Financial Twitter, Beware. The Cops Are On to You
(Bloomberg Opinion) -- U.S. authorities appear to be opening a new front in their efforts to battle securities fraud. The territory: financial Twitter.
Their target is @AlexDelarge6553, an allusion to the movie “Clockwork Orange” and the Twitter handle of a Maumee, Ohio-based trader named Steven Gallagher. His Twitter persona projected an image of success, posting a photo of a Tesla Model S that he claimed to have purchased with his winnings, and touting numerous thinly traded penny stocks to more than 70,000 followers.
The Justice Department arrested Gallagher earlier this week, on charges that he talked up the stocks only to sell them at inflated prices, a practice commonly known as pump and dump. The indictment — for securities fraud, wire fraud and market manipulation — alleges that he amassed more than $1 million in illegal gains. Authorities have frozen brokerage accounts containing nearly $7 million.
Gallagher is just one example of how social media is supercharging the world of stock touting. Once upon a time, the activity occurred primarily in so-called boiler rooms, where aggressive brokers would cold-call potential buyers. Then it moved to online message boards. Now, services such as Reddit and Twitter are overrun with thousands of self-professed experts boasting about their trading prowess, posting screenshots of their alleged winnings and seeking to orchestrate buying frenzies.
Among the stocks Gallagher touted was Alpine 4 Holdings Inc., a company I wrote about in June. At the time, the level of fanaticism surrounding an over-the-counter stock that few people had heard of seemed highly unusual, to put it mildly. According to the Justice Department’s complaint, Gallagher first bought shares of Alpine in early December 2020 at 52.5 cents each, and by the end of the month had accumulated 125,000 shares.
During that period, Gallagher tweeted dozens of times about the stock, seeking to drive up the price with screenshots that showed big returns and pledges such as “I ain’t selling $ALPP long.” Over the next few months, according to the complaint, Gallagher continued to talk up Alpine to his followers as a “must own,” while actually selling almost all of his shares. The complaint estimates his profits from trading Alpine alone at nearly $500,000.
Last week, Alpine started trading on Nasdaq -- a milestone that Gallagher and dozens of others had predicted would send the price upward. After a quick surge above $5 a share, the stock is back around $3. Other of Gallagher’s “must owns” have fared worse. SpectraScience Inc. gained 300% amid his avid tweeting — even though the company, according to the complaint, appeared to be out of business and had failed for more than three years to file required documents with the Securities and Exchange Commission. The stock is currently worthless.
The methods and venues of stock touting may change, but the result for investors remains the same. It’s good to see that the SEC and the Justice Department are staying on it. Gallagher might be among the first to draw scrutiny, but I would venture a guess that he won’t be the last.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Michelle Leder is an expert on SEC filings, having launched her site, Footnoted.com, in 2003 after writing the book "Financial Fineprint: Uncovering a Company’s True Value."
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