Information: Fraud and Manipulation Attempt

The direct placing of order created a feeling of security and control over the result of transaction, and the large quantity of information related to investment, such as investment ideas or advices. However, it became difficult to distinguish between correct and valuable information and the bad information because of the high volatility of the advices due of the large number of sources, in addition to the fraud and manipulation attempt.

“Manipulation is one of the important issues in securities markets because manipulative actions send false signals to investors and make them buy or sell securities they otherwise would not buy or sell” (Predicting financial information manipulation by using statistical methods and neutral network Ramazan AKTAŞ, Ali ALP, M.Mete DOĞANAY)

Since the apparition of the first Stock Exchange in Amsterdam during the seventeen-century, brokers discovered a good method to destabilize the stock market by manipulate the investors. The goal of that was to take advantage of a massive selloff leading to drop the prices in order to buy back at lower levels. This manipulation of stock prices increases by spreading rumors about firms, banks and economies.

Amsterdam Stock Exchange 1602

One very popular example has occurred in 1815 during the battle of Waterloo between the Duke of Wellington and Napoleon of France. The London financier Nathan Rothschild, because of his powerful network, was able to obtain the information that the Duke has defeated Napoleon during this battle before everyone else. However, he took advantage from being the only one in England to have this valuable information and spread the rumor that Napoleon was glorious. Given his authority in the British financial market, Rothschild created with his wrong information a massive drop in British government bond prices and he took advantage of lower prices to buy up the entire market in government bounds. With this manipulation act, Nathan Rothschild became the dominant holder of England’s debt.

    

 Waterloo battle 1815 

More recently, on April 5 2012, Faruqi & Faruqi, LLP, a leading national securities law firm, is investigating potential securities fraud at Chelsea Therapeutics International, Ltd.


Chelsea Therapeutics International, fraud accusation (Article)
Chelsea Therapeutics (Nasdaq:CHTP - News) is a biopharmaceutical development company that acquires and develops innovative products for the treatment of a variety of human diseases, including central nervous system, rheumatoid arthritis, psoriasis and other inflammatory diseases. Founded in 2004 around its library of unique anti-inflammatory and autoimmune technology, Chelsea has further expanded its product development portfolio with early and late stage candidates that leverage the company's development expertise and accelerate the company's drug commercialization efforts (Yahoo Finance).

Faruqui & Faruqi LLP is aqusing Chelsea Therapeutics of violating federal law. In fact Chelsea Therapeutics has done an information manipulation by hiding key information on its company. The company was waiting for an approval from the FDA on March 28^th for one of the drug that Chelsea wanted to introduce to the market. The company hided the fact that the drug is more likely to be rejected and also the drug was no meeting the standards of safety.

According to this information, many blogs, financial reviews were advertising the likeliness that the drug is going to be approved from the FDA on the scheduled date. On Minyaville.com, a financial online news provider, for example was confirming with 61% probability that the drug would be accepted "Two other companies Affymax (AFFY) and Chelsea Therapeutics (CHTP) are expecting drug-approval decisions by the FDA today and tomorrow"

Minyanville.com Article (Article)

Many investors have followed the rumors, what made the stock bullish to more than 15% the day before the FDA decision. Finally on March 28^th 2008, the FDA rejected Chelsea Therapeutics request for approving its new drug and the stock went down more than 30%.

This chart illustrate the quality of CHTP's shares traded (green columns), with correlation with news' released (grey columns) and the stock price (green line).Prior the FDA decision on March 27th and 28th informations have been released, a large number of shares have been traded (6,239,821 shares on March 28th), which drives the stock price to $3.67 (15%). After FDA rejection on March 28 night, about 9 million shares has been traded on a movement of panic and drove the shares down 30%.

By facilitating the access to information, Internet has increased the power of the people trying to manipulate the market.

To read more about the issue:
 Financial information manipulation (Research Paper) .pdf