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Finfluencers and the Reasonable Retail Investor

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Sua Guan highlights how much recent debate has focused on finfluencer hazards. Finfluencers influence investment decisions greatly on social media.

Image courtesy of interviewee. January 22, 2024

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This video video discusses the influence of social media and retail investors on stock market dynamics, highlighting how influencers can significantly impact stock prices through their online presence, even without explicit misinformation. It cites a securities fraud case involving Ryan Cohen, the founder of chewy.com and current CEO of GameStop, which raises questions about the responsibility and accountability of influencers in this evolving market environment.

The paper argues that existing securities laws, primarily focused on clear deceit and manipulation, struggle to address the "gray area" of influencer accountability, often leaving retail investors vulnerable. This video video notes a recent ruling in a case involving Bed Bath & Beyond, suggesting that courts are beginning to assess the impact of influencer behavior on the reasonable retail investor's perception, even when communications lack concrete information.

Cohen's social media actions, particularly a tweet with an emoji that his followers interpreted as a positive indication about stock performance, led to significant trading activity and profit from his stock sales. The court ruled against Cohen’s dismissal motion, indicating that his tweet could be seen as misleading due to the context in which it was shared, thus opening pathways for future securities litigation against influencers.

The document posits that a focus on the reasonable retail investor could facilitate better protection against harmful influencer activities in the stock market, encouraging more informed investor participation and promoting accountability among influencers in their communications. Overall, it underscores the potential for adapting existing securities regulations to address the unique challenges posed by the influence of social media on trading.

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X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

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These people are these entities

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that have outsized influence on investor decisions

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through social media.

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And this is really because of their reach, the reach

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of influencers, the reach of the retail investors

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that they engage with.

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Combined are really shifting today's stock market

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information ecosystem.

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And they're doing this because influencer

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and retail trading increasingly generate stock price

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movements that reflect their cultural

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values and preferences.

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Information is increasingly disseminated

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through social media and almost anybody can become an

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information broker or a influencer in today's stock markets.

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And a further consequence is

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that influencer's social media activity can generate stock

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price movements through followers trading activity,

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even when that influencer has not made any statements

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containing concrete information directly related

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to the stock price or the underlying companies

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or issuers prospects.

01:02.885 --> 01:04.785
So this paper really arose out

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of a ruling in a securities fraud case brought against the

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activist investor Ryan Cohen, who is also the founder

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of chewy.com and the chairperson in current CEO of GameStop.

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And he is a classic influencer.

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And this study is trying to investigate the scope

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of the current securities laws as applied to the sort

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of gray area that has arisen as a result of influencer

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activity in the stock markets.

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Existing securities laws primarily target lies.

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They're designed to target clear deceit

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or manipulative intent.

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And the two main provisions of the securities laws

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that do this are section nine A

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and section 10 B, along

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with section 10 Bs accompanying rule 10 B five

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of the Securities Exchange Act of 1934.

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Section nine A targets manipulation

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and effectively its reach hinges on the

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manipulator elicit purpose.

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Rule 10 B five has largely been used to police

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deceit and misrepresentation.

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And really what that means in practice is

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that it looks for fraud.

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Again, their focus is on lies.

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And this has created something of a gray area with respect

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to influencer accountability

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because less clear is the application of securities laws

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to situations where a FI influencer does not share false

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information or

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where a influencer arguably doesn't share any concrete information at all.

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But nevertheless, stock prices are reacting

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to something about the influencers behavior

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and the growing ubiquity of influencing has created this

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concern that influencers can influence their followers

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And profit off their followers trading

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while essentially steering clear of the securities laws.

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And retail investors are disproportionately harmed

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by this kind of gray area activity.

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And re Bed Bath and Beyond has had a recent ruling on a

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motion to dismiss, which opens a potential path

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for accountability in precisely these gray area

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or borderline situations.

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And that's the fundamental argument of this study

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in Reed Bath and Beyond is the latest NA series of cases

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and sort of regulatory actions that adjudicate the scope

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of wrongdoing in sort of today's modern trading context.

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However, previous examples

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of influencer litigation primarily involve traditional pump

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and dump schemes.

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In a traditional pump

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and dump scheme, a manipulator purchases stocks

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at a low price

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that manipulator shares false information about

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that stock or about the company.

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This prompts others to buy the stock.

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The price gets inflated

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and then the manipulators will,

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shell sell their shares at a profit.

