Beware of Fake News When Investing
The concept of knowledge has recently undergone a radical change, with no less a personage than our new president and his cohorts attempting to legitimize what one of them has referred to as “alternative facts.” Notwithstanding the societal consequences of government leaders making decisions based on false information, fake news can be especially problematic when making investment choices. The SEC’s Office of Investor Education and Advocacy recently issued another Investor Alert to warn investors that seemingly independent commentary on investment research websites may in fact be part of paid stock promotion campaigns.
Here’s a summary of the SEC’s findings about this and other key areas of investment fraud:
- Posted articles may not be objective and independent. The writer may have been paid directly or indirectly by a company to promote that company’s stock. Sometimes the same author uses different pseudonyms to publish multiple articles promoting the same stock.
- Fraudsters may misrepresent their backgrounds and experience to lure investors into investment schemes. Do not rely on their or anyone else’s assertions regarding their credentials or professional experience. Instead you can use the SEC’s Investment Adviser Public Disclosure (IAPD) website and the Financial Industry Regulatory Authority (FINRA)’s BrokerCheck website to determine whether a person recommending or selling an investment is licensed or registered and to find out any disciplinary history.
- Be wary of social media posts, tweets, texts, or emails promoting a stock from someone you do not know, even if the sender appears connected to someone you do know. Especially if a company’s stock is being promoted more heavily than its products or services.
The SEC also cites some enforcement action examples:
- A solicitor for a private fund allegedly misrepresented that he was named a “Top 25 Rising Business Star” by Fortune Magazine when no such distinction exists. To gain credibility, he also allegedly lied to potential investors about the persons who would be associated with his fund, the profitability of his past investments, and the expected profitability of the fund’s proposed investment.
- A promoter of short-term promissory notes allegedly misrepresented himself as a stock market commentator on television business news programs and as a graduate of the University of Maryland (both of which were false). He also stated in marketing materials that he had previously worked for a broker-dealer registered with the SEC (without disclosing that the broker-dealer terminated him for misuse of company assets). He is currently under investigation for using the majority of the investment money for his own personal expenses.
- An online marketing company is being sued by the SEC for fraudulently promoted a data storage company through emails, online blogs, articles, and other media, without fully disclosing its compensation or that it would be paid more if it increased the company’s share price. The marketer also made false statements to try to increase the trading volume and share price of the company’s stock, including falsely naming well-known companies as customers and making highly misleading projections about investment returns.
The lesson here is never to choose an investment based solely on what you read or hear on the web or in the media. The world in which we live today abounds in false assertions. Before investing in a particular stock, research the company thoroughly and make sure you understand its business. As with any investment decision, you should carefully review all of the materials available to you and, if possible, verify what you have been told about the investment. Better still, skip the individual stock investments altogether and instead invest in more diversified publicly-traded mutual funds and ETFs.
Here’s a link to the SEC’s Investor Alert: https://www.sec.gov/oiea/investor-alerts-and-bulletins/iastockrecommendations