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July 28, 2014 at 08:43 AM
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.
