Enforcement Action Against Gaming Company Suggests Trading Based on Social Media Posts May Be a Bad Bet
Today, the SEC announced an enforcement action against an online gaming company alleging that the company selectively disclosed material nonpublic information (MNPI) on the CEO’s social media accounts in violation of Regulation FD.
In 2013, the SEC issued a report of investigation that offered much-needed clarity regarding the ability of public companies to disclose material information via social media in compliance with Regulation FD, which requires that such disclosures are reasonably designed to disseminate the information to the public in a broad, non-exclusive manner. The report concluded that social media may be used to disclose material information, provided that the company has previously disclosed to investors which social media accounts will be used for this purpose.
In today’s enforcement action, the SEC alleges that a public relations firm posted MNPI to the CEO’s personal X (formerly Twitter) and LinkedIn accounts in contravention of several of the company’s policies related to disclosing confidential information on social media. The SEC’s order states that the company quickly identified the error and had the posts taken down, but did not take steps to promptly disclose the information to the public as required by Regulation FD when a company inadvertently makes a selective disclosure of MNPI.
This case serves as a reminder for advisers to be cautious about trading in response to information posted on social media, even if the account is associated with the company or its executives. While there is no indication in this case that the SEC intends to investigate or take action against anyone who traded the company’s stock following the social media posts, it is not outside the realm of possibility that could happen. For example, in 2013-2014, news outlets reported that the SEC was investigating certain hedge funds who received a research report from a political intelligence firm that was alleged to contain MNPI. Notwithstanding that the report was apparently broadly-disseminated to the research firm’s clients, the SEC’s investigation reportedly was focused on whether any of the firms in question may have known that the report contained MNPI. It is not hard to imagine that the SEC could apply similar logic in a case like this to probe whether any of the CEO’s social media followers may have known that the posts contained MNPI before trading the company’s stock.