In the Hollywood blockbuster The Wolf of Wall Street, the main character, Jordan Belford, made it rich from his “pump and dump” schemes.
Played by Leonardo DiCaprio, Belford’s firm Stratton Oakmont schemed to inflate the prices of stocks by making false, misleading or greatly exaggerated statements. When stock prices rose due to the hype resulting from these statements, he would then sell stocks at the raised prices, making a fortune in the process.
Such practices are illegal and regulators worldwide clamp down on these schemes, punishing those who perpetrate them.
The modern day “pump and dump” scams go by a new name – “fake news”.
Over the past few weeks in Singapore, a Select Committee on Deliberate Online Falsehoods has held a series of public hearings involving academics, executives from social media giants like Facebook and Twitter, as well as editors from the two main media companies Singapore Press Holdings and Mediacorp.
The focus of the committee is to look at how deliberate fake news can impact social cohesion (for example, making a minority group feel like they are being picked on by law enforcement agencies) as well as politics (for example, Russian interference in the 2016 US Presidential elections) and whether new laws are needed to combat the problem.
But the growing spread of fake news goes beyond impacting politics and society as a whole.
Corporations and the stock markets are also vulnerable to such falsehoods.
How markets swing on fake news
In 2013, a tweet sent out by the Associated Press’ (AP) official Twitter account that two explosions in the White House had injured the then US President Barack Obama wiped out more than US$130 billion in stock value in a matter of minutes and the Dow Jones Industrial Average dropped 143.5 points.
AP later said its Twitter account had been hacked.
Even though stock prices quickly recovered, this incident highlighted the potential power of using, or rather misusing, social media to swing the stock market one way or the other.
In 2015, the United States’ Securities and Exchange Commission (SEC) filed fraud charges against a Scottish trader whose tweets caused the stock prices of two companies to drop by as much as 28 per cent so that he could profit from the swings.
These tweets, sent from Twitter accounts he had set up using names similar to real market research firms, cost shareholders to lose more than US$1.6 million, according to court documents.
Then, there are also deliberately misleading ‘news’.
In 2012, Seeking Alpha, an American website focused on finance, ran an article titled “Another revival could be in store for ImmunoCellular Therapeutics”. It highlighted the US drug company’s work in developing a cancer treatment that would provide a cheaper alternative to its rival’s offering.
Over the next few months, ImmunoCellular’s share prices soared, almost tripling from US$42.80 on the day the article was published to an all-time high of US$155.20 six months later.
But over time, with the drug company failing to come up with an approved treatment, share prices plunged and it now hovers in the US$0.20 – US$0.30 range.
It emerged several years later that ImmunoCellular had actually paid a writer to publish the article on Seeking Alpha.
The SEC investigated at least 200 articles on Seeking Alpha where there was no clear disclosure as to who paid for the articles. The regulator also found similar incidences across many other investment websites.
The SEC eventually charged 10 companies and 11 individuals with fraud, with most of them agreeing to pay fines of between US$2,200 and US$3 million.
The widespread use of fake news to influence stock markets concerned the SEC enough for it to issue a warning against seemingly independent articles on finance websites that are actually part of a “paid stock-promotion campaign”.
“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 regulator warned investors.
Cryptocurrencies ripe for manipulations
Cryptocurrencies are not immune to such online manipulations.
In fact, some would say that cryptocurrencies are particularly susceptible to fake news as they are still relatively unknown and are largely unregulated.
It is, after all, a currency that confuses a lot of people, but is still extremely attractive to plenty of over-eager traders hoping to strike it rich.
Business Insider UK reported in November last year (2017) that crypto traders use the secure messaging app Telegram to orchestrate “pump and dump” scams by getting a few buyers to act at specific times and then sell off quickly when prices have gone up.
In January this year (2018), a fake Twitter account purportedly belonging to cybersecurity firm McAfee’s boss John McAfee sent out a tweet promoting a cryptocurrency GVT as the “coin of the day”.
McAfee had developed a reputation for being a bit of a cryptocurrency “sage”, having been one of the first to tout bitcoin as the currency of the future long before its recent surge. His ‘recommendation’ of GVT thus carried a lot of weight.
Within four minutes of the tweet from the fake account, GVT’s value went from US$30 to US$45 and trading volume more than doubled.
Bitcoin has also been prone to sudden dips in their value amid suggestions and rumours that some countries are contemplating banning its use and trading.
How investors can avoid being duped
So where do all these leave the investor, or even banker for that matter?
In a world where investors perceive that a minute of hesitation or indecision may cause them to lose big bucks, the pressure to react quickly to breaking ‘news’ which could affect stock prices is extremely high.
But making hasty decisions, especially in the stock market, has never made anyone rich.
The two major sources of fake news in Singapore are WhatsApp and Facebook, according to a recent survey by government feedback unit Reach.
So, if a friend forwards you a WhatsApp message, do not immediately take it to be gospel truth. Take the effort to double check the allegations made.
One way to do this is to look for the story on legitimate news websites. If most of the trusted and established media outlets have run the story, it is more likely to be true.
Another way is to scrutinise the article properly. Look out for quotes and confirmations of certain facts by parties directly involved in the story. A story with no official confirmation or statements from the parties involved should raise alarm bells as to its authenticity.
On top of looking through media stories, you should go directly to the source to check the facts.
Most corporations and even government agencies have a social media account nowadays. Look for their official accounts on the various social media platforms to see if they have issued any statement regarding the particular story.
It is also important to note that just because a tweet or message has been shared by many people, or gone ‘viral’ in online lingo, does not make a falsehood suddenly true.
And if you are still inclined to believe that a piece of news may be real, always consult your relationship manager to verify things.
In current conditions where real news are already causing markets to consistently change course, the last thing investors need is for fake news to seep into the system and cause more volatility.
Until authorities find a way to weed out such fake news, the best thing investors can do is to stay calm and “double confirm” everything.
Source: This article was first published in The Business Times © on 6 April 2018. Permission required for reproduction.
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