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How cultish social media accounts fuel trading in penny stocks
An FT investigation found dozens of privately traded shares that showed sudden surges following endorsement on Twitter

May 18, 2021 4:00 am by Hannah Murphy in San Francisco and Philip Stafford in London
“ALERT!!!”, shouted a Twitter post on February 3 by a user called Alexander Delarge, whose profile picture is the sociopathic protagonist with a similar name from A Clockwork Orange.

The message was a bombastic plug for a little-known penny stock called MedX Holdings, a “brands and acquisitions” business looking at the emerging cannabis industry.

“Weed is hot,” the account’s 61,000 followers were told. “I love this one!”

Delarge’s real identity may be a mystery, but the trader’s clout is clear. The message appeared shortly before the end of the US trading day, but within minutes the price of MedX had soared from $0.022 to close at $0.0287, a 30 per cent jump.

The week before the tweet, MedX was trading about 4m shares a day. But in the days before the posting, volumes had already started to surge and by the end of February 3 more than 38m shares had changed hands. That swelled to 47m the next day as the shares peaked at $0.035.

Screenshots of several small private discussion forums, shared with the Financial Times, appear to show some traders tipping off others that Delarge’s “alert” message was coming, in the hours before it landed.

MedX is just one of hundreds of so-called penny stocks — those worth less than $5 — traded privately, away from the main US stock markets, which have seen their own frenzied, social media-driven speculation this year. An FT investigation found dozens more stocks that in recent months showed sudden surges in trading — followed by lulls — often encouraged by social media accounts with cultish followings, including Delarge’s.

Some of the cases have caught the attention of regulators. In February, the Securities and Exchange Commission suspended trading in more than 20 penny stocks, suggesting they had fallen victim to apparent co-ordinated social media attempts to inflate their price. Some of these were shell — or even defunct — companies, with ringleaders blasting on Twitter that they would rise again, the FT found.

The wild moves are drawing attention to the rumbustious world of trading shares over the counter, where prices can soar and plummet on momentum rather than specific corporate news. It is the lesser known of the US equities markets, where deals are privately negotiated between brokers rather than sent through a central exchange such as the New York Stock Exchange or Nasdaq.

The exchanges have seen their own episodes of frenetic speculation around the retailer GameStop and other so-called “meme stocks” in 2021. But the over-the-counter world has also seen a surge of interest from retail investors during the coronavirus pandemic. In February there were nearly 2tn trades, shattering all previous records.

Column chart of Shares traded (tn) showing Trading volume of over-the-counter penny stocks
The risks of OTC fervour were called out recently by David Einhorn, a prominent hedge fund manager and president of Greenlight Capital, who in a letter to investors raised the problematic case of Hometown International, which owns a single deli in rural New Jersey and only brought in $13,976 in sales in 2020. Yet its market capitalisation is about $100m.

“The pastrami must be amazing. Small investors who get sucked into these situations are likely to be harmed eventually, yet the regulators — who are supposed to be protecting investors — appear to be neither present nor curious,” Einhorn wrote.

“It’s absolutely the Wild West. And unfortunately there’s no real sheriff in town,” says George Sharp, a microcap company adviser and former consultant to OTC Markets Group, a private company that collects, manages and distributes the limited information that exists on penny stocks that are privately traded.

“And Twitter is the chosen forum du jour [that] has allowed the bad actors to execute these schemes to a larger extent than ever before.”

Niche subculture

The penny stock speculators have their own niche online subculture that is similar to — but distinct from — Reddit’s WallStreetBets army which has been driving volumes in meme stocks.

Their pace of posting on Twitter is more frantic. Research by social media analytics group PiiQ Media found that some of the penny stocks that experienced sudden surges in 2021 had 3,000 to 4,000 mentions a day — sometimes as high as 7,000 — compared with about 2,000 to 3,000 daily mentions of meme stocks such as GameStop and AMC Theatre on Twitter.

The impact of the chatter is clear: in some cases, PiiQ found that spikes in posting correlated directly to the highest volume of trading for those specific stocks over a six-month period, as well as the most dramatic shifts in stock price.

“There is an unusually high level of inauthentic social media behaviour and activity around some of these penny stocks,” says PiiQ’s co-founder and chief technology officer Aaron Barr. “The volume of activity appears to go past mere speculative optimism, with clearly mismatched trade volumes to value.”

How the Twitter penny stock enthusiasts pick their targets remains unclear. Some are tiny shell or defunct companies which have failed to make regulatory filings or which have changed their name, management or core business multiple times over the course of several years. The SEC’s recent clampdown on some of these cases points to instances of more blatant “artificial” promotion.

