Fake news stories have existed as long as the news has existed. The fake stories could be misunderstood parody or entertainment (think "War of the Worlds"), or they could be launched with malicious intent. With the rapid dissemination of news across the Internet, malicious fake news can cause real damage in financial markets.
Twitter’s Takeover That Wasn’t
The most recent fake news story involved Twitter, when a fake report of a $31 billion takeover bid caused Twitter stock to momentarily spike 5% before falling back within a ten-minute window. The story appeared to come from Bloomberg.com, but it was actually produced by a knockoff site under the address Bloomberg.market.com. Bloomberg and Twitter spokespersons quickly denied the report and the market returned to normal, but a malicious trader poised and ready could have taken advantage of the spike to sell at a significant gain.
Hoaxes like this are relatively easy to pull off since the source code behind any website is readily available. Anyone can register a similar domain name (as they did in the Bloomberg case through a Panamanian proxy service), create their own website, and cut and paste the source code. The Bloomberg spoofers went so far as to include links back to the real Bloomberg website.
Avon’s False Filing With the SEC
The fakery does not always take the form of a webpage. In May, a fraudulent takeover offer for Avon Products was filed with the SEC. The listed company, PTG Capital, did not exist — although it was likely chosen to make skeptics assume the bid was from the real private-equity firm TPG Capital. Avon stock rose 20% before Avon announced that the takeover bid was a hoax.
The SEC traced this action to a Bulgarian trader who had also sent out a fake press release in 2014 regarding a takeover of Tower Group International, Ltd. as well a false SEC filing in 2012 for a takeover of Rocky Mountain Chocolate Factory. In each of these scenarios, the trader intended to profit from the temporary stock shift.
Business Wire and Javelin Pharmaceuticals
News wires were hit by a couple of fake reports in 2010. Business Wire passed along false information that Javelin Pharmaceuticals had won a Supreme Court ruling regarding some of their products, and several days later PR Newswire was taken in by a false report implying a government investigation of the supply chain of cereal giant General Mills.
As far back as 2000, people have been faking news online for profit. In March 2000, a Houston day-trader continually reposted a fake press release stating that Lucent Technologies would miss earnings estimates. That earned the trader a $4,000 fine and a two-month jail stint for securities fraud.
In all of these cases, the goal was the same — plant a story that drives stock price temporarily up or down and make money off the initial market reaction. Technology just expedites the process.
The Twitter scammers not only took advantage of the technology, they also took advantage of psychology. Speculation about takeover bids had been building, making those expecting a takeover bid more reactive and less likely to give the story a critical review.
To avoid being taken in by a fake news story, do not overreact. The Internet may make it easy to spread false stories, but it also makes it easier to check them out. Even trusted websites such as Bloomberg are vulnerable to attacks and spoofing, so develop a network of several websites that you trust to visit as a reference. Let everybody else believe that aliens landed in Grover's Mill and plan to take over Apple, while you wisely avoid panic selling.