Biotech Has a Fake News Problem

Biotech Has a Fake News Problem
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Don’t believe everything you read on the internet — especially if a small, thinly traded biotech stock is involved.

So says the Securities and Exchange Commission, which charged 27 people and companies with misleading investors by pushing promotional articles without disclosing that the authors had been paid for their pumping.

It all went down on sites like Seeking Alpha and Benzinga, where anyone can sign up to post investment ideas. According to the SEC, three biotech companies — Galena Biopharma, Lion Biotech, and ImmunoCellular Therapeutics — committed fraud by indirectly paying writers to post laudatory pieces without disclosing that they were on the take.

All three firms have settled with the SEC, with only Lion ordered to pay a fine. Overall, 17 of the charged parties — including promotional firms, biotech executives, and writers — have settled, paying nearly $5 million in penalties in the process. The SEC is suing the other 10.

Beyond its punitive implications, the SEC’s crackdown sheds some light on biotech’s little-discussed fake news problem. Each day, Twitter users human and otherwise tout small-cap stocks, linking to articles on crowdsourced websites with promises of a major clinical breakthrough or a sure-fire buyout just around the corner. Money is made and (mostly) lost, and little is made of the matter.

But digging through the latest allegations provides a glimpse of how that anonymized ecosystem can run afoul of the law — and how difficult it is to police it.

It starts with the promotional firms, according to the SEC, which recruit stables of writers to churn out bullish pieces under a range of pseudonyms with fabricated credentials. Then the firms pitch to biotech companies, which sign on to pay as much as $20,000 a month to lease an army of embedded stock promoters, the SEC said. If everything works out, the deluge of positive stories gooses the company’s stock price, and the whole process more than pays for itself.

Conceptually, it’s just like the boiler-room scams of a bygone generation. Just as yesteryear’s telephonic scammers would promote a handful of blue-chip stocks to mask the scent of pink-sheet duds, promotional firms advised their writers to pepper their stories with the names of big companies to avoid suspicion, according to the SEC.

But where boiler-roomers had to go through the trouble of renting an actual room, today’s stock promotion is both easier to do and harder to trace, thanks to the internet.

The likes of Seeking Alpha and Benzinga — which weren’t charged in the crackdown — have no way of verifying just who’s writing for them. Each requires authors to disclose whether they’ve been paid for their work, but the simple check of a box allows fraudsters to get around that. Doing so is illegal, the SEC notes, but not necessarily preventable.

So gaze with caution into the abyss of anonymous stock tips on the internet, warns an accompanying investor alert from the SEC. The person on the other side of that tweet might be trying to rip you off.

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