Fraudulent messaging that affects retail investment decisions come in many forms, but the applicable regulatory statutes apply across all circumstances.
That includes the use of social media.
On August 7, 2018, Elon Musk made the decision to publicly announce on Twitter, “Am considering taking Tesla private at $420. Funding secured.”
His stated price represented a significantly lower value than the current market price of Tesla stock, which alarmed many investors and tainted investor decision-making regarding the purchase or sale of Tesla stock.
The SEC says the statement regarding “funding secured” represented a fraudulent act since it’s believed that Musk knew the necessary transactions were still far from certain.
The SEC has also filed charges against Tesla Motors regarding a lack of oversight capabilities.
In 2013, the company clearly notified the market that it would be using Musk’s Twitter account to communicate with investors.
The SEC’s complaint against Tesla stems from a lack of controls in place to ensure the content of Musk’s tweets met SEC disclosure standards and a lack of processes to reasonably ensure that the statements themselves within the tweets were true.
The full SEC Press Release is available here — read more.
The Consequences of Lack of Oversight Can Be Severe
As the result of “misleading” social media statements, Tesla stock jumped approximately 7 percent on that day specifically — the statements also led to substantial disruption of the markets in the following days.
Both Musk and Tesla Motors have agreed to settle the SEC’s charges without accepting or denying wrongdoing, with the settlement package to include the following conditions:
- Musk will step down as Tesla’s chairman, ineligible to be re-elected for 3 years
- Tesla will appoint 2 new independent directors to its board
- Tesla will establish a new committee in charge of controls and procedures to oversee Musk’s communications
- Musk and Tesla will each pay $20 million in penalties
- The $40 million in total penalties will be distributed to harmed investors, under court supervision
Shareholders have also filed lawsuits charging that Musk made the claim with the intent to manipulate the stock price.
RIA’s Must Monitor Social Media Use
At first glance, Musk’s use of Twitter to communicate material information to the public would seem an extreme example not necessarily applicable to RIAs. However, it does raise an important issue around social media use.
This case serves as a reminder that RIAs need to take care to follow their firm’s policies and procedures when disseminating information over social media, and they must also be sure that they have good controls in place to monitor the social media use by those individuals they are responsible for supervising.
Should any marketing information (e.g. performance metrics) be publicized over social media, firms must apply adequate review procedures to ensure that the content and messaging are authorized and that they meet firm policies and procedures and comply with SEC regulations.
Preventing Fraud Via Social Media: Effective Policies and Procedures Are Vital
The use of social media to disseminate marketing materials and other information can be difficult to monitor, and if RIAs or supervised persons use social media to conduct business, it can implicate their firms in compliance violations and subject them to possible enforcement.
Core Compliance & Legal Services, Inc., can help registered investment advisers and their firms with creating or reviewing oversight policies and procedures designed to monitor and control the use of social media for business purposes, mitigate risk, and be sure all necessary disclosure obligations are met — contact us for any assistance you may require.