At least since Elon Musk’s infamous “take private” Tweet, we have known that communications on social media can potentially give rise to liability under the federal securities laws. Now, after a company posted an allegedly upbeat Tweet ahead of its full quarterly earnings release, and after the company’s share price rose on the Tweet but slumped on the later release of the detailed results, the company has been hit with a securities class action lawsuit based on the Tweet. A copy of the complaint filed on February 28, 2022 against Affirm Holdings can be found here.
Affirm operates a digital platform permitting consumers to make “buy now, pay later” purchases. The company planned to release its full results for its second fiscal quarter after the close of the markets on February 10, 2022. However, according to the subsequently filed securities class action complaint, at approximately 1:15 pm EST on February 10, the company released a Tweet from its official account that disclosed certain metrics regarding the company’s quarterly results. According to the complaint the partial information in the Tweet “portrayed a highly successful quarter,” including a sizeable revenue increase. The company’s share price rose nearly 10% on intra-day trading.
The complaint alleges that the intraday Tweet was “materially misleading, in that it omitted to disclose the full details” of the company’s second quarter results. The complaint alleges that later the same afternoon the company deleted the Tweet and released its full financial results ahead of schedule. The complaint alleges that the full financial results were “lackluster,” and included a loss per share that exceeded analyst expectations. The complaint alleges that on this news, the company’s share price “plummeted” from an intra-day high of $83.57 per share to close the day on February 10 at $58.68.
On February 28, 2022 a plaintiff shareholder filed a securities class action lawsuit in the Northern District of California against Affirm as well as against the company’s Chairman and CEO. The complaint purports to be filed on behalf of investors who purchased the company’s securities on February 10, 2022, after the company released its 1:15 pm EST tweet. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class.
As I noted at the outset, we already knew from Elon Musk’s “take private” Tweet debacle that social media posts can give rise to potential liability under the federal securities laws. However, the allegations in this new complaint take this phenomenon to a new level. According to the complaint, the necessarily compressed Twitter format allegedly cause the company to publish only partial results rather than the full quarterly results, and the supposedly misleading omission of the full results allegedly breached the federal securities laws.
This lawsuit has only just been filed and it remains to be seen how it will fare. Among other challenges the plaintiffs will face is demonstrating that the defendants acted with scienter – this pretty obviously was a goof-up of some kind, not some devious plan to hoodwink the market. Pretty clearly, something got short-circuited in the social media publication process. Arguably, the mistake was planning any type of social media release in advance of the release of the full results. But while these missteps may be deeply regrettable and even arguably negligent, it remains to be seen whether they will prove to be sufficient to establish securities fraud.
Among the many unusual features of this complaint is the unusually short class period. The putative class of investors on whose behalf the complaint was filed consists of investors who traded during a very short time period on the afternoon of February 10. I am sure there are readers out there who will point out similarly short class periods, but a class period this short is, in my experience, highly unusual if not unique. In addition to the short class period, the complaint itself –– which weighs in at nine pages in length – might be the shortest securities class action lawsuit complaint I have ever seen.
The one thing that is for sure is that the allegations in this complaint underscore the need for companies to build some protective processes around their social media practices, particularly when it comes to using social media to transmit news about the company’s operating and financial performance. As I noted above, the real error here may have been using social media to release partial financial results ahead of the full financial release. At a minimum, the allegations show that if the company is going to incorporate social media activities as part of its release of financial results, the social media activities should be carefully coordinated with the more traditional releases. Arguably, the use of social media should be as fully supervised as a full release would be.