In December 2022, the social media world was stunned to learn that federal prosecutors and the Securities and Exchange Commission (SEC) were filing civil and criminal charges against eight social media influencers. According to the complaints, the prosecutors and SEC accuse the influencers of using their social media visibility to manipulate stock prices—a $114 million fraud scheme. As we will discuss below, the case highlights the line between legitimate advice to investors and illegality, whether it’s dispensed online for the public or in more traditional forms of investor communications.
A Pump-And-Dump Reimagined Is Still A Pump-And-Dump
In the 2022 case, the defendants allegedly ran a “pump and dump” scheme. According to the criminal indictment, the defendants purchased stocks at a low value, then posted positive but unfounded messages about them on social media. They disseminated false claims about how long they intended to hold onto the securities, the amount of due diligence they’d conducted relating to the securities’ values, and how much they believed the securities would increase in value. It worked. The stock prices rose. Then, the defendants secretly sold their shares, profiting at least $114 million from their manipulations.
Using Social Media To Accelerate The Securities Fraud Scheme
While the overall structure of the alleged scheme is a classic pump and dump, the fact they were doing this on social media adds a couple of twists to an otherwise familiar fraud.
The defendants each had hundreds of thousands of followers on Twitter. A couple had podcasts relating to financial advice. Thus they could execute the entire process of buying a stock, pumping its value—by convincing their followers to buy shares—and selling their shares in hours. On at least two occasions, they posted buy recommendations and liquidated their holdings less than ten minutes after they’d posted the recommendation.
Their social media reach allowed the defendants to execute multiple instances of fraud in a comparatively short period.
The Influencer Aspect—Less And More Important Than at First Glance
While social media influencers aren’t the only analysts making public recommendations on stock purchases, this is not simply a case where an advisor profited from a recommendation they had shared publicly.
What made the defendants’ actions illegal was that they willfully concealed and misled followers about their positions for their financial gain when they knew their actions could influence stock prices.
As laid out in the indictment, the defendants even repeatedly addressed concerns that these were pump and dumps on social media. They promised followers they were in the buys together and were not “scalping” stocks for short-term profits.
But privately, the defendants acknowledged their “market manipulation” (they used those very words) and congratulated each other on robbing “idiots of their money.” They discussed ways to be more persuasive, “less obvious,” and evade criminal and civil sanctions.
That’s the key lesson here for anyone considering becoming an SEC whistleblower but wondering if the activity in question warrants a call to the SEC. These are some questions to be asking:
- Are the individuals who recommend purchases intentionally deceiving others about their current holdings or plans for purchase?
- Are they recommending stocks that, under normal circumstances, would be unlikely to be a focus of recommendation or unlikely to see any large changes in valuation?
- Are they willfully misleading investors on relevant facts, such as exaggerating the amount of due diligence they have conducted to make their recommendations?
- Are they omitting material facts that could impact investors’ decisions (e.g., pressuring investors to buy stocks at a particular time without explaining why, or claiming to keep stocks they’re intending to sell?)
- Are they secretly coordinating their actions with others?
If the answer is “yes,” to any of these questions, the advisors are likely committing securities fraud.
In the current indictment, the defendants face charges of conspiracy to commit a crime. This is a reminder that whistleblowers don’t need to wait for fraudsters to have successfully manipulated a stock before contacting the SEC. If the advisors have taken active steps to manipulate a stock (e.g., planning and coordinating their actions), that’s a violation of the law, and it’s enough to alert the SEC.
Additionally, one defendant is alleged to have committed wire fraud—having transferred the profits of their illegal plan to buy property. So again, whistleblowers should be looking for transactions that could reveal related criminal activity.
If you’re considering becoming a whistleblower, Silver Law Group and the Law Firm of David Chase have created a strategic alliance to represent SEC whistleblowers like you.
With years of experience representing SEC whistleblowers, and an SEC Enforcement lawyer on our team, we have an in-depth understanding of the SEC Whistleblower Program. We understand what the SEC is looking for. We can help you submit a tip that is more likely to result in a successful covered action. We are here to help whistleblowers maximize their opportunity to receive a financial bounty. For a free, confidential consultation, contact us by email or call us today at (800) 975-4345.