SEC Charges Eight Social Media Influencers: Takeaways for Companies and Individuals
On December 14, 2022, the Securities and Exchange Commission (“SEC” or the “Commission”) announced charges against eight social media influencers in a $100 million securities fraud scheme, alleging that they manipulated the market through an arrangement of coordinated misrepresentations to their thousands of followers on Twitter and Discord (an instant-messaging social platform).
The defendants in this case are all members of a thriving subcommunity on social media and other platforms focused on finance and the stock market. Defendants Perry Matlock, Edward Constantin and John Rybarcyzk run the Discord stock trading chatrooms Atlas Trading, SMALL CAPS trading floor, and Sapphire Trading in which various defendants posted trading advice to followers. Defendants Daniel Knight and Mitchell Hennessey host the podcast “Pennies: Going in Raw” which bills itself as the #1 Stock Market Podcast in America with over 2.3 million downloads. And all defendants have garnered huge numbers of followers on “FinTwit,” the subcommunity of Twitter dedicated to finance and the stock market. The defendants’ Tweets often featured market advice or pictures of their extravagant lifestyle, promising followers they too could reap the same rewards. Together, and across all platforms, the defendants amassed hundreds of thousands of followers.
According to the SEC, the defendants used this following to engage in extensive market manipulation known as “scalping”: first, by identifying stocks ripe for manipulation and buying up shares of that security; then promoting the stock to followers across various platforms to generate demand and inflate share price — including by setting price targets, teasing breaking news about the company, or claiming an intention to buy and hold shares; and finally, after drumming up demand, selling their shares into the demand they’d created, usually for a significant profit. In furtherance of this scheme, the Defendants frequently misled their followers — claiming they too had suffered losses or been surprised by market turns in order to maintain trust.
The SEC’s complaint — filed in the Southern District of Texas — asserts defendants violated (or in the case of Daniel Knight, aided and abetted violations of) the anti-fraud provisions of the Securities Act of 1933 and Securities Exchange Act of 1934 and seeks permanent injunctions, disgorgement, prejudgment interest, and civil penalties against each defendant. Additionally, criminal charges were filed in tandem by the Department of Justice’s Fraud Section and the U.S. Attorney’s Office for the Southern District of Texas.
Takeaways From This Latest Enforcement Action
This action is yet another reminder that the Commission can and will use statements made via social media to open investigations and support charges of potential violations of the federal securities laws. Additionally, it’s clear from the complaint, which references texts and a broad array of social media postings, including “deleted old tweets and Discord chats” that the Commission used a broad array of SEC resources, including market intelligence, to build their case and support their allegations. Even individuals who do not work for a specific public company, and aren’t associated with a registered entity such as a broker-dealer, can commit securities fraud through statements made on social media. And perhaps just as importantly, this case shows the SEC can find them.
For public companies and their executives, this is a general reminder that public statements to the market aren’t limited to SEC filings, earnings calls, and press releases. More than ever, the SEC is monitoring statements made to the investing public through social media and alternative platforms. Companies should review and amend their disclosure controls and procedures to ensure they include review of public internet and social media posts made through official company channels as well as those of key executives who could be seen as speaking on behalf of the company. If they will be using social media to speak to the investors, companies must both disclose to investors in their official SEC filings that they will be using their identified social media channels to disclose material information and ensure that any statements the company makes are both accurate and complete.
Social media can be an exciting way to engage with current and potential investors, particularly with retail investors, and many companies have benefitted greatly from the increased attention social media can bring, but companies must work with their counsel and Boards of Directors to ensure their use of social media won’t bring the SEC to their door.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.