Tuesday’s ruling by the Securities and Exchange Commission could open the fraud floodgates by enabling virtually anyone who wants to manipulate the markets to do so using social media.
As a result, Facebook Inc (NASDAQ:FB), Twitter and other social networks could be facing increased legal risks as well, simply by providing a platform that isn’t secure enough for the dissemination of official information about a company.
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The ruling was handed down Tuesday on a case involving Netflix, Inc. (NASDAQ:NFLX) CEO Reed Hastings. The SEC decided that he should not be sanctioned for announcing how many viewers Netflix had on his Facebook account. The agency found that Netflix’s official blog had details similar to Hastings’ post and was more technical in nature.
It decided not to sanction Hastings or Netflix, Inc. (NASDAQ:NFLX) even though it didn’t release the information in a public filing rather than on the Internet. And the reason for that decision? Uncertainty about requirements for disclosing information about public companies over social media.
The ruling basically sets a dangerous precedent because it provides a very broad avenue for the dissemination of information about public companies over social media. Currently the SEC requires that official communication involving investments into the companies can only be disseminated by social media if the company informs investors that it intends to do so. Netflix, Inc. (NASDAQ:NFLX) did not do that.
Of course it’s a natural step to allow companies to release information via social media, but the big problem is that it’s far too easy to fake social media accounts. For example, earlier this year, shares of Audience Inc (NASDAQ:ADNC) plummeted in just a few seconds because of a tweet on a fake account that appeared to be from Conrad Block at Muddy Waters.
The fraudster not only used Block’s name and his firm’s name but also the same photo that’s used on the firm’s Twitter account. Muddy Waters posted on its real Twitter feed that it didn’t have any connection with the fake account. The Department of Justice is now investigating the fake tweet.
Of course this incident is slightly different because Muddy Waters is a research firm, and the fake tweet was about another company, but it wouldn’t take much of a leap for a fraudster to jump from using a well-known analyst’s name and firm name to manipulate the markets via a fake post to using a CEO’s name and company name to post false information about the company.
All it takes is a slight change in spelling or an abbreviation, and a fake account can easily be set up. So now that we have the precedent set by the case involving Netflix, Inc. (NASDAQ:NFLX), will we see more of what happened to Audience Inc (NASDAQ:ADNC)?
The key here is obviously for the SEC to instigate better controls over how social media is used to release information about public media. In short, how do investors know which social media accounts truly belong to companies and which actually belong to fraudsters? Right now, there are few ways to tell.