January 2023 Business Litigation Update

We are all on social media daily. Facebook, YouTube, Instagram, TikTok – they have become part of the fabric of our daily lives. And, many of us follow and rely on “influencers” on these social media platforms for suggestions and guidance about what to buy, wear, and even where to invest money. However, disputes concerning advice from some social media influencers has found its way to the courthouse.

The SEC recently filed a lawsuit in Texas federal court seeking civil and criminal penalties against eight social media influencers for their online postings, announcing charges in what it calls a $100 million stock fraud scheme. The agency alleges the group engaged in coordinated market manipulation known as “scalping,” where the influencers would identify stocks they could manipulate, buy them up, and then promote the stocks to their social media followers, but do so using false and misleading information. The influencers’ promotions would generate demand and inflate the price of the stock so the influencers could sell their shares at a profit.

A recent case at the Ninth Circuit Court of Appeals also highlights the perils of buying and selling stocks promoted by an “influencer” via social media, with the court reinstating a securities fraud lawsuit against influencer and real estate syndicator Grant Cardone and his company, Cardone Capital, LLC. The court ruled that Cardone’s social media posts on Instagram and You Tube can constitute solicitations under the Securities Act of 1933, rendering Cardone and Cardone Capital as “sellers” of securities under the Act.

And it does not stop there. Several celebrities have been swept up in the demise of FTX for their previous promotion of the company on social media. Tom Brady, Shaquille O’Neal, Naomi Osaka, and Stephen Curry – to name just a few – were named as defendants in a class-action lawsuit accusing FTX of using deceptive means to attract investors in the company.

Social media is not going away, and neither are social media influencers. We have come to trust them, right or wrong. But it is important to remember that information from social media must be carefully scrutinized and cannot be blindly relied upon, as there can be ulterior motives and there is always the risk of relying on false or inaccurate information.

Regulators and the courts are beginning to catch up with this evolving technology, and gone are the days that no one is watching what is said online. Be cautious with what you consume, as well as what you put out in the world.