Social Networking Services Present a New Risk for Investors


“Socialized” or “social” investing is the latest way that some brokerage firms are creating a casino-like atmosphere and catering investors’ worst instincts, according to a Forbes article by Zack O’Malley Greenburg called “Tweets on the Street.” “Social networking is coming to the brokerage business. It’s unlikely to do much to enrich your retirement,” Greenburg writes.

These services may seem fun to some, but they can also encourage foolish behavior, such as trading on tweeted tips and frequent in-and-out trading, as well as providing a haven for fraudsters.

Regulators take a dim view of those who disseminate or allow other to disseminate unsuitable or fraudulent investment advice via Twitter and other internet-based services. The Securities & Exchange Commission recently froze the assets of a Canadian couple that used Twitter and Facebook to earn $2,4 million by fraudulently touting penny stocks.

The Financial Industry Regulatory Authority (FINRA), which is charged with regulating sales practices of brokerage firms, warned that “firms should consider prohibiting all interactive electronic communications that recommend a specific investment product and any link to such a recommendation unless a registered principal has previously approved the content.”

Despite such warnings, Charles Schwab, E*Trade, and TD Ameritrade are jumping into social networking. According to the article, E-Trade bought Cake Financial to allow users to share trading and other information through their brokerage accounts; TD Ameritrade offers a service that enables customers to broadcast trades with a Twitter-like service called MyTrade; and Charles Schwab is educating financial advisers about Facebook, Twitter and other social networking topics.

Seven out of ten brokerage firms currently provide some form of social media access, and one in ten now allows them to post transaction details directly to Twitter, according to Corporate Insight and the article. Ditto Trade, a nationwide brokerage firm, enables customers to piggyback on one another’s trades in real time.

“I can easily see a scenario for this to be a con game,” one financial adviser was quoted as saying. “Someone with a lot of Twitter followers puts in a trade, waits for the followers to come in and push the price up, then dumps the stock and pockets the profit, he added.”

Page Perry is an Atlanta-based law firm with over 125 years collective experience representing institutional and individual investors in securities-related litigation and arbitration all over the country. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions.