Wall Street is waging its own battle against fake news — in particular, against both amateur and sophisticated promoters of stocks.
Regulators have lodged complaints against writers for the internet investment sites SeekingAlpha.com, Benzinga.com, TheStreet.com, Forbes.com, and several others, saying the authors were writing under pseudonyms or who did not disclose that they were promoting stocks for money.
Of those charged in April by the Securities and Exchange Commission, 17 have agreed to settlements that include disgorgement (repayment) or penalties ranging from about $2,200 to nearly $3 million. The SEC's litigation continues against 10 others.
"This was something different than what we've seen in a classic pump-and-dump, where typically one individual is promoting one stock. This was more organized, and we saw it as a different kind of threat," Melissa Hodgman, associate director of the SEC's Enforcement Division, said of the complaints.
Consider SeekingAlpha.com, one of the most popular websites covering Wall Street. The SEC alleges that some "expert" investors writing for the site weren't experts at all — and weren't even writing under their real names.
According to an SEC complaint, one writer in Florence, Ky., was paid by a public-relations firm, Lidingo, to publish at least 90 articles about issuer companies. His pseudonyms included A. John Hodge, the Swiss Trader, Amy Baldwin, Trading Maven, Henry Kawabe, Teresa Dawn, and Leopold Epstein.
Lidingo writers published on multiple investment websites, among them SeekingAlpha.com, Benzinga.com, WallStCheatSheet.com, SmallCapNetwork.com, TheStreet.com, Finance.Yahoo.com, InvestorVillage.com, Fool.com, InvestorsHub.com, Investing.com, Minyanville.com, and Forbes.com.
Paid stock promoters also claimed fake credentials: The Swiss Trader claimed he had both an MBA in finance and a degree in physics. The profile for the Amy Baldwin pseudonym read, "I am currently employed by a Fortune 20 company, on any given day I am assessing risk management and the financial health of various companies" — except that Amy Baldwin didn't exist.
Currently on the Seeking Alpha site is this statement: "Seeking Alpha authors are required to disclose personal positions in stocks they write about."
Still, it allows pseudonyms: "There are firm limits to this anonymity, however: Seeking Alpha holds our anonymous contributors to the same compliance and biographical standards as contributors who write under their own name. We insist on receiving the author's real name and contact information (which we keep confidential) and maintain a correspondence with the author, forwarding the author any questions or concerns that may emerge about their articles. Stock positions held by anonymous authors must also be disclosed. When an author uses a pseudonym, it is clearly stated on the SA author page."
Tim Holland, global investment strategist at Brinker Capital in Berwyn, argued that the rise in passive investing exacerbates volatile moves in stocks. Sometimes, he said, false information presents opportunity for those who truly know and understand the public companies.
"If a stock is off 10 percent because someone posts on Seeking Alpha, and you know the company well and you believe it's bogus, what do you do? You buy on weakness. The market's given you a gift," Holland said.
PR firms handling investor relations, however, say sometimes false information alters the perception of a company. "This is where we have found the pitfalls. It's not that it's real or fake — everything is real if that's the perception," said New York-based Jennifer Connelly, who handles press matters for public companies.
One red flag that an investment tip might be false, for example, is if the author "guarantees" returns or a high price in a stock. Steer clear, particularly if the article pressures readers to buy "immediately" so as not to "miss out."
Terry Siman, managing director with United Capital in North Wales, divides false information on Wall Street into two camps: unsubstantiated facts and intentional falsehoods.
"The former aren't always malicious. The latter are designed to move stocks. That's really dangerous. The consumer has to be able to tell or at least ask: Is this person getting something out of this?" said Siman, a former prosecutor. "When fact and allegedly unbiased opinion is confused with obfuscation and downright malicious intent, the entire system is damaged for millions."
"Laws in place are meant to protect Americans from the failure to divulge conflicts of interest that might allow any of us to be wary of statements that appear factual but lack veracity," he added. "Publishers who knowingly shirk their responsibility to both properly vet stories prior to publication, as well as fail to vet their paid authors, facilitate the hoax on their readers and should be outed and punished. Americans know how to react when given proper education."
Overall, false information is not just an abstract threat — respondents to at least one survey say it is having a serious impact on Americans' ability to navigate their financial lives.
More than three in five Americans (63 percent) say that the spread of fake news has made it more difficult to make critical financial decisions, according to an American Institute of CPAs survey. Specifically, they're having a harder time with health-care decisions (44 percent), investing in the stock market (40 percent), retiring (36 percent), and buying or selling a house (35 percent).
Cambridge University social psychologist Sander van der Linden contends that we believe false information because our brains use shortcuts to process large amounts of information. The public can be quick to believe what is presented as consensus, or from what appears to be a highly credible source. In a recent study, van der Linden "inoculated" subjects against the false information surrounding climate change by giving them a "vaccine": He made it clear when information was politically motivated.
"Like Professor van der Linden, we wish to inoculate our clients and friends from the most powerful form of fake news for investors — investment return calculations — easily the most manipulated and oversimplified measurement," said Mitch Tuchman of the investment firm ReBalance IRA.
Consider the data and their source, Tuchman advised. Mutual-fund companies (such as American Funds, T. Rowe Price, Janus, and Franklin Templeton) advertise investment returns to convince investors that they will do better with their funds. But, he said, they can emphasize and manipulate those returns. For instance, poorly performing funds are merged into a great-performing funds to erase the poorly performing fund's results.
"It is like going to a college for three years, achieving a 2.3 GPA and then transferring to a new college. At the new school, you achieve a 3.5 GPA in your senior year and now, like magic, report an overall 3.5 college GPA. Ask yourself, who gains by showing you this data, and how could they be tilting it to their favor?" Tuchman said.
In the realm of false stock news, "no one comes out of this with clean hands. The internet is the Wild West. These sites' business models heavily depend on people writing for them for free. So that's what you get," said Mark Hulbert, founder of Hulbert Financial Digest, based near Chapel Hill, N.C. "Why else would someone out of their goodness of their heart write a long analysis of a stock?"
Red flags for false information
• Someone is touting a stock instead of a product.
• The number of posts an author has written is small, or just about one stock.
• The author "guarantees" returns or a high price in a stock, particularly if readers are pressured to buy "immediately" so as not to "miss out."
• You've received an email about a stock, and there's a sudden spike in the price after a solicitation. That may be an indication of manipulation.
• Disclosures or fine print that's vague.
• Simple misspellings. "Often, we see companies try to look like someone else, especially an established household name. For example, Morgan Stanley is misspelled or inverted as Stanley Morgan," said Melissa Hodgman, associate director of the SEC's Enforcement Division.
To file a complaint