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Fake news and how to protect yourself

Yan Barcelo  |  01 Jun 2017Text size  Decrease  Increase  |  

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While partial news can cause damage, the impact of fake news can be even worse. Investor beware.

 

Social media and websites play an increasing role in the world of finance, and not necessarily for the better. Investors are increasingly subjected to hype, partial information, and fake news that can make a stock deceptively attractive and cause them to lose money.

While regulators are only starting to catch up, investors need to know how to protect themselves.

In March, the Canadian Securities Administrators (CSA), which represents securities regulators across Canada, took aim at the problem of partial news.

Staff Notice 51-348 addressed companies that use social media and the internet to reach investors, disseminating "selective or early disclosures" and "misleading and unbalanced social-media disclosure".

The CSA study found that 72 per cent of issuers used at least one social media, such as Twitter, Facebook, YouTube, and LinkedIn. Furthermore, 77 per cent of issuers had no specific social-media policies and procedures.

That led to all sorts of irregularities such as selective targeting of investors, early or misleading disclosure of information, and hiding unfavourable facts.

The most significant finding is that, in four specific cases, irregularities led to a 26 per cent movement on average in the stock prices of issuers.

The study "didn't necessarily unearth bad faith on the part of issuers," says Sylvain Théberge, spokesperson for Quebec's Autorité des marchés financiers (AMF). "Still, there was clearly an infraction. And companies told us: 'We goofed.'"

While partial news can cause damage, the impact of fake news can be even worse. In April, the US Securities and Exchange Commission (SEC) addressed this problem. As reported by Reuters, the SEC "cracked down on alleged stock-promotion schemes in which writers were secretly paid to post hundreds of bullish articles about public companies on financial websites".

Such websites included Seeking Alpha, Benzinga, and Wall Street Cheat Sheet. Paradoxically, while sites like these can circulate fake news, they can also serve as an antidote.

For example, in June 2014, one Seeking Alpha contributor, who wrote under the name Weighing Machine, pointed to a long Twitter trail that ultimately led to spectacular gains in a penny stock called CYNK Technology.

A tweet issuing from a dozen penny-stock promoters like BuriedTreasureStocks, UltraPremiumPicks, and NYStockPic crowed ecstatically: "$CYNK NOW 2.75 +1427 per cent keeps SURGING HIGHER!!! This could be EPIC!!! $$$"

That month, CYNK Technology was still trading at US$0.06 a share. By 12 July, it had skyrocketed to US$21.95, giving a company without assets, revenue, and employees a towering valuation of US$6 billion.

The SEC quickly interrupted trading on CYNK, and when it resumed two weeks later on Friday 25 July, the stock fell to US$3 in the first few hours, according to CNBC.

The Twitter trail that "Weighing Machine" pointed to in his Seeking Alpha article was not the only factor that contributed to CYNK's absurd overvaluation, but it was a significant one.

Interestingly, Weighing Machine was also playing the CYNK hype, but on the shorting side; and contrary to what a number of authors do, he had the decency to disclose: "The author is short CYNK." (A "short" is someone who sells borrowed shares of a company in the hope that he will profit by later covering this short position at a lower stock price.)

The CSA notice touched upon the issue of fake news only marginally, denouncing the practice of misleading or untrue statements "provided through links to other documents".

In a number of cases, such "independent" analysis and articles came from authors who were paid by the issuer, a fact disclosed only in the fine print. Unfortunately, the CSA notice doesn't give a single specific instance of partial or fake news in Canada, nor did the AMF want to divulge any.

How can investors protect themselves? Partial news from issuers are probably the easiest to dodge, because such information links back to a specific source: the company.

The first thing to do for an investor who questions a social-media statement "is to call the company's investor-relations department," says Michael Levitt, marketing and design strategist at Kin Communications, a Vancouver investor-relations firm.

"Every company with a stock listing will have such a department or person responsible." And if not, call the CEO, especially if it's a small company. "Small-cap CEOs are easier to reach," he says.

The foremost misdemeanour picked up in the CSA study is selective targeting. Only a specific group of investors gets an announcement. And that's illegal.

"A news item must be communicated to everyone at the same time," says the AMF's Théberge. And simply posting it on the company's website or through a number of social networks doesn't cut it.

The key aspect of official press releases is that they will not only disclose positive developments, but also negative ones, as companies are required to report them.

Regarding hype and fake news, checking with issuers first is a good way to verify if a piece of information is legitimate, but the main directive here is the opposite: multiply your sources of information.

"Keep as large a conversation as you can to get different points of view," advises Levitt.

And beware of the types of network where a news item circulates. "Fake news can be detected in a similar way to a computer virus, they have certain characteristic signatures," says Anton Gordon, CEO of Indexer, a Houston fintech.

Indexer has developed Vector, an artificial-intelligence system aimed at institutional investors that analyses news and their impact on stock prices. Copycat websites bearing names like Bloomberg.com.co or WallStreeter.com should arouse suspicion.

The most damaging moment for fake news is when it "breaks out" of its initial network and makes its way into mainstream media outlets.

"That's when fake news start impacting stock prices," says Gordon, who has studied these phenomena in depth.

Artificial-intelligence algorithms will at some point help investors detect fake news, but they are still not readily accessible.

Indexer is launching a fake-news detection app, the first of its kind, that will filter millions of news stories for bias, subjectivity, and trustworthiness. The app will be pricey at the outset, requiring a US$299 monthly subscription, but Gordon doesn't rule out the possibility of coming out at a later date with a cheaper "consumer" version.

Even with the assistance of artificial intelligence, the best advice and the most effective defence remains: "Investor, beware!"

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Yan Barcelo is a contributor to Morningstar's Canadian website, where this article initially appeared.

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