Recent regulatory scrutiny has highlighted how the misuse of social media can blur the lines between personal market opinions and manipulative trading practices. A current high-profile case demonstrates the risks for investment advisers who fail to uphold fiduciary duty, implement personal trading controls, and comply with the SEC’s Marketing Rule.
Case Overview
The Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) have jointly charged an individual and their firm with using social media to manipulate stock prices for personal gain. Allegations include posting misleading statements about certain securities and then engaging in rapid trading activity that contradicted these public positions, resulting in illegal profits estimated at $20 million.
The alleged scheme worked as follows:
The individual allegedly took long or short positions in certain stocks through personal accounts or an affiliated firm.
They published social media posts or reports designed to influence market sentiment, either encouraging buying (when holding long positions) or selling (when short).
After the market reacted to these public statements, the individual quickly reversed their positions, profiting from the market's movement.
Example Allegations:
In one instance, a bullish post caused a stock's price to jump over 12%, after which the accused sold shares at a profit.
In another, a bearish post led to a significant price drop, with the accused closing their short position shortly after.
While publicly claiming to hold positions until specific price targets were reached, their private trading actions showed rapid reversals shortly after making those statements.
Misleading Disclosures:
Despite claiming independence, the individual allegedly received compensation from hedge funds in exchange for favorable or unfavorable coverage.
Disclosures suggested unbiased reporting, while undisclosed financial incentives were influencing public statements.
The SEC complaint states that the individual publicly claimed they had “never been compensated by a third party to publish research” and that compensation tied to the success of a trade “would not pass internal compliance nor would it pass compliance of any fund that [their firm] would collaborate with on ideas.” The presumed intention was to assure readers that the recommendations were independent and free from conflicts of interest. Compensation tied to trade outcomes would not have been approved by internal compliance due to the potential for biased recommendations that prioritize personal gain over client interests.
The individual also presented their firm as an independent publisher, stating: “The goal of this website is and has always been to provide truthful information in an entertaining format to the investing public.” Additionally, they denied receiving compensation from hedge funds, asserting: “We have never received compensation from a hedge fund in connection with publishing trading recommendations.”
In criticizing other market participants, they emphasized ethical standards by stating: “No credible hedge fund or short seller would ever do this.” However, the case alleges that despite these public disclosures, the individual received substantial compensation from hedge funds for trading around their recommendations and even attempted to conceal these payments through third-party intermediaries and fabricated invoices. Evidence, as noted in the case, also suggests that trades were executed shortly after public recommendations, contradicting the claim: “I do not trade based on TV appearances.”
Use of Social Media Amplification:
The accused strategically used social media platforms, such as X (formerly Twitter), alongside media appearances to amplify the impact of their market commentary. Posts often contained bold statements or strong opinions about specific securities, designed to attract attention and influence market sentiment quickly.
The allegations suggest that these posts were carefully timed to coincide with the individual's trading positions—encouraging followers to either buy or sell specific securities. As the audience reacted, the market price of the security moved in a way that benefited the individual's positions. Once the price shifted favorably, the trades were quickly reversed, securing profits before the market could correct itself.
For advisers, this case underscores the importance of:
Avoiding Unsubstantiated Claims: Public statements should be backed by thorough research and presented in a balanced, factual manner.
Transparency: Disclose any material conflicts of interest clearly, including personal positions in securities being discussed.
Timing of Trades: Engaging in personal trades immediately after making public recommendations could be perceived as manipulative and should be carefully reviewed by compliance teams. Firms should also consider implementing restricted lists and applying trading restrictions both before and after discussing a particular asset to prevent potential conflicts of interest.
Compliance Oversight: Social media content should be reviewed to ensure alignment with the firm’s compliance policies, including fiduciary duty, non-public material information controls, personal trading restrictions, the SEC’s Marketing Rule, and antifraud provisions under Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act.
Fiduciary Duty: Acting in Clients' Best Interests
Fiduciary duty requires advisers to act in the best interests of their clients. Misleading communications, whether intentional or not, erode client trust and could violate this fundamental obligation. In this case, the accused party's rapid reversal of trades after public recommendations raised questions about whether their actions prioritized personal gain over client welfare.
