Last month, the SEC warned investors about companies using fake news to drive up stock prices. In conjunction with this warning, the SEC charged 27 public companies, firms and writers with fraud for failing to disclose paid promotion, using multiple pseudonyms for publications about the same stock and/or using fake credentials. Just over half (17) reached settlements of up to $3 million.
The fraud at issue resulted not from the accuracy or the inaccuracy of the facts presented in the story. Instead, the SEC was targeting potentially biased news coverage and analysis which appeared as unbiased analysis on an investing website with no disclosure of interest by the author. The complaint against Lidingo Holdings for example describes it as a stock promotion firm generating articles on investment websites about publicly-traded companies that appeared to be objective and independent, when in fact it was a paid promotion.
This reminds me of the lawsuits brought by the Federal Trade Commission about a decade ago to require disclosures by affiliate marketers about product endorsements. It also resembles a bit the pump and dump scams that used to happen with penny stocks trading over-the-counter on the pink sheets.
This is not the first time that investors have had run-ins with fake news online. Two years ago, there was a fake news story that Twitter was going to be acquired by Google for $31 billion. The fake story sent Twitter stock up 8 percent because the website containing it looked identical to Bloomberg News.
Individuals at the publicly traded companies, the marketing promotion companies, the writing agencies and the online stock websites could be potential whistleblowers. The question in these types of cases is whether there will be more than $1 million in civil penalties and disgorgement. If it is a sufficiently large scheme to pull in multiple players and publicly traded companies, then it becomes more likely that the fines will get to a point where the whistleblower can qualify for a Dodd-Frank award.