Social media’s ability to ensnare investors has been highlighted by claims of a pump and dump scheme after a small Australian mining company’s shares raced from 34 cents to 95 cents in just two months — and then collapsed.

At the centre of the accusations are traders using pseudonyms to anonymously swap tips, scuttlebutt, opinions, and sometimes baseless rumours in an online forum.

The target of the hype and misinformation was Cleveland Mining, which was a $20 million company before the trading frenzy in March and April 2012. Its shares last traded at 7 cents before being voluntarily suspended from trading last October.

The rise and fall of Cleveland is now the subject of complaints to ASIC and the Financial Ombudsman, a Supreme Court writ, and a potential class action involving hundreds of investors.

One investor reportedly lost $4 million. Cleveland’s managing director, David Mendelawitz, lost about $30 million of his own money and is scrambling to save the company.

While Cleveland’s corporate adviser, Macquarie, is the lightning rod for investors’ anger and legal action, social media was at the heart of the storm. There is no suggestion that Macquarie or its advisers were involved with the social media campaign.

In the midst of the frenzy, one frequent spruiker of Cleveland, a user who called himself Troutfish007, posted on Hot Copper, a forum for traders: “Still plenty of upside .. I’m hoping for a retrace to buy more before an announcement sends this through the roof.”

In another post, he said: “Any additional news and the magical $1 mark … will be seriously tested. Happy holding.”

Unfortunately, the “magical $1 mark” was never reached.

Investors in other companies also have been hurt elsewhere on social media.

Several ASX-listed companies, including David Jones and Whitehaven Coal, have suffered significant drops in their stock prices at various times due to market rumours spreading over Twitter. Like Hot Copper and other social channels, spruikers and trolls alike can hide behind pseudonyms on Twitter.

But there is a way for investors to use social media safely.

That’s why the New York Stock Exchange and the Nasdaq support companies listing on their boards with social media campaigns.

That’s why 59% of institutional investors read company blogs and 29% of them have followed up investment leads after reading posts on Twitter, according to research from the Brunswick Group.

In this age of fake news, the key for investors to use social media safely is authority. Instead of relying on random anonymous individuals, they should rely on authoritative sources.

For example, when iron ore shipments from Port Hedland are suspending during a cyclone, investors will know as soon as the cyclone has passed and the port has reopened because there will be tweets from the Pilbara Ports Authority, the Bureau of Meteorology and ABC reporters on the ground among others.

When Telstra declared an increased dividend last financial year, a wave of posts from media organisations and investors of all types hit social media.

There wasn’t just a lone voice in the wilderness. There was a deafening thunder of response. With 500 million tweets a day, lone voices on Twitter get drowned out.

This creates an opportunity for companies to become trusted voices that investors turn to. By attracting followers, companies can create communities of investors who opt in for their news.

Australia has some of the world’s most rigorous compliance rules and the ASX requires companies to correct any information — even on social media — that can result in a false market. This means investors can have faith in company posts.

With social media, companies can keep shareholders informed and attract new shareholders by amplifying their ASX announcements.

A study of 3,516 ASX announcements by Victoria University’s Maria Prokofieva showed that smaller companies in particular — the ones that are less visible to investors because they have less press and broker coverage — benefit most by using Twitter to engage investors.

When Prokofieva released her results earlier this year, she pointed out that individual investors were limited in time and resources and unable to track all securities. This mean share prices did not reflect all available information.

“So companies that put extra effort to reach their investors are rewarded,” she said.

“They are able to grab the investors’ attention and lead them closer to the decision to invest.”

That is why, Ms Prokofieva said, corporate information sent out on social media could unintentionally influence investor decisions and stock prices in an unequal way.

With increasing numbers of people getting their news through social media and social media accelerating the speed that information is disseminated, investors and companies have lessons to learn — and to learn fast.

The lessons are clear. Investors should look for authoritative sources and companies should position themselves as authoritative sources.

Investors that fail to learn their lesson are at risk of falling victim to the next scammer harnessing the anonymity of social media; companies that fail to learn their lesson are allowing others to dictate how the market sees them.

(David Coe is managing editor of Investor Torque, a social media specialist)

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