July 11, 2019
Corporate disclosure in the age of Twitter: Social media’s impact on pension funds
Social media is a prevalent part of almost all of our lives. Nearly everyone is on Facebook, Twitter, Instagram, or some other social platform today. But most of us aren’t thinking about the effect these platforms could have on pension funds or retirement plans. What happens when the CEO of the company you or your pension fund hold stock in is also on Twitter?
In 2007, Twitter first got its start at the South by Southwest Music and Film Festival. More than 60,000 tweets a day were sent at the festival during Twitter’s launch. Now, Twitter claims 126 million daily active users, with an average of 300 million tweets sent per day, every day.
Securities Fraud and Corporate Disclosure
One of those 126 million users is Elon Musk, well known for creating Tesla—the line of electric and self-driving cars—and for founding SpaceX. In addition to that impressive resume, he has 26.2 million followers on Twitter.
This means that what Musk tweets can and does have an effect on Tesla stock. In August of 2018, the CEO of Tesla tweeted:
Am considering taking Tesla private at $420. Funding secured.
— Elon Musk (@elonmusk) August 7, 2018
Musk’s followers took notice, and so did the media, and Tesla stock price skyrocketed more than 10% the next day. Unfortunately, there was one major problem with this development. The tweet was not accurate and funding was not, in fact, secured.
Following this tweet and its subsequent effect on the market, the Securities and Exchange Commission (SEC) filed charges against Musk for distributing misleading information to the market. Eventually, Musk and the SEC agreed to a settlement, which included a $20 million fine, required that Musk step down as Tesla’s Chairman for three years, and required Musk to get pre-approval of his tweets from Tesla’s legal counsel before tweeting.
However, just a few months later, in February of 2019, Musk tweeted “Tesla made 0 cars in 2011, but will make around 500k in 2019.” Unfortunately, that tweet is also inaccurate—Tesla is not expected to make 500,000 cars this year. Musk clarified the tweet, stating that by the end of 2019 Tesla could make 500,000 cars per year if it retained that rate of production. The market was closed when Musk wrote both of those tweets, but the SEC took notice.
Once more, the SEC took action claiming that Musk was in violation of their earlier settlement agreement. In April 2019, the parties reached a new agreement over his use of Twitter, now specifically laying out what kinds of information requires legal review before Musk tweets.
However, Musk has not been alone in making rogue social media posts and thereby affecting the stock market. Back in 2012, the CEO of Netflix, Reed Hastings boasted from his personal Facebook page that the company had surpassed one billion streaming hours in a month for the first time. The SEC did not bring charges against Hastings, but did issue a rule clarifying the use of social media for communicating with investors. In 2013, the SEC stated that most social media avenues are acceptable conduits for disseminating corporate information to investors, as long as the company has informed shareholders which outlets they intend to use. The SEC also warned that personal pages were not as appropriate as a company-run social media platform to communicate with the market about company announcements. Now, any comments made on social media by publicly held companies must adhere to the same rules of SEC regulation that are required for more traditional methods of communication.
The examples of celebrities, CEOs, and other public figures who potentially violate SEC rules are numerous. Many of these tweets and other social media posts affect the market. If a celebrity endorses a product while making false claims, its stock price might go up. Social media has created a world that can be difficult for the average investor to keep up with.
Social Media and Securities Fraud Litigation
Unfortunately, tweets from CEOs and famous influencers are not the only way that social media can affect your retirement fund. The social media giants themselves have a responsibility to their users. For instance, Twitter executives were accused of misleading the public about their user metrics in 2014 and later reported that their actual user growth was much slower than anticipated. On this news, the price per share of Twitter stock fell dramatically. Securities litigation has since been filed for shareholders who were affected by Twitter’s allegedly false and misleading statements.*
Additionally, Facebook itself has had its name in the news for multiple reasons over the past few years, rarely in a positive light. The revelation that Facebook allowed Cambridge Analytica to gain access to an estimated 87 million of Facebook’s users’ private data largely sparked the current debate on data privacy and social media presence.
Social media’s impact on our day-to-day lives has been deeper than we could have anticipated. Nearly everyone is on social media in some form and it has changed the way we interact with each other. Some of those changes are good—it is now easier than ever to keep in touch with friends and family no matter where they might be in the world. But, many of those effects are also negative. It is much easier to be rude or divisive through a keyboard than it would be in person. There is evidence that terrorist groups use social media to recruit young and impressionable youth from around the world. Our politicians often now use social media to announce policy decisions and engage in trade wars.
Effect on the Stock Market
The changes that social media has inflicted on our world may seem unrelated to your retirement plans, but they are not. Social media platforms have a massive effect on the market in three major ways: political, corporate, and potential securities fraud. In short, these changes affect your retirement fund’s bottom line.
So, what can be done? There needs to be greater federal government regulation of social media giants, but the government has been slow to enact regulations for social media companies. Regulations to protect users’ privacy, to require action on threats of violence or terrorist activity, and to prevent securities fraud seem like common sense. However, where the government declines to step in, there is litigation. Securities fraud litigation can help pension funds recover losses caused by corporate misconduct and misinformation. Data breach litigation can help protect those who have been affected by identity theft, or have had their personal information exposed. Finally, trustees of pension funds and individual stockholders watching over their own retirements can be vigilant. Sitting on the sidelines of social media is not an option. With the way that companies now communicate with investors, at least being a passive consumer of social media is all but required. My colleagues Marlon Kimpson and Meredith Weatherby discussed this more in a blog, Shareholder activism: An investment opportunity.
However, as shareholders and as individuals you can take steps to protect yourself. Watch the market and pay attention to what major influencers say on social media. If you are going to engage on social media, employ privacy protections through the platform and be conscious about what you share. If you wouldn’t share that information in a public setting, don’t share it on social media. With all the benefits that social media confers, remember that those benefits can come with a price. Be vigilant.
* Motley Rice is co-class counsel for Twitter shareholders in securities fraud litigation alleging false and misleading statements by the company.