Tag: Twitter

Social Media Pump and Dump is Not Illegal (?)

Pump and Dump schemes brought the fiduciary standard to light. In SEC v Capital Gains Research Bureau the US Supreme Court said a pump and dump scheme by an investment adviser violated its fiduciary duty.

More recently, the SEC published an investor alert about Social Media and Investment Fraud. There is a lot of different frauds in there, but one is

Fraudsters may use social media to conduct schemes including: 

Pump and dump schemes – pumping up the share price of a company’s stock by making false and misleading statements to create a buying frenzy, and then selling shares at the pumped up price. 

A little over a year ago, the US Attorney is the Southern District of Texas thought they had seen a fraudulent social media pump and dump and brought charges against eight social media finance influencers. Edward Constantinescu aka Constantin 38, of Montgomery; Perry “PJ” Matlock, 38, of The Woodlands; John Rybarczyk, 32, of Spring; Dan Knight, 23, of Houston; along with Gary Deel, 28, and Tom Cooperman, 34, both of Beverly Hills, California; Stefan Hrvatin, 35, of Miami, Florida; and Mitchell Hennessey, 23, of Hoboken, New Jersey were accused of “pumping” the prices of securities by posting false and misleading information, and concealing their intent to later “dump” their securities after the prices rose. It was lucrative. The US attorney claimed the eight had illegally made more than $114 million.

Last week a federal judge in Texas said this wasn’t illegal and dismissed the criminal charges against the eight. Matt Levine thinks it’s a “weird opinion.” I agree.

I think what the order is trying to get at is that the eight had no obligations to the companies it was pumping, no obligations to their follower on social media, and since they were nota regulated entity, had no obligation to the financial markets.

Assuming this holds up to appeal, if there is one, pump and dump by influencers is not illegal, as long as as they are outside the finance industry. Or hired by the finance industry.

An alternative take on social media influencers is the action by FINRA against M1 Finance for social media posts made by influencers on the firm’s behalf that were not fair or balanced, or contained exaggerated, unwarranted, promissory or misleading claims.

M1 Finance paid social media influencers to post content promoting the firm, and instructed the influencers to include a unique hyperlink to the firm’s website that potential new customers could use to open and fund an M1 Finance brokerage account. …

FINRA found that M1 violated FINRA Rule Rule 2210 (Communications with the Public) and Rule 2010 (Standards of Commercial Honor and Principles of Trade). In addition, M1 Finance did not review or approve the content in its influencers’ posts prior to use or retain those communications. M1 Finance also failed to have a reasonable system, including written procedures, for supervising the communications that the firm’s influencers made on its behalf. These were in violation of FINRA Rules 2210, 2010, 3110 (Supervision) and  4511 (General Requirements-Books and Records).

The firm got in trouble, but the social media influencers seem outside the reach of FINRA.

Sources:

Twitter for Stock Manipulation

Twitter is stream of random thoughts, news, insightful commentary, boring stories, humor, sadness, food pictures, hate, love, and cat pictures. The internet as a whole. At least a few traders have used Twitter as stock pricing indicator. Theoretically, that means stories could be planted that would move the stock price of a company. One trader tried to do so under false pretenses and is now subject to civil charges by the Securities and Exchange Commission and criminal charges by the Department of Justice.

twitterlogo

James Alan Craig set up a few Twitter accounts. One was modeled after Muddy Waters Research, the influential equity research company. Another was modeled after Citron Research, another influential securities research firm. In each case he stole the firm’s logo to use on the Twitter accounts.

On Jan. 29, 2013, Craig used a Twitter account to send a series of tweets that falsely said Audience, Inc. was under investigation. Audience’s share price plunged and trading was halted before the fraud was revealed and the company’s stock price recovered. On Jan. 30, 2013, Craig used another Twitter account to send tweets that falsely said Sarepta Therapeutics, Inc. was under investigation. Sarepta’s share price dropped 16 percent before recovering when the fraud was exposed.

false tweets

Craig used his girlfriend’s brokerage account to buy the companies’ shares at depressed prices, hoping to sell them later after they rebounded. He was a terrible trader and missed the low prices. He bought $13,000 worth of stock in the companies, but made less than $100 of profit.

