Loose Lips Sink Stocks

The whisper numbers and inside information that inevitably leak have the potential to move markets in an instant, and in many cases the information is true. Increasingly, however, we are seeing a rash of rumors that often have the power to temporarily (or even permanently) hit a company’s stock below the belt. Here are a few of the strangest and most notorious rumors that have misled investors, and we look forward to your comments and links to some of the many others that have been heard and acted upon over the years.

The King Is Dying (Steve Jobs)

Steve Jobs once referred to Apple as “A Ship That Leaks From the Top,” but this time the “leak” came from somewhere else entirely. Certainly a lot of good can come from the witness in the street and the mad scramble among journalists to break a story first, but when a reporter (who was actually a 4chan prankster) “broke” the news of Steve Jobs’s heart attack on October 3rd, Apple stockholders felt a panic nearly on par with the “Enemy Planes Spotted Off California Coast” headline that popped up in World War II. Luckily for everyone, the story turned out to be false (and of course back in the day, the enemy planes weren’t there either). Apple’s stock price took a 10% hit in ten minutes before recovering, which was enough time for someone to make a lot of money, and for some panic sellers to lose big as well. In the fallout after, many people suggested that CNN’s iReport do some basic screening before something is published as “news,” as this can help prevent future scam efforts that piggyback off of a mainstream news source’s credibility.

Burned By The Past (United)

It’s rough enough for a company to battle its way through bankruptcy once, but when a worker at a stock advisory firm recently found a 2002 story that appeared to be current, United Airlines stock plummeted 75% for a brief window of time. It quickly rebounded, and finger-pointing ensued among all parties involved. Bottom line, the employee should have done a bit of fact-checking to get his bearings right before adding the article to a Bloomberg news feed, which led to the rapid sell-off of the stock. Of course, news sites can do their part and clearly date their articles for the good old web crawlers sent out by search engines so that we don’t freak out about an attack on Pearl Harbor.

The Bear Raid

Far more damaging to companies, and even entire industries, are the sustained attacks mounted by short-sellers. In a recent study by two finance experts, they argue that, while many of these attacks can be counteracted by bullish investors who see the lower price as a bargain, some companies are hit at crucial times and are sent spiraling. If a company is somewhat uncertain about the future of a potential new product or spending initiative that is announced that could potentially improve earnings, they are particularly susceptible to this type of attack as the sell-off could prompt them to believe that the market was simply responding negatively to the actual product or initiative.

Caught While You’re Sleeping (ZZZZ Best and Barry Minkow)

The phenomenon of stock manipulation, rumors and outright fraud is not new, of course, and one of the most notorious past examples is ZZZZ Best, the company that Barry Minkow took public in 1986 which was built on an entire foundation of lies. For awhile, no one even noticed that he was manufacturing phony invoices and receipts, and he was “savvy” enough to even perpetuate his scheme by spending $4 million on his office space. He ended up serving 25 years in prison for fraud after losing investors over $100 million. He was only 18 at the time the company went public, so if you can take any lesson from this, it is this: no matter how “hot” the stock, don’t bet it all, especially if it is run by a high school kid. Looking back at Enron, Worldcom, and Tyco, and certainly a few big surprise collapses that could come at any time, you should remember to take universal acclaim for any company with a grain of salt and diversify your portfolio.