Martin Shkreli, former CEO of biotech company Retrophin, and an ex-hedge-fund manager invoked his Fifth Amendment rights while testifying before Congress in 2016. During the hearings, his body language and facial expressions elicited widespread outrage. After the congressional hearings, Shkreli tweeted, "Hard to accept that these imbeciles represent the people in our government." Shkreli had a widely followed, yet a poorly managed social media practice.
On a separate criminal matter, involving hedge fund investors and a drug company he founded, Shkreli was convicted of securities fraud. He is currently serving a seven-year sentence in a federal prison in New Jersey and was fined $75,000. Additionally, he was ordered to forfeit $7.36 million. A choked-up Shkreli told the judge at his sentencing, "The one person to blame for me being here today is me. I took down Martin Shkreli with my disgraceful and shameful actions."
Tesla CEO, Elon Musk liberally uses Twitter to disclose company “material information,” and express his thoughts. His whimsical and cathartic media statements have led to numerous controversies and troubles.
Sniping and insulting analysts during a conference call; publicly accusing a Thai rescue diver for being a pedophile with no evidence; conducting a radio interview while smoking marijuana; on August 7th a whimsy tweet about taking Tesla private at $420 TSLA stock price; next day doubling down and stating funding secured; subsequently, on August 24th, reversing and abandoning these statements which triggered an investigation by SEC, etc., are some of the media shenanigans displayed by then Tesla Chairman and CEO, Musk.
Continuing with the shenanigans, Musk rejected a settlement with SEC on September 28th that resulted in SEC suing Musk; only to accept the settlement over the weekend of September 29-30. After agreeing to the settlement, strangely, on Oct 4th, Musk derided SEC as aiding and abetting short sellers of Tesla stock. His mocking tweet said, “Just want to [say] that the Shortseller Enrichment Commission is doing incredible work. And the name change is so on point!”
The August 7th going private tweet sparked an 11 percent rise in Tesla stock price. Ihor Dusaniwsky, head of S3's predictive analytics, estimates that the short-sellers had mark-to-market losses of $1.3 billion that day. Musk’s rejection of the SEC settlement offer resulted in federal charges, which triggered a 14% drop in Tesla stock price (TSLA) on September 28th, resulting in Tesla market cap loss of $7.293 billion. Elon Musk's personal Tesla shareholdings slid by $1.44 billion.
Finally, as part of the settlement with the SEC, Musk agreed to pay a personal $20 million fine, and step aside as Tesla's Chairman for three years. Tesla as a company also accepted a $20 million fine, despite not being initially charged.
Musk’s and Shkreli’s cathartic and excessive media expressions underscore the inherent risks associated with social media usage and provide essential lessons for all. Elon Musk’s use of Twitter to communicate at whim or Martin Shkreli’s live streaming to opine and vent, highlight the human frailties that can get exposed while functioning in these high-pressure jobs or hot seats.
Regulation Fair Disclosure (Reg FD) was promulgated by the U.S. Securities and Exchange Commission (SEC) in August 2000. The regulation prohibits public companies from disclosing nonpublic, material information to select few unless it is distributed to the public first or simultaneously. Reg FD is enforced to ensure that all investors can gain access to material information at the same time.
As a result of Reg FD, the company conference calls to discuss financial results conducted by management and Investor Relations (IR) are open to all interested investors (“open calls”). Company presentations at investment/industry conferences and investment “bus tours” are webcast live. Machine-driven algorithms and RSS feeds gather and disseminate news and information on a continuous basis in real-time.
SEC has provided guidance and suggestions regarding social media disclosure of Regulation FD material information - “Most social media are perfectly suitable methods for communicating with investors, but not if the access is restricted or if investors don’t know that’s where they need to turn to get the latest news.”
In this social media disclosure era, meeting SEC’s broad distribution guidelines is the least burdensome of company compliance issues. The more significant concern is the accuracy of the impulsive representations made by executives via numerous social media channels. Any “material information” disclosed on company managers’ social media postings, which are not appropriately vetted and simultaneously disseminated by the usual communications channels, could violate Reg FD or be construed as market manipulation.
Social media is a powerful interactive channel for information dissemination, and if used judiciously can help the company build its brand and enforce market efficiencies. Companies must have clear social media policies. Here are a few suggestions: Explicitly state and designate in 8K filings, the names and their respective social media account handles, of each officer and executive authorized to distribute “material information.” Concomitantly complete the required regulatory filings for “material information” disclosures via such designated accounts. Design and enforce internal compliance controls to ensure the accuracy of these disclosures. Incorporate guidelines into employee training programs for social media usage, instant messaging and possible violations of securities laws.
On the one hand, social media makes information available in a much more “level playing” manner and adds to the efficiencies of the market, on the other hand, it makes the company and its executives much more vulnerable to regulatory mishaps and legal snafus. Internal compliance controls must make sure that the social media disclosures by the designated officers and executives are disseminated with adequate oversight to avoid violating the laws, both at the individual and company level.
SEC needs to work with companies such as Twitter and Facebook to make the regulatory filing and disclosure processes much more seamless and fitting with the evolving social media disclosure channels. The designated company executive social media accounts should be able to not only seamlessly disseminate the information to the outside investors but also simultaneously trigger and file regulatory updates, albeit after the respective company’s internal compliance vetting for accuracy.
Social media, however, also offers external individuals the platform and venue to form and promulgate convictions about the company. For example, opinions of an influential analyst with a large social media following can impact the company stock price. This phenomenon can reduce the company’s ability to control the accuracy of corporate information and narratives. Nevertheless, a strong social media presence by the company can help rebut such propagated views.
As millennials take on more prominent roles in corporations, they need to be mindful of the positive and negative attributes of social media. Their unfettered and compulsive need to share views and thoughts via social media warrants a focus in the context of corporate governance. While a careful and deliberate social media usage can help build their own and the company brand, an ill-advised and excessive use can explode into a firestorm and even bring forth criminal charges.
Although spontaneity and rapidity with which one can post on social media can elude thoughtful deliberations, the more damning and harmful attribute of social media, ironically, is – “content indelibility.” The speed of dissemination, permanence, along with “going viral,” of a tweet or a post can take a life of its own and may result in severe long-lasting adverse consequences.
Career and reputation carefully built with years of hard work can be ruined with one wrong “viral” social media post. An inadvertent material information disclosure by a corporate officer on a social media account, not declared as an official venue by the company, can trigger regulatory lapse, resulting in a violation of the law and can become incriminating evidence. Ad-hoc tweeting and disclosure, without the proper procedural checks with internal compliance can be construed as the age-old pump and dump or outright market manipulation.
Breathe and deliberate before you post or tweet!!