However, there was substantial short term damage to the targeted companies. The stock drop erases $1.6 million of shareholder value for at least a short time. There was enough of an impact that the NASDAQ halted trading in one of the companies.

It’s hard to believe that an unverified Twitter account that is poorly used could dupe the market into thinking that the claims were true. But I may be underestimating how much traders are using Twitter algorithms in their trading strategy. Craig’s accounts had very few followers and brief histories. Most people would discount the quiet tweeting from such an account. The algorithms did not.

For a few tweets and $100 of profit Craig faces a maximum prison sentence of 25 years, a fine of $250,000, penalties and restitution. Of course that is only if the US authorities can get their hands on him. His whereabouts are unknown.

If the case ever makes it to trial, it would be an interesting legal examination of the intersection of social media an securities fraud.

I don’t think I could be convicted of securities fraud for standing on a street corner and telling everyone that passes that Company X is a fraud and subject to upcoming charges. I didn’t think the same would be true if I did the same thing on Twitter. But maybe I’m wrong.

Sources:

How Not to Use Twitter as a Fund Manager

Navigator Money Management

The Securities and Exchange Commission charged Mark A. Grimaldi and his firm, Navigator Money Management, with making false claims through Twitter, newsletters, and other communications about the success of their investment advice and a mutual fund they manage. Grimaldi and Navigator were using social media and widely disseminated newsletters to cherry-pick information and make misleading claims about their success in an effort to attract more business.

The Investment Advisers Act’s main thrust is to not be fraudulent, deceptive or misleading. When it comes to the restrictions on advertising, the rules can get complicated.

Grimaldi co-founded The Money Navigator and it had more than 60,000 subscribers by the end of 2011. He used it in part to promote the performance of his various investment financial advise platforms. He stretched the truth and the SEC caught him.

Based on the order, the SEC came in for a exam and poured through the publication looking for advertising rule violations and found some.

Mark Grimaldi manages Sector Rotation (NAVFX),” which “was ranked number 1 out of 375 World Allocation funds tracked by Morningstar. Sector Rotation produced an average annual return of 10.25% from August 31, 2002, to October 31, 2011, vs. 5.47% for the S&P 500 Index, according to Morningstar.”

The ranked #1 and nearly doubling the S&P index must stand out as problematic. The #1 ranking was from October 2010 to October 2011. It was ranked lower before that time frame. I read the copy as saying it was #1 from 2002 to 2011.

It’s tough to claim a 10.25% return from 2002 to 2009 when the fund did not exist prior to December 2009. The return is based on a hypothetical return published in The Money Navigator, not actually put to work. Plus, Grimaldi did not work at The Money Navigator until 2004.

That kind of stretching the truth is even more problematic when you edit the statements down to the 140 characters used in Twitter:

the April issue of the Money Navigator will give you an inside look of how I doubled the S&P500 the last 10 years w/o using low cost funds”

“[m]y cap app model has DOUBLED the S&P 500 the last 10 years.”

You can add on two more failure. If you state a specific recommendation you need to disclose all of the recommendations within the past year. When showing past performance you need disclaimer that it should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list under Rule 206(4)-1(a)(2)

You should read the order as way to test your knowledge of the advertising rules. I bet that Mr. Grimaldi also understands them better now.

 

References:

Make Sure You Have the Right Ticker Symbol

tweeter

Perhaps you’ve heard the news that Twitter is going public. So you see that TWTR is already heading up fast so you but some. There is a trading frenzy. The stock is doubling in price, and then again, and again. Great offering. Just one problem. You bought stock in the defunct Tweeter Home Entertainment Group. It used to trade on the TWTR symbol.

When companies file for bankruptcy, the Financial Industry Regulatory Authority typically adds the letter Q to the existing ticker. That frees up the symbol for potential use by another company. So TWTR became TWTRQ when Tweeter filed for bankruptcy in 2007 (and again in 2008).

