Market manipulation through fake press releases poses serious risks to investors and the integrity of financial markets. Unscrupulous companies, organisations and individuals spread false or misleading information through press releases to artificially inflate or deflate stock prices for their own profit. Investors can suffer major losses by trading on this fake news. Regulators like the SEC and CFTC are cracking down on these deceptive practices with hefty fines and criminal charges against the worst offenders. This article explores the tactics and impacts of fake press release schemes and the regulatory efforts to combat this form of market abuse.
Fraudsters use several deceptive tactics to manipulate markets with fake press releases:
1- Sensationalized headlines: Press releases with exaggerated or misleading titles designed to generate hype and artificially boost a stock's price.
2- Unverifiable claims: Vague statements about deals, partnerships, or financial projections that lack specific details for investors to fact-check.
3- Suspicious timing: Releases published at odd times, like Friday evenings or before holidays, possibly to avoid scrutiny.
4- Misrepresented authorship: Commentary presented as originating from the company when it may be from a biased third party.
5- Pump-and-dump patterns: Sudden spikes in promotional releases followed by insider selling when the stock price jumps.
Investors should be alert for these red flags. Always seek to verify material claims from press releases against company filings and credible third-party sources before trading on the news. Relying on hype without due diligence often leads to losses when the deception is exposed and inflated share prices collapse.
Fake press releases can significantly disrupt stock prices and trading activity in the short term. When a fraudulent release containing false information about a company is widely disseminated, it often triggers a sudden spike or drop in the stock price as investors react to the news without verifying its authenticity.
This artificial volatility is often accompanied by a surge in trading volume as duped investors rush to buy or sell shares based on the bogus information. For example, in 2015, a fake press release claiming that Twitter had received a $31 billion buyout offer caused the company's stock price to jump 8% and trading volume to quadruple within minutes before the hoax was uncovered.
While markets typically correct once the deception is revealed, investors who traded on the false news can suffer major losses in the interim. To avoid falling victim, investors should always seek to fact-check material claims in press releases against company filings and reputable third-party sources before making trading decisions based on the news alone. Regulators also continually monitor for and prosecute the perpetrators of fake releases to deter this form of market manipulation.
Investors who trade based on false information in fake press releases can suffer significant financial losses. When a fraudulent release containing exaggerated or fabricated claims about a company is widely disseminated, it often triggers a sudden spike in the stock price as investors buy shares without verifying the news.
However, the artificial inflation is short-lived. Once the deception is exposed, the stock price typically plummets, leaving investors who bought at the inflated prices with substantial losses when they sell. For example, in 2015, a fake press release claiming that Twitter had received a $31 billion acquisition offer caused the stock to jump 8% before the hoax was uncovered, likely leading to losses for investors who traded on the false news. To avoid falling victim, investors should always seek to fact-check material claims against company filings and reputable third-party sources before trading based solely on a press release.
Investors who trade on fake news, even unknowingly, may face legal consequences. While intent is a key element in many securities fraud cases, investors still have a responsibility to perform due diligence before making trades.
Regulators expect investors to seek out factual information from reliable sources to verify claims made in press releases or other promotional content. Failure to do so could potentially expose an investor to allegations of negligence or lack of proper care.
Investors may be able to avoid liability by demonstrating they took reasonable steps to investigate and confirm any news that materially influenced their trades. Carefully documenting research efforts and reliance on reputable information sources is prudent to mitigate potential legal exposure from trades made on fake news.
check the The Adani Group fake press release to see a real life example of how a fake press release can affect a company
The SEC has brought several major enforcement actions in recent years against companies and individuals involved in disseminating fake press releases to manipulate stock prices. In 2015, the SEC charged PR firm Marketwired and three penny stock companies with issuing misleading press releases touting stocks. The SEC alleged Marketwired had inadequate processes to prevent clients from publishing false releases through its system. The companies agreed to pay nearly $3 million to settle the charges.
However, these enforcement efforts have not eliminated the problem. In 2021, the SEC charged three individuals in a scheme to drive up stock prices through phony press releases picked up by national media outlets. Authorities allege the group made over $10 million in illegal profits by trading ahead of the bogus releases.
While the SEC has made policing fake press release schemes an enforcement priority, more work remains to protect investors. The agency continues to rely on tips from whistleblowers and cooperation from legitimate PR distribution platforms to identify and halt new fraudulent schemes as they emerge. Investors must also stay vigilant and verify claims in press releases before trading on them.
Market manipulation often goes undetected, allowing fraudsters to profit at the expense of ordinary investors. However, the SEC and CFTC whistleblower programs provide a powerful solution to combat these abusive practices.
Under these programs, individuals who report original information that leads to a successful enforcement action resulting in sanctions over $1 million can receive awards ranging from 10% to 30% of the money collected. These potential multi-million dollar rewards create a major financial incentive for whistleblowers to come forward with evidence of market manipulation schemes.
By enlisting the help of insiders to expose misconduct, the SEC and CFTC gain valuable intelligence to quickly identify and halt manipulative practices before more investors are harmed. Whistleblowers' tips and cooperation are a critical tool for regulators to police increasingly complex markets and protect the integrity of the financial system.
Regulators are ramping up efforts to educate investors about identifying and avoiding fake news related to stocks and trading. The SEC's Office of Investor Education and Advocacy provides alerts, bulletins, and online resources to help investors protect themselves from fraud.
However, with the rapid spread of misinformation online and through social media, it remains an ongoing challenge to keep investors informed about the latest schemes. Fraudsters are constantly developing new tactics to manipulate markets and trick unsuspecting investors.
Continued investor education, combined with robust enforcement actions against wrongdoers, will be key to combating the pernicious effects of fake financial news. Empowering investors with the knowledge and tools to critically evaluate information is an essential line of defense against market manipulation.
Wiztrust Protect is a blockchain-based solution designed to combat the spread of fake press releases and protect companies from market manipulation. Here's how it works:
Before sending a press release, communication teams certify the document's authenticity using their Wiztrust account.
Wiztrust creates a unique digital fingerprint for each file by extracting metadata, encrypting it, and anchoring it in the blockchain.
Investors, journalists, and other recipients can verify the authenticity of press releases by uploading them to https://protect.wiztrust.com/.
The software compares the metadata of the uploaded file with the certified version in real-time.
Users are immediately informed if the file is certified and authentic or if it requires further verification1.
Wiztrust Protect serves as a formidable barrier against market manipulation attempts. In a world where hackers and activists might seek to influence stock prices through false information, this system provides a critical line of defense. It addresses a growing concern for regulators by creating a standard for market leaders' communication teams and risk managers.
The widespread adoption of Wiztrust Protect by major listed companies and financial institutions speaks volumes about its effectiveness. With over €1.2 trillion in market capitalization now protected, it's clear that this solution is making significant strides in the fight against corporate fake news.