4 Ways to Spot Social Media Investing Scams: SEC

SEC warns in a recent investor alert that social media can be a hotbed for stock, investing schemes

The SEC warns about social media pump-and-dump scams. The SEC warns about social media pump-and-dump scams.

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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. “Wrongdoers may perpetuate stock rumors on social media, as well as on online bulletin boards and in Internet chat rooms,” the SEC says.

The false or misleading rumors may be positive or negative. For example, in a “pump-and-dump” scheme, promoters “pump” up the stock price by spreading positive rumors that incite a buying frenzy and they quickly “dump” their own shares before the hype ends. 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 couple allegedly received millions of shares of these companies as compensation and sold the shares around the time that their website predicted the stock price would massively increase (a practice known as “scalping”).

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 (even if the sender appears connected to someone you know).
  • 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.

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