You knew it was going to happen: The Manhattan U.S. attorney's office is investigating a stock-fraud case in which alleged criminals used social media Web sites - including Facebook and Twitter - to pump up stocks. Shareholders who fell for the fraudulent stock touting ended up losing over $7 million. There were 22 people involved here - mostly longshoremen, of all people - who posted "false and misleading statements," according to the complaint filed against them, then made "coordinated purchases and trades... in order to sell the cheaply purchased stocks at higher prices."
The fact that there were so many fraudsters involved here probably was instrumental in duping so many people. If you see 10 or 12 of your "friends" on Facebook all getting excited - and seeming to have insider knowledge - about a particular company's stock, it's easy to fall for the ruse. The wisdom of the crowds is a very real phenomenon.
But this is one more reason to stick with prudent, long-term investing. Once you hear about a hot stock tip, that should be the beginning of the research process, not the end. If all those people had looked into the longshoremen's tips and discovered for themselves whether the stocks were really worth buying, they'd be $7 million richer today.
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