Personal Trading Controls: Safeguarding Against Conflicts
Strong internal controls around personal trading are essential for preventing conflicts of interest:
Pre-Approval of Trades: A robust process ensures that personal trades are reviewed before execution, reducing the risk of conflicts with public statements.
Restricted Trading Windows: Firms should implement restrictions on trading shortly before and after public recommendations.
Ongoing Monitoring: Regular audits can identify inconsistencies between personal trades and client advice.
Testing for Market Manipulation
Market manipulation violates Section 10(b) of the Securities Exchange Act and Rule 10b-5. Advisers should implement testing mechanisms to detect potential manipulation patterns:
Monitoring for rapid trade reversals after public communications.
Tracking unusual trading volumes in securities mentioned on social media.
Conducting periodic compliance reviews based on a schedule that aligns with the
firm’s operations and trading activity to assess potential manipulation patterns.
The SEC’s Marketing Rule and Social Media Compliance
The SEC’s Marketing Rule emphasizes fair, balanced, and substantiated communications. While investment advisers can share market insights on social media platforms, they must:
Avoid making misleading or exaggerated claims.
Ensure that statements are supported by factual analysis.
Disclose material conflicts of interest clearly.
The Need for Regulatory Clarity: Are the Rules Sufficient?
This ongoing case highlights a debate within the financial community:
Rules Are Already Clear: Some experts argue that existing laws against market manipulation and misleading disclosures are sufficient. Advisers are already expected to align their personal trading with public statements and adhere to fiduciary duties.
More Clarity Needed: Others believe there is a regulatory gray area, particularly regarding the timing of trades following social media posts. Calls for clearer guidelines could help advisers avoid unintentional violations and ensure consistent enforcement by regulators.
How Compliance Teams Can Review Social Media Activity
Firms should develop comprehensive procedures to monitor social media activity:
Pre-Approval for Posts: Establish policies requiring pre-approval for posts that mention specific securities or market predictions.
Regular Monitoring: Implement automated tools to track advisers’ social media posts and cross-reference them with personal trading activity.
Training Programs: Provide regular training on acceptable use of social media, focusing on the firm’s compliance obligations and fiduciary responsibilities.
Documentation: Maintain detailed records of all social media activity and approvals, ensuring transparency for potential audits or regulatory inquiries.
Where the Case Stands
Currently the legal proceedings against the individual accused of market manipulation through misleading social media posts are ongoing. In July 2024, both the U.S.
Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) filed charges alleging that the individual manipulated stock prices and defrauded investors by disseminating false information about various securities.
The individual has pleaded not guilty to the charges. In October 2024, the defense filed a motion to dismiss the SEC's fraud case, arguing that the allegations lack a valid fraud claim and sufficient supporting evidence. The trial is currently scheduled to begin on September 30, 2025, following a mutually agreed delay between the defense and prosecutors. As of now, no final determinations or judgments have been made regarding the allegations.
Key Takeaways for Investment Advisers
To mitigate compliance risks:
Uphold fiduciary duty by ensuring all public communications are in clients' best interests.
Implement personal trading controls to prevent conflicts of interest.
Test for market manipulation through regular monitoring and audits.
Align social media practices with SEC Marketing Rule requirements.
Review regulatory developments, risk alerts, and outcomes of this and similar cases for clearer guidelines on permissible social media practices.
Conclusion
The ongoing case reminds investment advisers to balance providing market insights with avoiding even the appearance of manipulative practices. Upholding fiduciary duty, strengthening personal trading controls, ensuring compliance with SEC regulations, and adapting to potential regulatory changes help firms maintain client trust and protect the integrity of financial markets.
Resources:
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All information provided is for educational purposes and shall not be construed as specific advice. The information does not reflect the view of any regulatory body, State or Federal Agency or Association. All efforts have been made to report true and accurate information. However, the information could become materially inaccurate without warning. Not all information from third-party sources can be thoroughly vetted. Coulter Strategic Services and its staff do NOT provide legal opinions or legal recommendations. Nothing in this material shall be considered as legal advice or opinion.
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