Apparently some investors were not paying close attention. The stock skyrocketed 684% on Friday. The price started at 0.018 and closed at 0.05 after rising as high as 0.15. Over 14 million shares had traded.

FINRA stepped in and stopped trading because the trading activity “demonstrated a widespread misunderstanding related to the possible initial public offering of an unrelated security, which … has caused a major disruption in the marketplace.”

Maybe it was just a data entry error that trigger the onslaught with others jumping on board. Maybe someone though Twitter would have to buy the ticker symbol from Tweeter so stockholders could see some value.

The question is why is the stock still hanging around. The company sold substantially all of its assets on July 31, 2007. There was brief and failed revival that blew up in December 2008.Presumably by now all of the AP And AR have run through the system.

I remember Tweeter as the special store to buy fancy and expensive audio equipment. All that hi-fi went away as the difference is sound quality diminished as digital took off. The iPod made the fatal blow.

Now the stock is just hanging around for shady traders and traders who get the wrong ticker symbol.

References:

Twitter Fail and Compliance


FINRA has long regulated and limited the ability of broker/dealers to communicate with the public. One of their missions is to protect the investing public from unscrupulous securities brokers. Twitter is a communications tools and any messages posted to Twitter will need to be in compliance.

It was inevitable that we would see a FINRA regulated party make a mistake using Twitter. The time has come.

FINRA also found that during eight months in 2009, the registered representative maintained a Twitter account and had more than 1,400 followers. Without notifying a principal of her employer firm, the registered representative posted 32 “tweets” related to a particular security. The tweets were unbalanced, overly positive and often predicted an imminent price increase. In the tweets, the representative failed to disclose that she and her family held a significant number of shares of the security. FINRA concluded that this conduct violated NASD Rules 2210 (communications with the public) and IM-2210-1 (guidelines to ensure that communications with the public are not misleading), and FINRA Rule 2010 (ethical standards).

To me, this sounds exactly like the behavior FINRA is trying to prevent by imposing Rule 2210 on financial representatives.

I don’t want to overstate the effect of this Twitter failure on the discipline. The registered representative was doing some other things in violation of the rules. I would guess that once a registered representative is under investigation FINRA takes a look at that person’s social networking activity to see if they have been doing other bad things.

Sources:

Image is 2008wmonroe by Liza P
CC BY-NC-ND 2.0

Corruption and Twitter

“If someone is being hit for a bribe, isn’t the easiest thing just to put it on Twitter? It goes round the world in next to no time.”

Richard Alderman, head of the U.K.’s Serious Fraud Office, is apparently serious about Twitter. After self-congratulating themselves for organizing the government overthrows in North Africa and the Middle East, social media sites are apparently ready to stop global corruption.

So I decided to search through Twitter to see what it had to say about bribery. I started with what I thought would be the most obvious using #bribe. The most common messages using that hashtag looked something like this example:

Had to resort to the best method of all just to get my niece to come to Target with me #bribe #sparklynailpolish

Not exactly focusing on the world’s problems.

But I did notice a message from @IPaidABribe, connected to the IPaidaBribe.com the Indian website mentioned in the Financial Times article. That led to this message:

I suppose that is closer to what Mr. Alderman was talking about.

On the other hand Mr. Alderman is in charge of enforcing the UK Bribery Act which makes it a crime to pay a bribe. So if you do report a bribe on Twitter, Mr. Alderman would be responsible for bringing charges against you. The SFO has said they would use prosecutorial discretion when bringing charges, so from a practical matter it would seem unlikely that you would end up with charges against you. But still, would you publicly announce that you just broke the law?

A few days ago, I heard about the Bribespot app for your smartphone that allows you to report bribery and see where it happening using the mapping tool. That would hide your identity when making your bribery report.

Sources

Compliance Lessons from Weinergate

In a tearful statement to the media, Rep. Anthony Weiner admitted he posted a lewd picture of his anatomy to Twitter. Not only that, he says he’s engaged in “inappropriate” online communications with at least six other women.

