James Alan Craig’s game plan was childishly simple. He set up twitter accounts to resemble those of two well known short-selling firms, Muddy Waters Research and Citron Research. While Muddy Waters and Citron Research have their twitter handles as @muddywatersre and @CitronResearch respectively, James Craig’s bogus accounts had the handles @Mudd1Waters and @citronresearc and looked like that of their original namesakes.
The Securities & Exchange Commission has alleged in its complaint that James Craig used the bogus accounts to tweet that two companies named ‘Audience’ and ‘Sarepta Therapeutics’ faced investigation from authorities for malpractices. This spread panic amongst investors and the stock prices plunged 28% and 16% respectively.
It is claimed that when the stock prices plunged, James Craig bought the stocks and sold them when they rebounded.
However, James goofed up big time because he bought a measly number of shares and also mistimed the sales. The details of the trades given by the SEC shows that the fraudster took home only a princely sum of $9 and $88 from the two trades.
The amusing part is that while the bogus Muddy Waters account had 17 followers, the bogus Citron Research had only 6 followers (see the Exhibits in the SEC’s charge sheet).
Can a twitter account with only 17 and 6 followers cause such mayhem to the stock price of two large companies?
Also, how the SEC was able to link up the collapse of the stock price with James Craig’s tweets is not brought out. Perhaps the timing did him in.
The SEC has leveled grim allegations against the fraudster:
“Craig’s false tweets and manipulative conduct caused substantial market disruption and loss, and caused Nasdaq to halt trading in a security. In reaction to Craig’s false and misleading tweets and the subsequent drop in price, certain Audience and Sarepta investors sold hundreds of thousands of shares during each of the temporary stock price depressions and sustained estimated losses of approximately $1.5 million total.
In addition, Craig’s tweets caused a public company and two established research firms to expend resources and respond to the tweets.
Craig’s fraudulent conduct also caused tremendous intangible harm to the U.S. markets as the unwarranted and substantial stock price drops he brought about undermine investors’ confidence.”
Interestingly, Citron Research, which is managed by Andrew Left, has become famous (amongst us) for having caused a massive loss of Rs. 13,000 crore+ to Bill Ackman and other hedge funds by alleging that Valeant Pharma is an Enron-like fraud.
Valeant shot back at Andrew Left by asking SEC to investigate his affairs and whether he was profiting from the scare mongering.
Andrew Left reacted in a belligerent manner to the accusation of wrong-doing on his part and claimed that he was being honest in his efforts to expose the alleged fraud company.
There are lots of algos that scan Twitter sentiment and data to trade on that information. What amazes you is the Twitter count follower, that is not relevant that much as some algo might have picked up the news and must have traded on it.