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Speaker 1: Computer algorithms have become an important part of the stock

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Speaker 1: trading universe, with a significant number of stock trades now

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Speaker 1: based upon algorithms that monitor such things as prices, information,

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Speaker 1: and news. But the Washington Post is reported that the

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Speaker 1: Securities and Exchange Commission is finding that fake stories on

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Speaker 1: social media, often written by people who are paid to

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Speaker 1: write positive stories about companies, can move markets, and the

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Speaker 1: SEC is a learning investors and filing complaints against people

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Speaker 1: who engage in these kinds of promotion schemes. Here to

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Speaker 1: talk with us in this latest development in uh the

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Speaker 1: stock fraud world is John Coffee, a professor at Columbia

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Speaker 1: University Law School. John, always a pleasure to have you

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Speaker 1: on the program. Explain to us, Explain to us kind

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Speaker 1: of what these these kinds of cases are about. What

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Speaker 1: what is the SEC targeting here? Well, I would tell

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Speaker 1: you that what we really learned from all this is

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Speaker 1: that old frauds never die. They mutate and they morph

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Speaker 1: into new forms and new technology. Not so long ago,

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Speaker 1: there was the boiler room, and it was used for

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Speaker 1: the so called pump and dump scheme. And they're high

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Speaker 1: pressure salesmen would call up from the boiler room and

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Speaker 1: reach maybe five hundred or more investors and phone calls

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Speaker 1: touting in particular stock, usually at penny stock. Now it's

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Speaker 1: gotten more subtle. Now all you need to do is

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Speaker 1: retain one of these social media firms. It commissions the

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Speaker 1: fabrication of dozens of articles, and it posts them throughout

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Speaker 1: the blogosphere, that post them on websites various web news analysis,

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Speaker 1: all of which may be very in most cases legitimate firms,

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Speaker 1: for example Motley, Fool and Benzinger, which are well known.

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Speaker 1: We're victimized by this by posting false stories by non

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Speaker 1: existing authors. And the point of all this is that

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Speaker 1: if you see twenty or more stories all over the blogosphere,

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Speaker 1: some retail investors will be fooled. But even more the

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Speaker 1: algorithm creator, the automized trader UH is going to count

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Speaker 1: up the number of stories and going to see the

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Speaker 1: nature of the recommendation, and we'll use that quantitative data

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Speaker 1: to make an investment decision to buy. And all these

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Speaker 1: people are being defrauded because it's not disclosed that all

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Speaker 1: of these stories have been paid for. I should explain

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Speaker 1: a very basic point here though the securities Law Section

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Speaker 1: seventeen B and the thirty three Act makes it illegal

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Speaker 1: to write any story, article, communication in which you are

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Speaker 1: compensated by the issuer directly or indirectly without disclosing that fact.

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Speaker 1: And that's what was chiefly violated here Jack. So this

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Speaker 1: is a tech version of it. But because it's on

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Speaker 1: financial websites and Facebook posts and tweets under different pseudonyms,

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Speaker 1: it's difficult to catch the fake news. How long does

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Speaker 1: it take? I mean, can it just be a quick

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Speaker 1: turnaround and the market moves well, I mean you might

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Speaker 1: get a quick turnaround, It may take you a couple

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Speaker 1: of days to get the stock up. And sometimes you

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Speaker 1: have retail investors who think they're being shrewd. They sense

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Speaker 1: it's to be manipulated, and they want to ride the

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Speaker 1: elevator off up to the top and get off. That

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Speaker 1: never succeeds. The elevator goes up somewhat slowly and it

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Speaker 1: comes down in a crash and people can't get out

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Speaker 1: in time. Um. But this is you know, large scale,

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Speaker 1: not small individual whispers. You have some of these firms

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Speaker 1: charging twenty dollars a month for their social media services,

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Speaker 1: and then they have a strange way of and forcing

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Speaker 1: your obligation to pay them because they threaten you. It's

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Speaker 1: a kind of extortion that if you don't pay that fee,

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Speaker 1: they're going to start writing bad stories about you, equally false,

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Speaker 1: but it will send the market down just as well

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Speaker 1: as I send it up. So you are sort of

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Speaker 1: locked into a pack with a dolt jack. It's a

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Speaker 1: good thing, I suppose if if you're against this sort

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Speaker 1: of fraud, as most people aren't, you get the SEC involved.

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Speaker 1: But what can investors do to avoid this kind of thing?

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Speaker 1: Given the speed with which everything happens in the stock

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Speaker 1: market now now does some degree investors can't fully research

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Speaker 1: who these anonymous stories are by. If the story is

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Speaker 1: by someone using a pseudonym like Swiss trader trader Maven,

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Speaker 1: you can't check. But it puts a story with a

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Speaker 1: sign name. I think you can go on Google and

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Speaker 1: Facebook and see if this is a real person. That

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Speaker 1: much due diligence even an ordinary investor can do. And

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Speaker 1: I think investors should put some pressure on the Motley

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Speaker 1: Fools and benzingers in this world to do some due

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Speaker 1: diligence themselves. I understand their view that they are resource

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Speaker 1: constrained and they can't check all the facts, but they

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Speaker 1: can check and see whether there's a real identity behind this. Ultimately,

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Speaker 1: go ahead check in. In about thirty seconds, seventeen defendants

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Speaker 1: UH pleaded guilty agree to pay more than four point

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Speaker 1: eight million dollars. Some of them did not plead. In

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Speaker 1: that situation, what do they have to prove it trial

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Speaker 1: the SEC The money will go into an SEC fund

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Speaker 1: and if they find it feasible, they can use their

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Speaker 1: fair funds provision and give that back to the injured investors.

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Speaker 1: But frankly, the injured investors here maybe in the tens

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Speaker 1: of thousandes, because there can be lots of people who

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Speaker 1: trade and it's generally not possible to identify the individual

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Speaker 1: victims very easily. This is not like a more typical

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Speaker 1: kind of fraud in a initial public offering or something

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Speaker 1: where you can easily identify the victim or Thanks to

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Speaker 1: John coffee Of, a professor at Columbia University Law School,

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Speaker 1: for being with us today on Bloomberg, Lack