By: Theodore Brothers
Social media has completely transformed the way we communicate with one another, but it has also now transformed the way that investors view the stock market. There is no purer example of this than the trial that began in mid-January 2023 concerning Elon Musk and the long-reaching effects of a series of tweets he sent out back in 2018 that absolutely rocked Tesla’s share price. As it turns out, investors took Musk’s tweet seriously, which resulted in thousands of dollars lost amongst them and a class-action lawsuit alleging that they were misled by Musk. While Musk has certainly been the subject of much controversy over the last six months as a result of his erratic and unpredictable business practices, this current trial only highlights a larger problem that is located at the intersection of social media, free speech, and the stock market. The stock market has experienced extreme volatility in recent years, and social media is partly to blame due to copious amounts of unconfirmed information or deliberate misinformation spreading rampant across multiple social media platforms. Left unchecked by the federal government, this volatility has the potential to completely destroy the stock market as we currently know it.
Defrauding investors is not uncommon among corporate executives – just look at the recent scandals of Elizabeth Holmes/Theranos and Sam Bankman-Fried/FTX. In the case of Musk, however, it can become difficult to pinpoint liability when a CEO uses his private social media account to communicate information that could be viewed as an expression of free speech, and arguably should not be taken seriously considering the medium that is being used to deliver the information. This is exactly the scandal that Musk currently finds himself in. On August 7, 2018, Musk tweeted, “[a]m considering taking Tesla private at $420. Funding secured.” He then followed up with a subsequent tweet stating, “[s]hareholders could either . . . sell at 420 or hold shares & go private.” Later that same day, he tweeted “[i]nvestor support is confirmed. Only reason why this is not certain is that it’s contingent on a shareholder vote.” This led to a week-long whirlwind of Tesla’s stock price, with prices swinging by roughly $14 billion during a 10-day period, which ultimately ended in no buyout.
Ultimately, these actions sparked an investigation of Musk and Tesla by the Securities and Exchange Commission (“SEC”) for fraud charges ending with a settlement. As part of the 2018 settlement, Musk was required to step down as Tesla’s Chairman and both Musk and Tesla were required to pay $20 million each ($40 million in total), to harmed investors under a court approved process. Fast forward to January 20, 2023, and investors of Tesla who were owners of Tesla stock during the 10-day period following Musk’s tweets brought a class-action lawsuit against Musk. Federal District Judge Edward Chen has previously ruled that Musk’s tweets were “false and misleading” and that he “recklessly made the statements with knowledge as to their falsity.” This lawsuit will let a jury will decide two prominent issues: (1) whether Musk acted recklessly when he tweeted this information and (2) whether he caused financial harm to Tesla shareholders.
This is hardly the first time that social media has influenced the stock market and gained attention from the SEC. Back in 2021, a few stocks – including GameStop and AMC – gained a cult-like following online led by retail traders, who are known for investing with their own personal money instead of investing on behalf of a group. These traders largely gathered on social media platform Reddit and were able to drive up the share prices of these companies by orchestrating a “short squeeze.” A short squeeze occurs when a large number of investors bet against a stock and the price shoots up instead, prompting sellers to buy large numbers of the stock, which drives the price up more and disproportionately effects the portfolios of many large investors. In response, retail brokerages, like Robinhood, limited clients from buying shares to prevent this which gained attention from the SEC in the form of investigations. SEC Chairman, Gary Gensler, has now signaled that he is interested in releasing new market rules that may limit the way Wall Street firms are able to take advantage of individual investors.
More recent stock market volatility ensued following Elon Musk’s takeover of Twitter when all users were able to pay $7.99 to obtain a blue check mark on their account – something that was previously only available to public figures and brands. Immediately after this roll out, thousands of accounts were created impersonating celebrities, politicians, and even large brands. Most notably, a fake account impersonating pharmaceutical brand Eli Lilly and Co. tweeted out “[w]e are excited to announce insulin is free now.” This simple tweet caused Eli Lilly’s share price to drop 4% by the next morning.
The stock market and social media are two complex networks that have abnormal formulas which produce unpredictable effects. Both of these systems have strong influence in the United States, with the stock market directly influencing the economy and social media directly influencing the sociocultural climate. However, if left unchecked, social media users can continue to exert great power over the economy with a simple tweet. In the age of social media influencers and the ever-growing rise of Artificial Intelligence, possibilities are endless as to how this can affect markets and investors.
Fortunately, the SEC seems to be acknowledging this growing problem and has signaled that they would like to take steps to address it. For example, the SEC recently announced charges against 8 social media influencers in a $100 million securities fraud scheme. Using social media platforms like Twitter and Discord, these influencers were able to gain a sizeable following of novice investors and took advantage of them by steadily feeding them misinformation about specific stocks. This in turn lead to profits of $100 million for the influencers.
It is a promising sign that intentional market manipulation by social media users appears to be on the SEC’s radar. However, if unintentional market manipulation is also on the rise (like what happened with Eli Lilly and Co. and their share price), then the SEC needs to also takes steps to address these possibilities and scenarios. As always, technology is ever-growing and a lot of our policies and regulations occur with trial and error, so it is often difficult to predict just how new technologies can affect our society. The SEC needs to carefully balance their goal of weeding out both intentional and unintentional market manipulation with social media users’ right to free speech. However, it is important for social media users to remember that freedom of speech does not mean freedom from the real-world consequences of the impacts of what is freely being said online. In this day and age, the government needs to do a better job of educating the general public on how social media can be useful but also detrimental. As such, it is essential to communicate the dangers and real-world consequences that social media posts and “jokes” can have.
The reach of social media is ever evolving. However, we have begun to see how intangible mediums like Twitter and Reddit can have real world consequences on our economy. As such, it is necessary for our federal government to be more diligent when it comes to the regulation of these platforms and what is being said on them. Left unchecked, social media could have the power to tank an entire economy with one tweet, either intentional or unintentional.
Student Bio: Theodore Brothers is a student at Suffolk University Law School pursuing his JD degree. He is also a staff writer on the Journal of High Technology Law. Theodore received a Bachelor of Science Degree in Public Service and Public Policy from Arizona State University and has previously worked for multiple technology-based start-ups prior to law school.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