One person familiar with this trading subculture, who had blown the whistle to the SEC after noticing worrying activity, describes what they understand to be the playbook for the most egregious players whose behaviour has led to the trading suspensions: “They will quietly buy stock and when they have enough, they will pump. Less shares out in the world, stock goes up easier and they dump into the ‘Fomo’ [fear of missing out].”

Other times, these traders push slightly larger stocks, piggybacking on wider market enthusiasm and chatter that also spans large Reddit groups and forums such as Investors Hub.

Multiple people familiar with the workings of some of the social traders told the FT that individuals run exclusive groups on private messaging platforms such as Telegram and Discord, where they begin to generate interest in a chosen ticker.

In some cases, trader mini-celebrities will declare publicly that they are “loading” up on a stock, or push out an “alert”, an endorsement which typically gets retweeted multiple times as new buyers rush to enter the market.

Volatile trading of SpectraScience before SEC suspension
Tip-offs and bots

Much of this behaviour is standard trader discussion and sits in a grey area. Among the most prolific penny stock tweeters is Delarge, whose profile has been active on the platform since September 2019. Like most Twitter day traders, the profile carries a warning: “ALL INFO MY OPINION DO YOUR DD!” — short for due diligence. The trader’s pinned tweet is a picture of a red Tesla bought with money earned from trading.

According to PiiQ, Delarge tweets up to 50 times a day, typically publicising picks to an enthused audience. Given the anonymity of the Twitter account, there is no way of knowing whether Delarge owned stocks before promoting them and there is no evidence of any wrongdoing on Delarge’s part.

A month before Delarge’s February alert, MedX changed control and got its regulatory filings in order, promising investors that it would capitalise on legislative changes to legalise cannabis. The company, which only lists an email address on its website, did not respond to requests for comment.

News of Delarge’s incoming MedX alert seemed to spread in selected private chatrooms run by other traders ahead of time. A screenshot of one private forum, viewed by the FT, showed one trader posting a “confidential” tip-off several hours before Delarge sent out the MedX Twitter alert. “Hopefully this push will give all of us that are stuck in it a big enough boost to get out,” the trader wrote. “You can see it starting to climb right now from some loading.”

In another discussion group on Telegram, dedicated to MedX and seen by the FT, one member, “Small_Time_Tina”, told its 36 members that she “just got a tip that $MEDH [MedX’s “cashtag”, its stock market ticker prefixed with a dollar sign] supposed to get alerted before close today”. She added: “There might be a campaign in the works. Hold your ground. The time is coming!”

When contacted by the FT, Small_Time_Tina says Delarge would typically go into “rooms” on social media and tell “many people” about planned alerts, adding that she did not believe the trader had any connections to the companies. “It is normal for investors to share information,” she says. “That’s why we are on social media in the first place.”

She adds: “Penny stocks for the most part move on hype or momentum. Rarely do they move purely based on performance because a lot of those stocks are in the start-up stage and barely turning a profit.”

Analysis from social media intelligence group Graphika, commissioned by the FT, points to the likely use of fake accounts by Delarge to boost posts. In particular, it identified at least two clusters of hundreds of accounts — including some using stock photos — that had only been recently created before they suddenly began to follow Delarge at the same time in early February.

Many of these appeared “to be co-ordinating for the purpose of amplifying” Delarge’s tweets and “have little online activity besides retweets” of that account, Graphika says. Delarge is also retweeted from many of the most popular accounts in the OTC trading space, the researchers note.

PiiQ found similar traits. “Our research shows smaller networks of social media profiles with historic and familiar reciprocal connections have higher than average volumes of sock puppet accounts inflating engagements and extending reach,” says Barr.

Contacted via Twitter, Delarge denied being involved in manipulating stock prices but declined to respond to specific questions from the FT, on the grounds that the press tended to publish negative articles about the OTC marketplace. “Please if you write anything to keep it positive. im here to help others?.?.?.?sometimes im right,” he wrote.

Regulatory clampdown

Twitter has no explicit policy banning market manipulation. It is difficult for a platform to differentiate a market manipulator versus an enthusiastic trader without getting subpoenas to see their actual holdings. The company allows its users to be pseudonymous rather than tying their profile to any real identity.

Twitter says Delarge’s account is not in violation of its rules at this time. It adds: “Whether it is conversations about sports, entertainment or stocks, we’re focused on ensuring people have access to reliable information from credible sources on Twitter.”

The limited public information that exists about US penny stock companies is funnelled through OTC Markets Group. It collates their regulatory filings and provides pricing and data for trades and serves as a less costly alternative than listing on the NYSE or Nasdaq.

