Socially Acceptable Securities Fraud

Abstract

What is a lie? Moreover, where is it a lie? Lies are bad. Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 create liability for issuer firms and individuals who make “an untrue statement of a material fact” or omit “a material fact required to be stated therein or necessary to make the statements therein not misleading.” In the ninety years since the passage of the Securities Exchange Act, however, the number of ways in which market participants may publicly disseminate statements that will be consumed by investors has exploded; does 10b-5 really apply to all these statements? This Article asks the question the jury in United States v. Schena asked the trial judge during deliberations: Do we not distinguish at all between a tweet and a press release? Presently, the number of ways in which issuers and officers communicate with the wider public and in which buyers and sellers communicate with each other is 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; some are vetted by legal counsel; and some are crafted with cautionary language that insulates otherwise rosy forward-looking statements from liability. Some of these communications, however, are extemporaneous, unvetted, and uncrafted. Yet all of these types of statements have formed the basis for private investor litigation, civil enforcement, and criminal enforcement. The Twitter trial of the century between Tesla investors and Elon Musk garnered substantial attention with scholars and pundits. This 2023 case, however, is not an isolated securities fraud case involving social media; in fact, in United States v. Schena and United States v. Milton, two different CEOs were convicted of criminal securities fraud based on tweeting activity. Though defendants question the role of social media in enforcement actions, courts are treating these marketplace statements just like formal corporate statements. Issuers and their officers who engage with stakeholders via social media may be unwittingly creating substantial litigation risk for their corporations. This Article presents an empirical analysis of 2022 10b-5 class action lawsuits and of 10b-5 enforcement actions by the SEC that suggests that though social media statements are not yet rich fodder for 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 some cases, allegedly false statements are repeated in multiple venues, including social media. Currently, courts decide on a case-by-case basis if particular statements in social media should be actionable under traditional rules for falsity, materiality, and nexus to issuer securities. This article argues that this approach may lead to very different outcomes within a single federal securities law regime and should be reformed. Ultimately, this article argues that there may be a level of socially-acceptable securities fraud that must be tolerated in an information society