In the 90 years since the passage of the Securities Exchange Act, the number of ways market participants can publicly disseminate statements to investors has skyrocketed. Yet no regulator, legislator, or judge has answered a fundamental question: Should the law distinguish between a company’s statements in a tweet and in a press release? In a new article, I present an empirical analysis of 2022 10b-5 class action lawsuits and 10b-5 enforcement actions by the SEC and find that social media statements are increasingly the basis for fraud litigation. I argue, though, that there are downsides to this development and that some level of socially acceptable securities fraud should be tolerated in an information society.
In 2022, posts on X, formerly known as Twitter, were cited as containing false statements in 13 investor class actions under Rule 10b-5. One of these cases has survived a motion to dismiss based on a tweeted emoji being actionable. What’s more, two former CEOs await sentencing for securities fraud involving false tweets. In a way, social media has pushed discourse into a realm beyond literal truth, yet securities fraud polices investor speech and issuer speech no matter where it occurs, as if the speech had been vetted and analyzed beforehand.
The ways issuers and officers communicate with the wider public, and buyers and sellers of securities communicate with each other are almost too long to list: social media such as TikTok, Instagram, Twitter, Discord, and Facebook; investor message boards such as InvestorHub, Motley Fool Community, r/wallstreetbets and Seeking Alpha; company websites; YouTube; earnings calls; webinars; investor and industry conferences; and of course, SEC filings. Some of these communications are scripted, others are vetted by legal counsel, and still others are crafted with cautionary language that insulates otherwise rosy forward-looking statements from liability. Many, however, are extemporaneous, unvetted, and uncrafted. Yet all have been the basis of private investor litigation, civil enforcement, and criminal enforcement. Issuers and their officers who engage with stakeholders via social media may be unwittingly creating substantial litigation risk for their corporations.
The Twitter trial of the century between Tesla investors and Elon Musk garnered substantial attention with scholars and pundits, particularly when the securities fraud case, centered on two tweets, ended in a jury verdict. Though the verdict form does not offer much insight into which elements the jury found missing in plaintiffs’ case, the judge held that reasonable jurors could have found either that the tweets were not material (or materially false) or that plaintiffs were not entitled to the fraud-on-the-market presumption of reliance because the statements were not material. Though not discussed by the court, Musk testified that “everyone on Twitter understands” that tweets are not the same as press releases and SEC filings because tweets contain a limited number of characters and so can be “truthful” but not “comprehensive.”
The Musk suit, however, is not the only securities fraud case involving social media. In United States v. Schena and United States v. Milton, two different CEOs were convicted of criminal securities fraud based on tweets, making it clear that courts are treating these marketplace statements just like formal corporate statements. When asked by jurors whether “publicly traded companies [are] required to be truthful on all forms of communication[s, e.g.] press release, email tweets” and whether “the bar [is] lower for one form of communication (e.g. tweet) vs another form (e.g. press release or email),” the court in U.S. v. Schena read to them the testimony of a FINRA attorney, who said federal securities law “applies to all communications … anything that comes from a company … [including] press releases, emails, postings, that type of stuff.” If a jury senses that there should be a distinction between types of issuer speech, then it seems logical that the “reasonable investor” would also make that distinction. A reasonable investor might not think certain types of speech are material, given the form they take. Alternatively, a reasonable investor might not think that speech has a sufficient connection to the purchase and sale of a security.
My analysis finds that, though SEC filings, press releases, earnings calls, and presentations are more commonly cited in securities fraud allegations, social media statements are the basis of some lawsuits and prosecutions. In a few cases, the social media statement takes center stage; in other cases, allegedly false statements are repeated in multiple venues, including social media. Currently, courts decide case-by-case whether particular statements in social media should be actionable under traditional rules for falsity, materiality, and nexus to issuer securities. Because the cases I analyzed were filed in 2022, many of them await judicial scrutiny as to whether the plaintiffs have adequately pleaded that the social media statements are actionable. Among cases that have survived a motion to dismiss are In re Bed Bath & Beyond Corp. Sec. Litig. Relatedly, in a different case, the court held that the tweets and other communications from Volkwagen Group of America, Inc. asserting that the automobile manufacturer was changing its name to “Voltswagen” were material false statements of fact but dismissed the complaint because of a lack of a nexus between the statements and the unsponsored ADRs that the investors purchased.
Scholars have theorized that the element of materiality and to some extent the requirement that statements be “in connection with the purchase and sale of a security” have long been used as avenues for limiting the number of 10b-5 cases and reducing the burden on the judiciary. This system may produce even more inconsistent results as judges wrestle not only with statements in SEC filings and press releases, but also with impromptu statements on earnings calls and in presentations, statements on websites, and statements on social media by the issuer, its officers, and even market participants such as retail investors.
My article argues that 10b-5 liability could be limited to particular types of public documents, as Section 11 and Section 12 liability is, or to particular types of issuers. For example, nonreporting issuers should be liable for their social media statements because the “total mix” does not include detailed, publicly filed information. Publicly-traded issuers, however, should not be similarly liable. Investors should be liable for their public statements in SEC filings, such as Schedule 13D, but not uncompensated statements on investor message boards, whether emoji-filled or not.
 In re Tesla, Inc. Sec. Litig., 2023 WL 4032010 (N.D. Cal. June 14, 2023).
 Tr. Vol. 3, 685-86, In re Tesla, Inc. Sec. Litig., No. 18-cv-04865-EMC (Jan. 20, 2023).
 United States v. Schena, 2023 WL 3170050 (N.D. Cal. April 29, 2023)
 — F.Supp.3d –, 2023 WL 4824734 (D. D.C. July 27, 2023) (holding that a “moon face” emoji was an actionable false statements if the investor was not holding on to his shares “to the moon,” but was in fact selling them).
 In re Volkswagen AG Sec. Litig., — F.Supp.3d –, 2023 WL 2505539 (E.D. Va. Mar. 14, 2023).
This post comes to us from Professor Christine Hurt at Southern Methodist University’s Dedman School of Law. It is based on her recent article, “Socially Acceptable Securities Fraud,” available here.