"Apparently I have a twitter impersonator," said the hedge fund manager, adding that he had no plans "to tweet about stocks."
What set off Greenlight Capital founder Mr Einhorn was a post by a since-suspended Twitter account associated with username 'Greenlightcap' that read, "The $HLF tug of war will in the end come down to who has more money to play with. I wouldn't want to be in Bill's shoes right now #TeamIcahn."
That may have misled people into thinking that Mr Einhorn - whose infrequent tweets under username 'Davidein' tend to be about poker - was picking sides in the battle between two other big-name investors - Carl Icahn and Bill Ackman - who have opposing positions in Herbalife.
Mr Einhorn isn't the only short-seller who has been impersonated on Twitter, which has become an important source of information for many investors. In late January, shares of Audience Inc and Sarepta Therapeutics Inc plunged following tweets that were purported to be from short-selling researchers.
"Twitter pump and dump schemes are obviously something for the market to be concerned about, even if they are just a new way for people to do schemes that have been done forever," said Keith McCullough, chief executive officer at Hedgeye Risk Management in New Haven, Connecticut.
Mr McCullough uses Twitter and has more than 22,000 followers.
In such hoaxes, anonymous users set up accounts with names that sound like prominent market players, issue negative commentary, and spark massive declines. The selling that follows shows how the rapid spread of information on social media can result in volatile trading, and is a warning to investors who trade on news before fully verifying the source.
The FBI monitors Facebook and Twitter, and told Reuters in November that social media will be a big part of securities fraud. The US Securities and Exchange Commission's website has a warning that swindlers can use social media "to appear legitimate, to hide behind anonymity, and to reach many people at low cost."
The Financial Industry Regulatory Authority has issued social media guidelines to broker-dealers, requiring that they keep records of usage.
In January 2012, the SEC charged an advisor with attempting to sell fictitious securities through LinkedIn Corp, an online social network catering to professionals.
"As some violators have learned the hard way, using social media to defraud investors leaves an electronic trail of footprints for our investigators to follow," said John Nester, a spokesman for the SEC in Washington, DC.
Looking for information
Investors can minimize the risk of being conned by only trusting the Twitter accounts of established users and independently researching any tip or rumor.
In addition to Twitter, another popular site for traders is Stocktwits.com, where users send messages almost exclusively about stocks. These sites in some ways are more sophisticated versions of on-line chat rooms that were popular during the dot-com boom. Rumors in those rooms flowed freely, and became a breeding ground for untrustworthy information.
Twitter and StockTwits have stronger filters - the Einhorn impersonator's account was suspended shortly after the misleading post - but the spigot of false information cannot be shut entirely.
StockTwits doesn't allow discussions of penny stocks "since those are the ones that are the most vulnerable to being pushed around," said Howard Lindzon, the company's San Diego-based chief executive.
Twitter, which did not respond to requests for comment, verifies the accounts of public figures, focusing on "highly sought users in music, acting, fashion, government, politics, religion, journalism, media, advertising, business, and other key interest areas," according to its website.
Analytic firms are also emerging to help traders navigate social media.
The activity in audio chip maker Audience, which has a market value of $275 million, serves as a prime example of the peril of following sources that are not what they seem - and is also where social media scanners see an opportunity.
The initial fake tweet was posted at 8:44 a.m. New York time on January 29, by someone pretending to be short-seller Carson Block of Muddy Waters. Mr Block is best known for exposing accounting problems and taking short positions in a series of Chinese companies listed in the United States.
The share declines did not accelerate until after 2 p.m., when trading picked up, and more than 300,000 shares traded in a two-minute period, far exceeding the stock's daily average volume of about 186,000 shares.
Dataminr, a New York-based social media analytics firm that monitors Twitter for stock activity, said it sent an alert on the fake tweet at 12:28 p.m. The firm "was able to warn its clients of a market rumor far in advance of the market-movement, along with providing context on the veracity of the message," said Dataminr chief executive Ted Bailey.
While Dataminr declined to provide the actual language of the alert, it said the alert conveyed skepticism about the tweet on Audience, noting the account's past activity and its "demonstrated domain expertise across the social graph."
Overall, analytic firms said scanning programs were not advanced enough to be fully automated yet.
"We're a strong believer in the human element in this," said Emmett Kilduff, CEO of Dublin-based Eagle Intel, a social media analytics firm that has alerts evaluated by a research team composed of former portfolio managers and analysts.
Another analytics firm, London-based Knowsis, filters its alerts through market professionals. CEO Oli Freeling-Wilkinson said the firm looks at who is sending information, taking into account the person's location, whether they are an established market professional, and how shares react.
No system is fail proof, and big share reactions will still likely occur from time to time, goosed initially by Twitter but later as investors react to price moves. It is this aspect that will keep people on their toes.
"There's an impulse, when you see a name of yours moving like this, to shoot first and ask questions later and find out why it is moving," said Sam Ginzburg, head of trading at First New York in New York.
Copyright @ Thomson Reuters 2013