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:
- Social Media and Investment Fraud – Investor Alert
- Pump and Dumps Are Legal Now by Matt Levine
- Securities Fraud Charges Dropped Against Social Influencers Accused of Stock-Manipulation Scheme by Todd Spangler
- Order in Motion to Dismiss US v Constantinescu March 20, 2024
- Eight men indicted for $114 million securities fraud scheme orchestrated through social media
- FINRA Fines M1 Finance $850,000 for Violations Regarding Use of Social Media Influencer Program
- SEC v Capital Gains Research Bureau 375 US 180 (1963)