In regulatory terms, it is not an exchange like the NYSE. It is overseen as a broker-dealer by Finra, Wall Street’s self-regulatory body, and is more lightly regulated than a full exchange. The SEC oversees trading of securities and can suspend stocks to protect investors.

MedX Holdings' price and trading increase around Delarge 'alert'
Even so, OTC Markets’s responsibilities include monitoring its 10,000 registered securities for “suspicious activity”. It cannot remove or halt trading in securities but only warn investors of potential dangers.

Among its warnings include a “Jolly Roger” skull and crossbones flag next to a stock that serves as a caveat emptor or “buyer beware” of potentially suspicious activity and lasts for at least 30 days. It has flagged Hometown with a caveat emptor but not MedX, although it warns the latter is “currently undergoing promotional activity”.

Critics accuse OTC Markets of lax oversight, urging it to more closely monitor its companies and their promotion in the social media era.

Some argue their obligations to protect investors are coloured by commercial incentives. Sharp says that OTC Markets has “taken several steps back” from efforts to supervise the market “because they make money off of it.”

The company rejects this claim, saying it makes money through subscriptions from investors rather than trading.

Where there is public interest concern about any company trading on our markets, we issue warnings to ensure investors trading in such securities do so with maximum transparency and disclosure,” says Jason Paltrowitz, executive vice-president of corporate services at OTC Markets Group.

Moreover, it has frequently made requests to the SEC to update its rules around promotion of stocks, combating fraud and investor disclosures for the age of digital media.

Suspect activity

To bolster the enforcement push in late February the SEC suspended 21 stocks whose price had been driven by what it called “suspect social media activity”. Virtually none of the companies had made any filings with the regulator or OTC Markets in more than a year. The SEC acted on many of OTC Markets’ recommendations, sometimes after OTC had issued its own warnings to investors.

Among the suspended stocks was SpectraScience, a Minnesota healthcare company with the cashtag $SCIE. At the end of December, Delarge was “loading” up on the stock almost daily. “When this pops?.?.?.?I’ll be richer!!” the account tweeted.

One example of the risks of the OTC fervour is the case of Hometown International, which owns a single deli in rural New Jersey and only brought in $13,976 in sales in 2020, but has a market capitalisation of about $100m
One example of the risks of the OTC fervour is the case of Hometown International, which owns a single deli in rural New Jersey and only brought in $13,976 in sales in 2020, but has a market capitalisation of about $100m © Mark Vandevelde/FT
A month later, the Delarge account was one of the most popular on Twitter to alert and repeatedly encourage investment in the stock, shortly before its suspension: “If we all only tweet $SCIE and own it?we are all multimillionaires?.?.?.?if we stick to the plan the price can’t go down!!” the account tweeted.

In another tweet, Delarge claimed Spectra had patents for “killing cancer”. In fact, the company did not have a working phone line or website and had not filed quarterly financial results since 2017.

Another OTC stock suspended by the SEC in February for social media-driven manipulation was All Grade Mining, which is listed as a “development-stage company focused on the extraction of iron ore and copper”.

Its chief executive officer is named in regulatory filings as Gary Kouletas. Separately, Kouletas was named — alongside eight others — in a Department of Justice indictment that was unsealed in December for allegedly being involved in a “pump and dump” scheme involving another resources company. Both Spectra and All Grade have been given a caveat emptor flag by OTC Markets. Kouletas did not respond to a request for comment.

In March, the SEC also announced fraud charges and an asset freeze against California-based Andrew Fassari for a pump and dump scheme involving a defunct Nevada company called Arcis Resources Corporation.

According to the SEC’s complaint, shortly after Fassari purchased 41m shares of Arcis in early December he began posting to his 13,000 Twitter followers, falsely claiming that the company was reviving operations and backed by “huge” investors.

Using the handle @OCMillionaire, he also allegedly shared multiple fake emails from the company’s chief executive alongside posts of a flashy black Ferrari. After the stock rocketed up 4,000 per cent, Fassari sold his shares, netting a more than $900,000 profit — all the while telling his followers that he continued to hold.

Fassari’s lawyer, Jessica Munk of Wiechert, Munk & Goldstein, would not comment on the case but says she expects more scrutiny from the SEC in the wake of the GameStop mania. “Individuals will need to be careful how they use these platforms to discuss stocks,” she adds.

@OCMillionaire still remains on Twitter but hasn’t been active since a week before the SEC complaint became public. Despite having 13,400 followers, he only follows 42 accounts himself. Among them: one Alexander Delarge.






https://www.google.com/amp/s/amp.ft.com/content/0ac9ecba-7408-4466-81ed-ae15f6333e36