It was just a few days ago that I revisited the Fabulous Fab Rule:

Don’t write emails so provocative that they wind up reproduced on the front page of the Wall Street Journal.

That rule is focused on email which for many companies is archived for years. That means it could end up in litigation or an enforcement action. The rule is really applicable to any type of publishing.

The internet has turned us all into publishers, or at least given us the ability to be publishers. Traditional publishers have layers of review before information, stories, and pictures get published. On the internet, the only layer of review is your common sense. That’s all that stands between you and that send button.

Weinergate is just another example of failed common sense. He never should have hit that send button.

I have not found anything new in the scandal. I don’t think you need a new policy prohibiting people from sending pictures of themselves in their underwear. (I suppose there is an exception if you are in the adult entertainment industry.) Common sense should take care of that.

I suppose its useful to compare this to Eliot Spitzer. He had his own sex scandal, but it required a government investigation. Weiner merely shot himself by sending out a public message.

Sources:

 

Image of Meet Congressman Weiner is by David Boyle
CC BY 2.0

Social Networking Malware as Affinity Fraud

Panda Security released its first annual Social Media Risk Index for small- and medium-sized businesses. They surveyed 315 US SMBs with up to 1,000 employees during the month of July.

33 percent of these companies had experienced a malware or virus infection from social networks

23 percent citing employee privacy violations resulting in the loss of sensitive data from social networks

Panda concluded that Facebook provided the majority of the reported malware and privacy violations. That should not be a surprise since Facebook is the most widely used social media site.

I was surprised to see how high Twitter was in list of sources causing problems. Yes, Twitter was half of Facebook. But Twitter’s popularity is much less than half of Facebook. I would pin the responsibility on the widespread use of URL shorteners in Twitter. If a friend sent a link from nytimes.com, I would be much more likely to click on that link than one from nigerianmoneymakingtips.com. When the link is hidden behind the URL shortener (http://bit.ly/aBzaiB), you do not know the destination. (Tell me you didn’t click on that link?) Yes, there are many tools that will expose the URL, but that is not the default for the services.

I think the vast majority of people realize that the Nigerian banker does not really have the millions of dollars promised to you. We are more likely to click on a link sent from a friend or a stranger saying they have money for us.

That is the increased danger from social network sites. They are a type of affinity fraud, preying on those in a similar social circle.  Instead of looking directly for money, they are looking indirectly for passwords and account information.

Affinity frauds exploit the trust and friendship that exist in groups of people who have something in common. They usually enlist respected community leaders from within a group to spread the word about the scheme.

Taking this to social networking sites, the relationship are exposed through the connections memorialized in the site. The leaders are those with the most connections.

By spreading the message from compromised account to compromised account, the malware is piggy-backing on the social connections. The better infections make it look like the message is from the person and the link is tied to something of interest, like the Most Hilarious Video.

The leaders for a social networking site end up being the leaders because the message gets sent to the most people. If I mistakenly send a malware url on Twitter, only a few thousand people will be potential targets. If Chris Brogan sent the message, it would be seen by over 150,000 people. If Kim Kardashian was the sender, then over 4 million people would be on the receiving end.

I don’t think that the malware and privacy concerns should deter businesses from using these tools. You just need to recognize the additional threats. We have become better at spotting the email scams and blocking malicious emails. We just need to improve the technology and increase employee knowledge to reduce the likelihood of social network malware infections.

If You Want to Defend Your Privacy from Geek and Poke

Sources:

Active Privacy Defense by Geek and Poke

Implementing Compliance Practices for Social Media

I was in the audience for FINRA’s latest educational Program: Implementing Compliance Practices for Social Media.

This program addressed implementation of new guidance that FINRA recently issued in , concerning social media.

Introduction

Tom Pappas

FINRA does not endorse any particular practice and each firm will have to do things differently. The views in this webinar will not provide a safe harbor.

