On December 13, 2022, the SEC announced charges against seven social media influencers in connection with a pump and dump scheme they promoted on Twitter and Discord. The announcement shines a light on the ability of influencers to manipulate markets for their own benefit.

A ‘pump and dump’ scheme generally involves a company (or its principals) issuing false or misleading announcements to inflate the trading price of its securities. Once the perpetrators have inflated the price (the ‘pump’), they liquidate their own holdings of the securities at the inflated price making a significant profit (the ‘dump’).[1]

Pump and dump schemes are usually prosecuted by Canadian securities regulators under the fraud and market manipulation provisions of the relevant provincial securities legislation. In Ontario, that provision, section 126.1 of the Securities Act, provides:

126.1 (1) A person or company shall not, directly or indirectly, engage or participate in any act, practice or course of conduct relating to securities, derivatives or the underlying interest of a derivative that the person or company knows or reasonably ought to know,

(a)  results in or contributes to a misleading appearance of trading activity in, or an artificial price for, a security, derivative or underlying interest of a derivative; or

(b)  perpetrates a fraud on any person or company.

The advent of social media influencers has created a variation on the traditional pump and dump. Rather than a company pumping the price of its own securities through misleading public announcements (and occasionally the use of manipulated trading to create the appearance of an active market for the securities[2]), individuals with no connection to the company – but having large social media followings – promote that company’s securities on their social media platforms. After their followers have themselves invested in the company’s securities (creating the ‘pump’), the influencers liquidate their holdings without telling their followers (the ‘dump’).

The SEC’s charges allege exactly this:

According to the SEC, since at least January 2020, seven of the defendants promoted themselves as successful traders and cultivated hundreds of thousands of followers on Twitter and in stock trading chatrooms on Discord. These seven defendants allegedly purchased certain stocks and then encouraged their substantial social media following to buy those selected stocks by posting price targets or indicating they were buying, holding, or adding to their stock positions. However, as the complaint alleges, when share prices and/or trading volumes rose in the promoted securities, the individuals regularly sold their shares without ever having disclosed their plans to dump the securities while they were promoting them.

The defendants allegedly obtained profits of USD $100 million through the scheme.

Given the relative ease with which significant social media influencers could operate a pump and dump scheme, it is surprising that Canadian authorities appear to have pursued few similar cases. Indeed, we were unable to locate any direct analogues to the SEC case amongst the Canadian English-speaking regulators.

Nevertheless, Canadian influencers should be very careful about promoting securities on their platforms. Prudence suggests that they should disclose any interest they have in the securities of a company they are discussing, and avoid overstating the attributes of the company or the benefits of holding its securities.

The SEC case also highlights the need for securities regulators to be vigilant in their market monitoring.  Just because large price fluctuations do not appear to be driven by a company’s press releases does not mean that market manipulation is not occurring through other means. That said, it will likely be challenging for regulators to locate influencers operating these schemes unless complaints are made.

Want to learn more about market manipulation in Canada? We last wrote about this topic in February 2021 in the context of the GameStop Short Squeeze.

[1] See e.g. Sulja Bros. Building Supplies, Ltd. et al. (Re), 2011 ONSEC 16.

[2] See e.g. Paolucci (Re), 2020 ONSEC 32.

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