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Eight Finance Social Media Influencers Charged In $100 Million Market Manipulation Scheme

Eight Finance Social Media Influencers Charged In $100 Million Market Manipulation Scheme

December 19, 2022

Eight Finance Social Media Influencers Charged In $100 Million Market Manipulation Scheme

By: Jake Gray

The U.S. Securities and Exchange Commission (“SEC”) has announced charges against eight finance-oriented social media influencers in an alleged $100 million securities fraud scheme, in which they engaged in “pump-and-dump” market manipulation by leveraging their following on various social media platforms.

The securities fraud charges, unsealed on December 13th, name seven defendants with an eighth defendant charged with aiding and abetting the alleged scheme. [1] In the SEC’s press release, Joseph Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit, said,

The defendants used social media to amass a large following of novice investors and then took advantage of their followers by repeatedly feeding them a steady diet of misinformation . . . . Today’s action exposes the true motivation of these alleged fraudsters and serves as another warning that investors should be wary of unsolicited advice they encounter online. [2]

The action comes among an outpour of criticisms and calls for action against popular figures who have publicly promoted various financial products that have since taken a dive. A proposed class-action lawsuit filed this week, for instance, seeks to hold Tom Brady, Gisele Bündchen, and nine other celebrity endorsers of the cryptocurrency exchange FTX financially responsible for losses suffered as a result of the firm’s bankruptcy and related concerns. [3] 

In general, the ubiquity of social media has facilitated the proliferation of influencers in practically every conceivable category and niche, from cars to computers to sports and medicine. An increasingly prominent instance of this phenomenon includes self-proclaimed finance or investment gurus flaunting their wealth to accrue a following, which they then work to monetize. This project often includes the offering and sale of educational courses or access to investment forums, in which purchasers access investment recommendations or tactics promoted by the influencer. While some may offer bona fide lessons for prospective-investor followers, investors need to be wary of market manipulators exploiting their followers’ eagerness for their own gain.

The SEC’s filing this week illustrates the risk. The agency writes that in this case, the seven primary defendants cultivated hundreds of thousands of followers on Twitter—with more than 1.5 million followers all told—and numerous acolytes in Discord servers by promoting themselves as successful traders. Meanwhile, the eighth defendant hosted a podcast promoting his associates as expert traders, offering them another platform for their proclamations of trading prowess. On Twitter, the defendants often made grandiose claims about their own wealth, advertising the possibility of making thousands of dollars per day and living a luxurious lifestyle.

But the defendants’ performance was not what it seemed.  

As the complaint alleges, the seven primary defendants purchased specific stocks, promoted those stocks to their social media followers by signaling that they were buying, holding, or adding to their positions, and when share prices and/or trading volumes rose, they regularly sold their shares without disclosing their intent to do so in their promotional efforts. The SEC’s complaint highlights a few instances of such manipulation, covering companies across the tech and pharmaceutical sectors.

The most illustrative example of their alleged market manipulation efforts concerns Camber Energy, Inc. (“CEI”). At various times from August to October 2021, several defendants allegedly established positions in CEI, promoted the company’s stock to their users, and sold their deceptive positions. On August 3 and 4, 2021, three defendants purchased more than two million shares of stock at $0.46 and $0.47 per share. [4] At 3:37 p.m. on August 4, one defendant tweeted and posted to Discord about his position in the company: “Volume is starting to come into pennies this week and this is very cheap. On the daily chart we have formed a double bottom. Last time it was at these prices we went to $3. So that leaves a lot of range.”[5] A second defendant then chimed in on the purportedly low price point. Over the rest of the afternoon and part of the next morning, the three defendants gradually unloaded, reloaded, and dumped their positions entirely while publicly urging their followers to continue purchasing under the pretense that they would be holding at least until $1. From August 3 to 5, the three defendants made trades netting them approximately $55,000 in profit. Two defendants engaged in similar tactics over a more extended period of time through buying and selling CEI stock—between September 1 and October 5, 2021, one defendant made more than $4.3 million trading that stock alone.

On several other occasions, defendants would even lie to followers about losing money on a particular stock when, in fact, they had profited, apparently in order to preserve their followers’ trust in their recommendations and obfuscate the true nature of their promotions. For instance, one defendant claimed in a tweet that he lost money trading on ABVC Biopharma Inc. (“ABVC”), which was one of his previous recommendations to followers: “$ABVC Strange action today . Bag holder here [waving hand emoji] honestly doesn’t make sense. Ran from $3.30 to $4.40’s yesterday and to $4.20’s today. But faded due to shorts and scalpers. I’m sure some made money. But I hold my word and don’t dump on anyone.” [6] But according to the complaint, he actually dumped his shares and made approximately $68,690 the day he posted the tweet. [7] In another example, another defendant claimed to have lost $20,000 on American Resources Corp. after promoting it, when he actually made more than $7,000 dumping shares that day alone in addition to other profitable trades from the previous day. [8]

All the while, according to the SEC, “in private chats and surreptitiously recorded conversations, [the defendants] bragged and laughed about making profits at the expense of their followers.” [9]

Each defendant faces a maximum penalty of 25 years in prison for conspiracy to commit securities fraud and for each charged count of securities fraud if convicted. A federal district court judge will determine any sentence after considering the relevant U.S. Sentencing Guidelines and other statutory factors. [10]

The SEC will likely combat a defense of “puffery” or “corporate optimism” in its attempt to establish fraud, considering that the defendants disclaimed on their Twitter accounts that they were not providing stock recommendations or financial advice, albeit despite simultaneously evincing their understanding that followers would act on their promotional tweets. [11] Indeed, in so doing, the SEC will need to demonstrate that the defendants’ statements were not a mere matter of exaggeration by which no reasonable investor could be misled, but that the statements were crafted to do just that. In all likelihood, the SEC will likely try to establish that the defendants’ alleged strategy depended on it.

 

[1] https://www.justice.gov/opa/pr/eight-men-indicted-114-million-securities-fraud-scheme-orchestrated-through-social-media 

[2] https://www.sec.gov/news/press-release/2022-221 

[3] https://www.washingtonpost.com/business/2022/12/14/ftx-class-action-lawsuit/  

[4] https://www.sec.gov/litigation/complaints/2022/comp-pr2022-221.pdf. Pg 18.

[5] Ibid. Pg 18.

[6] Ibid. Pg 16. 

[7] Ibid. Pg 16.

[8] Ibid. Pg 17.

[9] https://www.sec.gov/news/press-release/2022-221 

[10] https://www.justice.gov/opa/pr/eight-men-indicted-114-million-securities-fraud-scheme-orchestrated-through-social-media 

[11] https://www.sec.gov/litigation/complaints/2022/comp-pr2022-221.pdf 

Jake Gray

Jake Gray

Jake Gray is a graduate of Columbia University and an established technology researcher, currently working in the betting and futures space as a consultant to a variety of operators. He frequently writes about online gaming and sports betting laws.

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