As I have noted in prior posts (most recently here), plaintiffs’ lawyers recently have attempted to rely on statements in social media posts as the basis on which to assert liability under the securities laws. In the following guest post, Nessim Mezrahi considers whether statements in posts on Twitter can support liability for securities law violations. Mezrahi is co-founder and CEO of SAR, a securities class action data analytics and software company. A version of this article previously was published on Law360. I would like to thank Nessim for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Nessim’s article.
Twitter, as it has been utilized more recently by some directors and officers of U.S. listed companies, may not serve as a trusted corporate disclosure mechanism.
The information disseminated via the social media platform’s tweets are ill- suited to validate potential class action liability from alleged violations of the federal securities laws under Section 10(b) and 20(a) of the Securities Exchange Act and U.S. Securities and Exchange Commission Rule 10b-5 promulgated thereunder.
First, recent and well-publicized events involving Twitter prove that the social media platform may not serve as a valid disclosure tool used to disseminate public company communications that may be relied upon by:
- Wall Street analysts that determine enterprise value;
- Institutional investors that analyze public equity investments;
- Public company accountants that audit financial statements;
- Credit rating agencies that rate corporate debt; or
- Insurance carriers that underwrite executive liability policies to protect directors and officers.
Second, due to Twitter’s information reception asymmetry, investors that allege securities-fraud for alleged violations of Rule 10b-5 may not satisfy critical class certification requirements because not all shareholders of common stock in U.S. listed companies have a Twitter account.
Key stakeholders in our capital markets — the gold standard across the globe — do not trust in social media as a valid corporate disclosure mechanism. General distrust in Twitter as a supplemental public company information dissemination tool invalidates any reliance on tweeted information to justify securities class action liability against directors and officers that use it for popular entertainment.
Nonuniform corporate disclosure standards of social media disqualify Twitter as a valid mechanism to disseminate company information.
The U.S. Court of Appeals for the Ninth Circuit, which recently affirmed the dismissal of Exchange Act claims against Twitter in Weston Family Partnership v. Twitter Inc., stated that:
While society may have become accustomed to being instantly in the loop about the latest news (thanks in part to Twitter), our securities laws do not impose a similar requirement. … Securities laws, however, do not require real-time business updates or complete disclosure of all material information whenever a company speaks on a particular topic.
For over half a century, directors and officers have relied on two well-established mechanisms to disseminate material and nonmaterial company information to key industry stakeholders that drive our capital markets: corporate disclosures issued via vetted company communications — press releases and earnings calls — and regulatory filings made with the SEC.
All market participants in our capital markets can access and obtain official public company communications through press releases, which are regularly published on the companies’ websites, and on occasion may also accompany a Form 8-K filing with the SEC if the information is significant enough or may be deemed to be material to shareholders.
According to the SEC’s website, “[a]ll companies, foreign and domestic, are required to file registration statements, periodic reports, and other forms electronically through EDGAR. Anyone can access and download this information for free.”
Given the troubled history of social media platforms in recent years, coupled with polarizing viewpoints of potential reforms to Section 230 of the Communications Decency Act, key stakeholders in our capital markets are better served by continued and exclusive reliance on well-established corporate disclosure mechanisms that provide information reception uniformity that social media outlets may not.
To date, no social media platform in our country has achieved industrywide acceptance and vetted institutionalization as a valid and trusted mechanism of corporate disclosure of material and nonmaterial information.
Corporate transparency continues to improve and evolve through tried-and-true reliance on company communications that are disseminated under the surveillance of well-crafted corporate governance mandates that are governed by internal controls — without the nuisance of real-time tweets.
Tweets run afoul of commonality due to information reception asymmetry
Potential alleged misrepresentations or misstatements that may be disclosed by a director or officer via Twitter may not constitute a violation of the Exchange Act and Rule 10b-5 that warrants class action treatment, because not all public company shareholders have a Twitter account and access to read the potentially misleading tweet.
According to a 2021 order denying class certification in Crago v. Charles Schwab & Co. Inc., in the U.S. District Court for the Northern District of California, Judge Richard Seeborg ruled that:
[T]he crux of the inquiry for the reliance element is whether each investor relied on Schwab’s alleged misrepresentations and omissions when conducting each particular trade. Although this inquiry would require asking each investor a common question, i.e., whether they had read the alleged misrepresentation and relied on it when choosing to trade with Schwab, there is not a common answer that “resolve[s] [the] issue that is central to the validity of each one of the claims in one stroke.” Instead, each plaintiff would need to provide individualized evidence of their reliance.
The same issue of commonality applies to potential alleged misrepresentations and misstatements made by directors and officers via Twitter. Not every shareholder reads tweets and those that do not have an account may not constitute a purported class of similarly situated investors that claim fraud on the market.
Elon Musk’s recent statements about Tesla Inc. via Twitter exemplify the circumstances under which such information may not provide an accurate representation of a public company’s actual strategic aspirations. According to a recent piece published by Protocol:
Musk tweeted that Tesla would stop accepting bitcoin for vehicle purchases due to the environmental impacts of the fossil fuels used in mining the cryptocurrency. He also said that Tesla would hold onto the bitcoin it already has for future transactions when “mining transitions to more sustainable energy.” (Tesla held about $2 billion in bitcoin at the end of 2021.) About a month later, he tweeted that Tesla would resume accepting bitcoin payments when its miners can show they are using roughly 50% clean energy.
Though not much has been announced about this since last summer, Tesla did say in its October earnings report that it “may in the future restart the practice of transacting in cryptocurrencies.”
A federal judge may conclude that these tweets could potentially constitute an alleged misleading statement related to Tesla’s intended use of cryptocurrency.
According to recent rulings in the Ninth Circuit, potential claims of fraud on the market stemming from potentially misleading tweets may not warrant class action treatment because the alleged harm was not common to all of Tesla’s shareholders — specifically, investors that did not read Musk’s tweets.
Twitter has failed to supplement industry-accepted mechanisms of responsible corporate disclosure and investors may not rely on real-time tweets to establish class action liability against directors and officers for alleged fraud on the market.
Nessim Mezrahi is co-founder and CEO at SAR LLC.
 Weston Family Partnership et al v. Twitter, Inc. Opinion (For Publication), Case 20-17465, D.C. Case No. 4:19-cv-07149.
 Crago v. Charles Schwab & Co., Order Denying Motion for Class Certification, Case No. 16-cv- 03938. Internal citation removed.
 “A timeline of Elon Musk’s wildest Twitter ideas – and whether they worked out,” Protocol, Nat Rubio-Licht, March 28, https://www.protocol.com/bulletins/elon-musk-tweets-promises.