March 4, 2022

Lawsuit Shows Importance of Social Media Controls

In a webcast last year – “Cyber, Data & Social: Getting in Front of Governance” – we talked about the importance of social media oversight & controls. The guidance is more on-point than ever now that shareholders have filed a class action complaint against a company for mistakenly tweeting just a portion of financial results (the good part, about a revenue jump).

The tweet – which was subsequently deleted – went out before the scheduled release time for the official earnings release, which provided a less rosy full picture (net loss and a miss of analyst estimates). Shareholders are therefore alleging that the tweet omitted material information and violated Section 10(b) and Rule 10b-5. Over on the “D&O Diary” blog Kevin LaCroix provides analysis:

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.

Liz Dunshee