a company’s reputation is critical.

“All it takes is one or two bad stories getting posted and reported on social media, and it is like a wildfire,” he said. “You just have to be diligent. Companies work decades to build a reputation and then gets someone on a keyboard can try to tear it down, for whatever reason. Some of it is for financial gain. They are paid to write fake stories. With social media and online now, everyone is a ‘journalist’ and lots of time you don’t know which reports are legitimate and which are not. Online, you don’t know who these people are or even if it is their real name. There are sites built just to drive agendas, personal or political. It just confuses the public.”

 

 

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