Summary of FINRA Regulatory Notice 10-06, Guidance on Blogs and Social Networking Web Sites

Joseph Savage

addresses five different areas:

Recording-Keeping. You need to keep copies of the information you publish, regardless of the form. FINRA is aware that it’s not easy to capture this information when using third-party sites like Facebook. (Tough. Deal with it). You can file screenshots with FINRA.

Suitability responsibilities (Notice to Members 01-23). You are better off not recommending any specific investments.

Types of interactive electronic forums. Generally, postings will be considered advertisement, but interactive postings are a public appearance (so you do not need principal approval). They felt that Twitter posts and Facebook updates would be interactive electronic forums.

Supervision of social media sites (Regulatory Notice 07-59). This should be a risk-based review.

Third-party posts (“Adoption” and “Entanglement”). Generally, third party content is out of your control. But if you arrange for third party content or endorses it, then you may be deemed to have adopted that content and treat it as if you adopted it directly.

The notice is just guidance, not a rule. FINRA is looking at a new rule. See Regulatory Notice 09-55.

Firms’ Perspectives: Is Social Media Right for Your Firm?

Doug Preston & Joanne Rodgers

Doug pointed out the tremendous growth of social media. Regardless of the form and how it works, you need to use the sites in compliance with rules. (The rules are not going to adapt to social media.)

Joanne is doing a pilot with a vendor to help with compliance. They had lots of requests from recruiting and sales to use the tools.

If you use a social media site for personal purposes, can you still list that you work for the financial services company? You can have a “business card rule.” Just post the information on your business card, with no call to action or specific information.

Is this a growth area or just customer pressure? They have no data. Sales really want to use the tools to generate business. They view it more as a lead generation instead of a sales tool. Recruiting is an avid user of social media sites, especially LinkedIn.

Nobody has much data on the cost/benefit of using social media sites.

Firms’ Perspectives: Developing Social Media Pilot Programs

Doug Preston & Joanne Rodgers

Joanne has just finished a pilot for 25 agents and 25 recruiters. She saw that most of the agents participated in Facebook, more personal than business. The recruiters mostly used LinkedIn. (She did not want to disclose the vendor she used.)

Doug has not opened up the broker side to social media. The bank side does use it. They using some of that learning to build a system for the broker side.

One issue is the level of activity and the additional resources needed to review activity. The tools may be free, but they require people resources and time.

The key is the ability to obtain and retrieve the records and to move the records into your email surveillance program. It’s also important to be able to shut off some of the functionality on social media sites.

Firms’ Perspectives: Compliance Practices Concerning Social Media

Doug Preston & Joanne Rodgers

There are lots of risks. You need to draw a line between sites you control and those run by third parties. You can stuff on a blog you host that you can’t do on a third party blog platform.

You will need new processes and policies. You will need lots of training.

FINRA is ahead of the curve compared to some other regulators in the financial services industry. Insurance regulators have not addressed the use of social media.

One of the big risks is brand/reputation risk. Each of the registered representatives becomes a brand ambassador. If they say some thing bad or embarrassing it affects the company as well as themselves.

What is FINRA looking for? If you are using social media, they will want to see: written procedures, actual supervision, records and procedures.

They did not like LinkedIn recommendations. Registered representatives should not accept the recommendations.

The static versus interactive categories is the toughest one to deal with.

Third-Party Postings

Joseph Savage, Doug Preston, Joanne Rodgers, & Joseph Savage

Questions 8, 9 & 10 in address the issue of third party posts. You probably should put in a disclaimer if you let third party posts on your site. You should monitor them to make sure there is no inappropriate material (porn, copyright). You also need to monitor complaints.

A reg. rep. “favoriting” something or “liking” something could be considered adopting that third party statement.

Program Summary

The session should be available online in a few weeks.

