The US Securities and Exchange Commission (SEC) is taking legal action against 27 individuals and several companies over hundreds of fake “impartial” blog posts that appeared on well-known financial websites.

In many cases- about 250 articles- the bloggers were secretly paid to write bullish articles to promote mainly small biotech stocks such as Lion Biopharma (LBIO), Arch Therapeutics (ARTH), Galena Biopharma (GALE) and Oncosec Medical (ONCS).

“This is different from the fraud cases that you usually see us bring,” said Stephanie Avakian, acting director of the SEC enforcement division. “Here, we allege that the fraud was in presenting the analysis as impartial,” she said. “It was bought and paid for.”

The SEC is cracking down on what’s called “pump and dump” stock schemes where companies buy shares very cheaply, flood the market with positive stock recommendations and then dump the stocks once prices rise on the good news.

From the SEC filing we can see that the accused include Hollywood actress Milla Bjorn (who runs Lidingo Holdings LLC) as well as bloggers such as VFC’s Stock House, Phil Lassiter and Stock Investor. Writers used multiple names and some even invented fake investing experience. If we look up VFC’s Stock House on TipRanks we can see that the blogger has a particularly poor rating:

Another blogger we came across, who uses the pseudonym Glen S. Woods, had a strong rating on TipRanks when his investments were measured on a one-year basis. However, if the same blogger’s performance is measured on a two-year basis, his success rate and average return drop dramatically to a success rate of only 33% and an average return of -14.4%:

By clicking on the stock tickers and delving into Woods’ stock coverage we can see, for example, that Puma Biotechnology (PBYI) gives Woods a 100% success rate and 57.8% average return on a one-year basis.

But if we change the measurement basis to two years then the same rating gives Woods a very poor performance score with a 0% success rate and -70.8% average return:

This shows just how volatile small cap stocks can be, especially as they can react quickly to positive or negative news. We can also see this from the TipRanks graph below which reveals how positive news can lead to plus 15% returns for small cap stocks over a two-month period (vs about 5% for S&P 500 stocks).

Conflicts of interest

As we know, it’s not just bloggers whose impartiality can be compromised. Analysts often face a conflict of interest between keeping corporate relationships strong and writing reports that really reflect their analysis of a company. We covered that in this blog post when we looked at the role of the sell-side analyst in today’s markets.

But while investors are aware of analyst’s ongoing dilemma, there is an assumption that bloggers are not subject to this same corporate conflict of interest. Will this impression now be tainted by these allegations?