SEC Charges Eight Social Media Influencers: Takeaways for Companies and Individuals | Vinson & Elkins LLP
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 sub-community 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 chat rooms 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 ranks as the #1 stock market podcast in America with over 2.3 million downloads. And all defendants gained large numbers of followers on “FinTwit,” the subcommunity of Twitter dedicated to finance and the stock market. The defendants’ tweets often featured marketing advice or photos of their lavish lifestyles, promising followers that they too could reap the same rewards. Together, and across all platforms, the defendants have amassed hundreds of thousands of followers.
According to the SEC, the defendants used the 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 to promote 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 asserting an intention to buy and hold shares; and finally, having taken up the demand, sell their shares in the demand they have created, usually for a substantial profit. In furtherance of this scheme, the Defendants regularly misled their followers – claiming that they too suffered losses or were surprised by market turns in order to maintain confidence.
The SEC’s complaint – filed in the Southern District of Texas – alleges that the defendants violated (or in the case of Daniel Knight, aided and abetted) the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. assisted) orders, disgorgement, prejudgment interest, and civil penalties against each defendant. In addition, criminal charges were filed jointly by the Department of Justice’s Fraud Division and the U.S. Attorney’s Office for the Southern District of Texas.
Takeaways from this latest enforcement action
This action is another reminder that the Commission can and will use statements made via social media to open investigations and support charges of potential violations of federal securities laws. Additionally, it is clear from the complaint, which refers to texts and a wide variety of social media posts, including “deleted old tweets and Discord chats,” that the Commission used a wide variety of SEC resources, including market intelligence, to conduct their case and support to build their claims. Even individuals who do not work for a specific public company, and are not 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 common reminder that public statements to the market are not 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 that they include review of public Internet and social media posts made through official company channels, as well as those of key executives who can be seen to be speaking on behalf of the company. If they are going to use social media to talk to the investors, companies must both disclose to investors in their official SEC filings that they will use their identified social media channels to disclose material information and ensure that any statements made by the company are both accurate and complete.
Social media can be an exciting way to connect with current and potential investors, especially retail investors, and many companies have benefited greatly from the increased attention social media can bring, but companies must work with their boards and boards to ensuring their use of social media will not bring the SEC to their door.