FACULTY

Tom Pappas (Moderator) is Vice President and Director of FINRA’s Advertising Regulation Department. The department regulates the advertisements, sales literature and correspondence used by FINRA firms. His responsibilities include rule development, management of the filing and surveillance programs and related enforcement activities. He served in the same role at NASD before its 2007 consolidation with NYSE Member Regulation, which resulted in the formation of FINRA. He joined NASD in 1984 and was previously with Davenport & Company LLC. He received a bachelor’s degree from The University of Richmond and an M.B.A. from Virginia Commonwealth University.

Douglas Preston is a Senior Vice President and Compliance Executive at Bank of America Merrill Lynch (BAML), as well as Chief Compliance Officer for Merrill Lynch Professional Clearing Corporation, the firm’s prime brokerage arm. He is also responsible for a number of other compliance areas at the firm, including serving as the Chairman of the firm’s Enterprise Electronic Communications & Media Governance Committee, and leading BAML’s Global Banking & Markets Electronic Communications & Media Compliance team, among other responsibilities. Prior to BAML, Mr. Preston was Senior Special Counsel at NYSE Regulation. In his role at the NYSER, Mr. Preston helped develop and interpret various NYSE rules. He has worked on several major regulatory initiatives, including Regulation SHO, gifts and entertainment and electronic communications (NYSE 07-59), among others. Before joining NYSE, Mr. Preston was the General Counsel and Chief Compliance Officer (CCO) for Santander Investment, SA’s New York investment bank. He was also the CCO of the investment banking arm of the Bank of Nova Scotia, and Associate General Counsel for the Securities Industry Association (now SIFMA). Prior to SIFMA, he worked in private practice, representing financial services entities. Mr. Preston received his J.D. from Fordham University School of Law. He is a member of the Bar of New York, New Jersey, Washington, DC and the U.S. Supreme Court.

Joanne Rodgers is a Vice President of Compliance at New York Life Insurance Company (NYL).  She is responsible for managing the sales material review unit, field review unit and market surveillance. Ms. Rodgers has worked at NYL in various roles of compliance for the past 15 years. Prior to joining NYL, she worked as an examiner at NASD. She is a graduate of Franklin & Marshall College with a B.A. in Business Administration.

Joseph P. Savage is a Vice President in FINRA’s Investment Companies Regulation Department. Mr. Savage specializes in a broad range of securities regulatory matters, including investment management, investment company, advertising and broker-dealer issues, and regularly appears at conferences regarding these issues. Prior to joining FINRA, he was an Associate Counsel with the Investment Company Institute and an attorney with the law firms of Morrison & Foerster LLP and Hunton & Williams. Mr. Savage also served as a judicial law clerk for United States District Judge John P. Vukasin of the Northern District of California. Mr. Savage holds a bachelor’s degree from the University of Virginia, a master’s degree from the University of California, Berkeley, and a J.D. from the University of California, Hastings College of the Law, where he served as Note Editor of the Hastings Law Journal.

The Social, Mobile Web: Business Productivity in an Era of Twitter, Facebook, and Unified Communications

I’m attending the Enterprise 2.0 Conference in San Francisco. I’m sharing my notes from this session. Clara Shih,founder and CEO of Hearsay Labs, which develops web applications to track brand engagement and accelerate sales on Facebook and Twitter. She is also the author of The Facebook Era: Tapping Online Social Networks to Build Better Products, Reach New Audiences, and Sell More Stuff.

Facebook is CRM, its the way to manage your contacts and stay in touch. She makes the argument that email is dead.

(I think this is a losing argument. You will lose just about everyone if you make this statement. So what if college students are not using email. They are not working inside a business organization.)

Companies are investing more time and money on social media as part of their marketing strategy.

She put forth that Facebook is the template for online identity. It has become socially acceptable to share photos, interests and demographic information. You can get to know people more quickly.  Now you also have the layering in the real-time identity.

The transaction costs of communication are being reduced. Email was cheaper than phone calls. Facebook and Twitter allow you to reach an even broader audience even cheaper. Especially, keeping in touch with weak ties.

She showed the tool she made called Faceconnector (originally called FaceForce) that pulled Facebook information into Salesforce. Essentially enhancing that CRM system.