Avoid Investment Scams on Twitter

Analysts, financial advisers and even Pimco's Bill Gross are on Twitter nowadays to dispense stock tips or offer up strategies on weighting a portfolio. According to the Securities and Exchange Commission, the financial services industry's use of social media is "rapidly accelerating." But the same things that make social media such a valuable tool for investors -- think up-to-the-minute newsflashes and direct access to financial professionals -- leave traders susceptible to market manipulations or hoaxes.

Take Our Quiz: Investor Psychology

Pump-and-dump schemes, fraudulent promotions and high-yield investment programs -- HYIPs, for short -- may predate Twitter, but two recent cases show how easily investors can fall into those traps on social media. On Jan. 29, shares of Audience Inc. (Ticker: ADNC) dropped 25% in seconds after a tweet purportedly from short-selling firm Muddy Waters warned that the audio chip maker was being investigated for fraud. Audience recovered quickly, but Nasdaq briefly shut down trading after about 300,000 shares changed hands in two minutes. The next day, someone impersonating a different short seller on Twitter accused biotech company Sarepta Therapeutics (Ticker: SRPT) of altering its drug trial results. The deceptive tweet sparked a flurry of activity where more than 700,000 shares traded in a minute and the stock briefly fell 9.9%.

The problem isn't limited to Twitter. In January 2012, the SEC charged an Illinois-based investment adviser with trying to scam potential buyers on LinkedIn and other sites with fake securities. FBI agents told Reuters in November that new technologies including social media will play an increasingly large role in financial fraud.

Here are some things to keep in mind before acting on online buzz:

Assess Twitter handles. The Muddy Waters impersonator copied the firm's logo in the deceptive Twitter feed but adjusted the handle to read "@Mudd1waters" (versus the legitimate handle: @muddywatersre). The Sarepta hoax came from Twitter feed "@citreonresearc," instead of short-selling firm Citron Research's real handle, "@CitronResearch." Be wary of big-name accounts with only a handful of followers, and compare suspicious tweets to a firm's or manager's official feed to see what they normally write about.

Research all claims. Check with your state's securities regulator, FINRA's BrokerCheck or the SEC's Investment Adviser Public Disclosure to determine if brokers, advisers and investment firms are legit and in good standing.

Ignore too-good-to-be-true tweets. Question, or better yet delete, unsolicited posts or messages that tout investment opportunities with outlandish returns. An out-of-the-blue promise that you'll earn 300% a year on your money won’t materialize. If you're tempted, first compare the promised profits to returns for similar investments. An enormous gap is a red flag. Or ask an independent financial adviser to evaluate the offer.

Leave investment advice to the pros. 50 Cent may rap about getting rich or dying trying, but he's probably not the guy you want picking stocks for you. In January 2011, he promoted shares of H&H Imports to his millions of Twitter followers when it was trading at 10 cents a share. The next trading day the stock gained nearly 300% on the hype, despite the fact that H&H Imports had little revenue, mounting losses and a warning from its own auditors about its ability to continue as a going concern. The company now goes by the name As Seen on TV (Ticker: ASTV).