SEC on Guard as Securities Swindlers Take to Twitter

Fraud on sites like Twitter is on the rise, and it’s sending shivers down the backs of executives and investors everywhere.

With a third of all Internet users on Twitter and more than 175 million tweets being sent every day, the second-largest social network behind Facebook (NASDAQ:FB) has undoubtedly become a central hub for news gathering. With news traveling at lighting speeds, however, it has also become a target of criminals looking to get into the business of defrauding.

Twitter has become a hot-spot for securities fraud and it is already having material effects on companies as they try to play catch-up and quickly adapt to the costs of doing business on social networking sites.

The U.S. Securities and Exchange Commission said it is aware of the escalating problem and will find, catch and prosecute criminals who use social sites to manipulate stock prices.

“Stock market manipulation is illegal no matter the medium, and as some of the crooks have already learned the hard way, the SEC can and does catch them when they use social media to scam investors,” an SEC spokesman said.

Instances of scammers using Twitter for fraudulent purposes are growing, including last month two copy-cat accounts created in an effort to drive down stock values.

On Monday, Burger King’s (NYSE:BKW) verified Twitter account was hijacked and hackers for more than an hour posted offensive and fake information about the company, including among other things accusations that its employees use illegal drugs on the job and that the burger chain was bought by rival McDonald’s (NYSE:MCD).

While U.S. stock markets were closed on Monday due to Presidents Day, the phrase “Burger King Twitter” quickly began trending on Twitter as talk buzzed. The microblogging site eventually suspended Burger King’s account.

Manipulating Stocks with Tweets

These days, when news comes from even the most unsuspecting of places and often outside of the mainstream media, people tend to believe the things they read on the Internet, particularly if it looks like it’s coming from an official source.

Since Twitter enables people to disseminate information quickly, it is often difficult for companies to immediately identify and quickly put a cap on the spread of fake information before it is too late. That has increased the urgency for companies to put together skilled social media teams, armed with contingency plans.

“Whether it’s untrue or semi-true rumors, the days where corporate press offices could sit and think things over for 24 hours are over,” said Jonathan Armstrong, a partner at Duane Morris who specializes in Internet law. “If companies aren’t prepared, a lie will travel more than the truth can.”

Last month, two Twitter scams separately caused shares of Audience and Sarepta Therapeutics (NASDAQ:SRPT) to tumble as much as 25% in mere seconds. In both cases, an account that looked very similar to either the company’s or an influential trader’s was created and used as a tool to post fake information, with Audience’s (NASDAQ:ADNC) shares plunging on false reports that the specialty chip maker was being investigated for fraud and Sarepta’s tumbling after a scammer posing as an influential short seller alleged improprieties at the biopharmaceutical company.

The damage in terms of stock movement can be especially devastating to small-cap companies, whose securities tend to trade on much lighter volume compared with those of blue-chip companies, leading more easily to greater volatility and outsized moves.

To give some perspective, Sarepta’s average daily volume over the last three years was 387,271 shares, while the average number of blue-chip drugmaker Merck (NYSE:MRK) shares that changed hands over the same period was 10.42 million, according to FactSet data. In the two-minute period following the fake Audience post, some 300,000 shares changed hands, accounting for nearly half the day’s volume, before the stock was halted.

Corporate accounts aren't the only victim. Cyber evildoers are also taking advantage of influential traders whose accounts aren’t verified on Twitter and are thus easier to replicate.

When Audience was hit in January, an account posing as Carson Block, founder of short-selling firm Muddy Waters, used the handle @Mudd1waters and the very similar name Conrad Block. The account claimed in a tweet that Audience was “being investigated by DOJ on rumored fraud” and that a full report would follow later in the day. Muddy Waters soon after cleared the air, saying there was no report and it was just a hoax, however the damage to Audience's stock had already been done.

In a statement to FOX Business, Muddy Waters said Twitter might be able to help solve this problem by officially verifying accounts of financial players, not just celebrities and corporate accounts. Muddy Waters Research doesn’t have a verified Twitter account and when searching for it on Twitter one comes to a number of account holders that have Muddy Waters in their name, including a bar in Minneapolis.

Neither Sarepta nor Audience responded to FOX Business for a comment on this story. Twitter said it would not comment on individual accounts “for privacy and security reasons.”

You Could Be the SEC’s Next Big Example

The SEC told FOX Business that it’s “no surprise” crooks are trying to take advantage of whatever means possible to conduct fraud, however it warns that it is on the hunt for criminals and isn’t afraid to prosecute those responsible.

“Regardless of a technology that’s used, if false statements are being made in an effort to drive stocks up or drive stocks down to make a profit, that certainly sounds like a scheme to defraud,” said White & Case Partner Greg Little, a former trial lawyer for the SEC who now specializes in securities litigation.

It wouldn’t be surprising if the government were to use some of the early Twitter prosecutions as an example and warning to others, especially since there have so far been very few cases involving social media fraud.

In fact, there appears to be no cases that exactly match the Audience/Sarepta incidents of a fake Twitter profile being used to report bad news about the company by a short seller, according to a lawyer who asked not to be named but conducted searches on the SEC’s website, Westlaw and the Bloomberg terminal.

In September 2009, ONEOK, an Oklahoma utility company, sued Twitter for trademark infringement for permitting a fake profile to post tweets under the illusion they were officially released by ONEOK. The company claimed the unknown account holder used its presence on Twitter to “damage ONEOK’s reputation in the investor community and energy industry.”

The complaint, however, was withdrawn the day after it was filed.

The closest thing to a prosecution involving social media securities fraud was in the Southern District of Florida where the SEC alleged two individuals ran a site called PennyStockChaser.com as part of a pump and dump scheme and used social media, including Twitter, as part of a promotional tool for its stock recommendations.

“It does show the Commission is somewhat alert to Twitter’s use in securities fraud scheme,” the person said. The defendants in the Penny Stock Chaser case agreed to pay $150,000 each in penalties.

The SEC has a publication on investor.gov setting forth forms of fraud retail investors should look out for online. While it does not mention the scenario involving fake Twitter accounts, it does highlight pump and dump schemes and cites Penny Stock Chaser as an example.

While the SEC can only seek monetary damages, jail time could be in the picture if the U.S. Department of Justice gets involved.