social media – Compliance Building

Social Media Pump and Dump is Not Illegal (?)

Pump and Dump schemes brought the fiduciary standard to light. In SEC v Capital Gains Research Bureau the US Supreme Court said a pump and dump scheme by an investment adviser violated its fiduciary duty.

More recently, the SEC published an investor alert about Social Media and Investment Fraud. There is a lot of different frauds in there, but one is

Fraudsters may use social media to conduct schemes including:

Pump and dump schemes – pumping up the share price of a company’s stock by making false and misleading statements to create a buying frenzy, and then selling shares at the pumped up price.

A little over a year ago, the US Attorney is the Southern District of Texas thought they had seen a fraudulent social media pump and dump and brought charges against eight social media finance influencers. Edward Constantinescu aka Constantin 38, of Montgomery; Perry “PJ” Matlock, 38, of The Woodlands; John Rybarczyk, 32, of Spring; Dan Knight, 23, of Houston; along with Gary Deel, 28, and Tom Cooperman, 34, both of Beverly Hills, California; Stefan Hrvatin, 35, of Miami, Florida; and Mitchell Hennessey, 23, of Hoboken, New Jersey were accused of “pumping” the prices of securities by posting false and misleading information, and concealing their intent to later “dump” their securities after the prices rose. It was lucrative. The US attorney claimed the eight had illegally made more than $114 million.

Last week a federal judge in Texas said this wasn’t illegal and dismissed the criminal charges against the eight. Matt Levine thinks it’s a “weird opinion.” I agree.

I think what the order is trying to get at is that the eight had no obligations to the companies it was pumping, no obligations to their follower on social media, and since they were nota regulated entity, had no obligation to the financial markets.

Assuming this holds up to appeal, if there is one, pump and dump by influencers is not illegal, as long as as they are outside the finance industry. Or hired by the finance industry.

An alternative take on social media influencers is the action by FINRA against M1 Finance for social media posts made by influencers on the firm’s behalf that were not fair or balanced, or contained exaggerated, unwarranted, promissory or misleading claims.

M1 Finance paid social media influencers to post content promoting the firm, and instructed the influencers to include a unique hyperlink to the firm’s website that potential new customers could use to open and fund an M1 Finance brokerage account. …

FINRA found that M1 violated FINRA Rule Rule 2210 (Communications with the Public) and Rule 2010 (Standards of Commercial Honor and Principles of Trade). In addition, M1 Finance did not review or approve the content in its influencers’ posts prior to use or retain those communications. M1 Finance also failed to have a reasonable system, including written procedures, for supervising the communications that the firm’s influencers made on its behalf. These were in violation of FINRA Rules 2210, 2010, 3110 (Supervision) and 4511 (General Requirements-Books and Records).

The firm got in trouble, but the social media influencers seem outside the reach of FINRA.

Sources:

The SEC Wants To Know About Your Social Media

The Securities Exchange Commission published an update to Form ADV last week. I’m going to devote this week’s stories to some of the new requirements. Today, I’m looking at reporting of social media.

Item 1.I of Part 1A of Form ADV currently requires registered investment advisers to list their websites. The SEC is casting a wider net.

Instead of just websites, the SEC is requiring the listing of accounts on social media platforms such as Twitter, Facebook and LinkedIn. We will be required to include the address of the registered adviser’s social media pages. (see page 34 of the release)

There were comments to the proposed release about the scope of this listing requirement. It’s limited to accounts on social media platforms where the adviser controls the content. You are not required to disclose information on employee social media accounts. It’s also limited to publicly available social media platforms.

Twitter, Instagram, and Facebook all fall clearly into this requirement.

LinkedIn is little fuzzy. A company can update the company page on LinkedIn. But many firms just have the default company page on LinkedIn. A firm can control the content, to some extent, but may not have exercised any control. That being said, those pages that have not been edited don’t provide much information. It would be unlikely to be of interest to the SEC. But if you are publishing information, then clearly the SEC is going to take a look at when it comes to exam time.

I do have a question about dormant accounts. I know many firms signed up for an account to control a particular account name, without intending to actually publish information. I remember back in the early days of Twitter, Lexis Nexis ignored the platform. Some yahoos grabbed the handle and started publishing strange stuff on the @LexisNexis twitter account. Lexis would eventually get it back because it was its trade name. I think you would need to list these unused accounts.

A hitch will be updating this social media information. If you add a new account or create an account on a new platform you will need to file an update to Form ADV, just as you would if you created a new website.

Sources:

Form ADV and Investment Adviser Act Rules Release IA-4509 (.pdf)