New York, NY – When are Manti Te’o and stock market investors alike? When they are both the victims of scams using social media to perpetrate lies. Unfortunately, in the past month, two such incidents have taken place where Twitter was used to pass on false market rumors to investors, prompting the stock prices of two public companies to sell off dramatically. Federal regulators are investigating these cases.
Muddy Waters Dirtied
According to the Huffington Post, the first case took place on January 29th, when between 9:30 am and 11:10 am, a number of posts on Twitter were made, purportedly by well-known short-seller Muddy Waters Research about publically traded company Audience, a provider of audio and voice processing components for mobile devices.
These tweets from someone using the name Conrad Block at the Twitter handle @mudd1waters, said “AUDIENCE noise suppression company being investigated by DOJ on rumoured fraud charges.”
The tweets originated from an account which included the logo of Muddy Waters Research. While the messages were sent several times, and tweeted at the accounts of the Chicago Mercantile Exchange and Merrill Lynch, it appears that most who saw the fallacious tweet disregarded it.
It is important to note that at 11:30 am, someone from Muddy Waters Research’s actual Twitter account @muddywatersre, tweeted the following: “There is NO report. This is a hoax. MW does not know this company.” Also, the founder of Muddy Water’s Research is named Carson Block, NOT Conrad Block.
Despite this tweet, at 2:20 p.m. a large computer generated sell-off in Audience’s shares prompted the stock price to plunge more than 25%. Fortunately, less than 20 minutes later, Audience shares rebounded to their previous level, just above $12 per share.
False Citron Research Rumor
On January 30th, one day after the Audience rumor, a similar event occurred when a tweet from the account of Twitter account @citreonresearc, accused biopharmaceutical company Sarepta Therapeutics of tainting and doctoring its drug trial results. This twitter account mimics the account name of well-known short selling research firm, Citron Research.
As a result of this rumor, the share price of Sarepta dropped close to 9.9% in a matter of seconds. Fortunately, Sarepta’s shares surged after the brief fall, trading up 1.4% to $27.56 on volume of about 3.5 million shares in afternoon trading. More than 700,000 shares traded in the one minute when the stock suffered its steep decline.
Just like in the Muddy Water’s case, Citron management came out against the fallacious tweet when Andrew Left, the California-based investor who runs Citron, said his company did not send a message about Sarepta.
In a statement on its website, Sarepta told investors that “as a growing company, we may be subject to market rumors through social media and other anonymous sources” and added that “in circumstances where false or misleading information is communicated that negatively impacts the company, we will take appropriate action.”
Regulators Take Up The Case
According to the Huffington Post, U.S. market regulators are trying to determine if at least the Audience case is part of a securities fraud scheme where Twitter was used to pass on false rumors and manipulate stock prices.
Diane Vanasse, a spokesperson for Audience, Inc. said the “company was certainly aware of the hoax tweets” and said that “NASDAQ is investigating” the matter. Joe Christinat, a spokesperson for exchange operator NASDAQ OMX, said the electronic trading board “did refer the matter to FINRA.”
Nancy Condon, a spokesperson for FINRA, could not confirm or deny an inquiry was taking place, but noted that market activity of this kind is usually investigated by either FINRA or the federal Securities and Exchange Commission. A spokesperson for the SEC declined to comment, and representatives for Twitter did not respond to repeated requests for comment.
No one has verified whether securities regulators are looking into whether the hoax tweet targeting Sarepta Therapeutics is also part of a stock fraud case.
Lessons from these Developments
So, what lessons if any should we learn from the Audience and Sarepta rumors? First, investors need to pay close attention to the sources of the information they receive, and make sure they are legitimate, particularly given the proliferation of social media in today’s culture. This is becoming important for institutional investors who are increasingly using inputs from social media sites as a part of their research and trading strategies.
Second, social media sites like Twitter, Facebook, and LinkedIn need to consider what their responsibilities are in cases like these in the future. Should Twitter have verified the identities of the people or firms that establish Twitter accounts to make sure that they are who they say they are? It is clear to the team at Integrity Research that continued use of social media to perpetrate stock fraud and market manipulation will force these sites to address these issues to remain credible and relevant.
Third, research firms need to develop compliance policies and procedures regarding the use of social media within their firms so they are not sucked into a charge of market manipulation at some point in the future. In addition, all research firms need to proactively monitor social media sites like Twitter and LinkedIn to make sure that others are not writing false posts in their names in order to move stock prices.
This is brave new world, and it would not surprise us if the Audience and Sarepta cases are merely the beginning of introducing the phenomenon called “catfishing” to the broad investing public.