From the boiler room-basement brokerages of southern New Jersey to the opulent office suites of midtown Manhattan hedge funds, the U.S. financial police are supposed to track down stock market fraud wherever it takes place. For what appears to be the first time, a tip-off is leading them into the world of Twitter.
U.S. market regulators are trying to determine if a message posted on a hoax Twitter account this week was used as part of a securities fraud scheme, The Huffington Post has learned. The inquiry will be looking at tweets, sent Tuesday from an account thinly disguised as that of a well-known equity research group, that contained false information regarding Silicon Valley company Audience Inc. The tweets caused a violent sell-off in the stock of that company Tuesday afternoon, which some market participants noted was likely intensified by high-frequency trading robots.
Diane Vanasse, a spokesperson for Audience, Inc. said the "company was certainly aware of the hoax tweets" and said that "Nasdaq is investigating" the matter. Joe Christinat, a spokesperson for exchange operator Nasdaq OMX, said the electronic trading board "did refer the matter to FINRA."
Nancy Condon, a spokesperson for private market regulator FINRA, could not confirm or deny an inquiry was taking place, but noted that market activity of this kind is usually investigated by either FINRA or the federal Securities and Exchange Commission.
A spokesperson for the SEC declined to comment, and representatives for Twitter did not respond to repeated requests for comment.
That a potentially illegal act of financial manipulation could reverberate on Twitter and provoke a shift in the market reflects the degree to which social media has augmented more traditional sources of information among traders. Just as journalists have come to rely on Twitter feeds in place of traditional wire services, investors are now prone to moving on a headline glimpsed on social media in addition to those they see on their Bloomberg terminals. Oftentimes social media has the information first.
In recent years, private equity firms and hedge funds have incorporated Twitter feeds and large data inputs from other social media sites such as LinkedIn, said Charlie Irish, a technology consultant in London who advises financial clients on how to implement new trading platforms. Traders have expanded from "using computers to gauge sentiment" -- for example, counting how many times the name of a company is mentioned by Twitter users -- to relying upon market developments reported by social media sites.
"What we’re starting to see now is people looking at Twitter to see key information," Irish said. "Quite often you'll see data released on Twitter a few minutes before it hits the mainstream financial press."
In this particular case, the market probe is focusing on messages sent from the account of @Mudd1waters between 11:44 a.m. and 1:09 p.m Tuesday, according to those familiar. The messages read:
The account showcased the logo of prominent firm Muddy Waters Research, which is in the niche business of researching shares of obscure Chinese companies and exposing those operating on a fraudulent business model.
While the messages were sent several times, and tweeted at the accounts of the Chicago Mercantile Exchange and Merrill Lynch, it appears that any traders who saw the fallacious tweet disregarded it. Then, at 2:20 p.m., a large sell-off sent the stock's price plunging more than 25 percent. By 2:36 p.m., orderly trading had been restored and Audience shares were selling at their previous level, just north of $12.
Various market participants pointed to the volatility and speed of the market action -- as well as to the fact it would be unlikely for a human trader to take massive positions based on a tweet from an unknown source -- as an indication that most of the trading was undertaken by automated systems.
Jamie Lisette, president of The Hammerstone Group in Connecticut, noted that "there's definitely tons of bots out there that are scanning for Muddy Waters and for negative information," adding a "non-sophisticated one" could have fallen for a fraud unlikely to trick a live person.
"It's trade and ask questions later," said Lisette, whose company runs a private communication system for institutional investors to share stock tips.
"People need to stop and consider the source of the information that they're getting," Zach Kouwe, a spokesperson for Muddy Waters Research said. Kouwe said that his company's high profile has made them a target for more low-tech impersonators, including some who've sent FedEx packages to reporters on the company's letterhead.
But the use of Twitter is a new take on an old scam, Kouwe notes. A day after the Audience debacle, a similar event occurred when a tweet from the account of @citreonresearc, which mimics the name of noted firm Citron Research, accused biopharmaceutical company Sarepta Therapeutics of being a fraud.
The stock dropped over 9 percent in a matter of seconds.
In a statement on its website, Sarepta told investors that "as a growing company, we may be subject to market rumors through social media and other anonymous sources" and added that "in circumstances where false or misleading information is communicated that negatively impacts the company, we will take appropriate action."
The Huffington Post could not independently verify whether regulators were also looking at the Sarepta sell-off for evidence of foul play.
The Securities and Exchange Commission would not comment on whether previous investigations had been launched to look into fraudulent market-moving information on Twitter. Previous SEC actions have cracked down on investment advisers who had offered non-existent products or misrepresented themselves on other social networks like LinkedIn. Christinat, the Nasdaq spokesperson, said he could not remember a case in which Twitter had been linked to suspicious market activity.
Irish, the London-based technology consultant, pronounced himself "surprised that we haven't seen more of an effect in terms of releasing incorrect information" to move the market, given the growing reliance on social media as a source of financial intelligence.