October 6, 2010
Twitter, Facebook Used In NY Stock Scheme
Two popular social networking sites were used to illegally promote stocks by spreading false information in a "pump and dump" fraud scheme, Manhattan prosecutors told Reuters on Tuesday.
The fraud, which was discovered during a cocaine-trafficking investigation, utilized Facebook, Twitter, and 15 or more other websites to "defraud the investing public into purchasing stocks that were being manipulated by participants in the conspiracy," the U.S. Attorney's office said in a statement, according to reporter Grant McCool of the news agency.
"Documents filed in Manhattan federal court said the 11 were from New York, Florida and Pennsylvania. They are accused of orchestrating web site links that touted picks in four penny stocks said to be based on the authors' expertise and independent research," McCool said. "None of the stocks were identified in court documents, which said more than $3 million was accrued in illegal gains by the accused and that shareholder losses amounted to more than $7 million."
The individuals charged in the scheme face up to 20 years in prison if convicted.
According to the Securities and Exchange Commission (SEC) website, pump and dump schemes, which are also sometimes referred to as hype and dump manipulation, "involve the touting of a company's stock (typically microcap companies) through false and misleading statements to the marketplace. After pumping the stock, fraudsters make huge profits by selling their cheap stock into the market."
"Often the promoters will claim to have 'inside' information about an impending development or to use an 'infallible' combination of economic and stock market data to pick stocks," the SEC website adds. "In reality, they may be company insiders or paid promoters who stand to gain by selling their shares after the stock price is 'pumped' up by the buying frenzy they create. Once these fraudsters 'dump' their shares and stop hyping the stock, the price typically falls, and investors lose their money."
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