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And the securities laws are very well equipped

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to handle these traditional pump

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and dump schemes regardless

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of the medium on which they're perpetrated.

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Whether you're calling somebody to manipulate

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or whether you're doing it on Reddit, for example.

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However, this recent district court ruling in, in Reed Bath

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and beyond indicates

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that the securities laws may also be flexible enough

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to handle wrongdoing in the influencer gray area,

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where again, statements may not be factually untrue,

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but you have situations

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where those statements can be interpreted

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as being misleading enough depending on the context

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and the particular beliefs held

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by the influencers social media followers.

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And this brings us to Ryan Cohen

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and specifically Enri Bed Bath and Beyond.

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So Ryan Cohen is the founder of chewy.com,

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the current chair of GameStop's board and it's CEO.

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He is this powerful influencer.

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He is known to his followers as Papa Cohen.

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He's been referred to as a meme stock king.

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He's got nearly 400,000 followers, all

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of whom pay close attention to his social media activity.

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They try to sort

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of divine hidden information on future corporate decisions

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or stock price movements simply based on his social

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media activity.

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And as with other influencers,

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even when Cohen's social media activity contains no

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information directly related to the underlying issuer

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or company, stock prices move in response nevertheless.

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So on August 12th, 2022, in response

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to A-C-N-V-C story stating that Bed Bath

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and Beyond faced these grim financial prospects,

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which included a picture of a woman

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with a shopping cart at the at Bed, bed Bath

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and beyond, Ryan Cohen tweeted the following,

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at least her cart is full, followed

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by a smiley face moon emoji.

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Four days later on August 16th,

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Ryan Cohen filed a Schedule 13 D

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with the SEC stating his current holdings in Bed Bath

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and beyond, which included roughly a 10%,

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11% stake in the company.

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And these are essentially the same positions Cohen had

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previously disclosed in March of 2022,

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about five months prior.

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Nevertheless, upon learning of Cohen's filing,

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retail investors purchased

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around $73 million in Bed Bath and Beyond stock.

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The share price jumped nearly 70%

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that same day Ryan Cohen started selling

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and he sold his entire stake in Bed Bath and Beyond,

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and Ryan Cohen made profits of around $68 million.

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Ryan Cohen then disclosed the sale, the price of Bed Bath

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and Beyond plummeted.

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And Cohen, along with others, was sued by plaintiffs

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for alleged securities fraud.

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And in the lawsuit at Issue was the meaning

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of his August 12th tweet with his smiley face moon emoji.

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And Cohen filed a motion to dismiss.

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He argued that his tweet was neither

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material nor misleading.

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The court rejected his argument.

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The court explained that you have these online community

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communities who understand this smiley moon emoji

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to mean things like to the moon

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or take it to the moon, right,

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that the court thought it was plausible

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that Cohen was telling his hundreds of thousands

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of followers that the stock was going up

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and that they should buy the stock, right?

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That their, that Cohen's followers perceived

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the smiley face moon emoji as a ri rallying cry

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to buy the stock,

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even though Cohen had already soured on Bed Bath and Beyond.

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And what's really happening,

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and the paper makes the argument

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that the court is really assessing these questions

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of materiality in today's context of social media

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and influencing the court considered the meme,

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stock subculture, which associated according

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to the court a moon emoji with the implication

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that a stock will rise.

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And the court considered co Cohen's particular relationship

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with his followers, including his identity

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as a powerful influencer.

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The court noted for example, that investors

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may have reasonably seen Cohen

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as this insider who's sympathetic to them

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that they had this specific relationship with Ryan Cohen

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or viewed themselves as having this specific relationship

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with Ryan Cohen.

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And ultimately the court relies significantly on this

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relationship between Ryan Cohen, this influencer

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and his followers,

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and focused on how his followers would interpret

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Cohen's tweet given those followers

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specific community beliefs.

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And more interestingly, the court did so for a communication

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that otherwise could be argued to contain no

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concrete information at all.

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This is precisely the kind of influencer communication

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that falls within the gray area under the securities laws

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that, we previously discussed.

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And this then opens this path

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for the reasonable retail investor

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to take primacy in future securities litigation

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against influencers.

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So the reasonable investor

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generically has a long history in securities laws central

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to a securities fraud action is the requirement

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of materiality.

09:40.145 --> 09:43.245
And the test for materiality involves determining whether

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there is a substantial likelihood that the disclosure

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of the omitted fact would have been viewed by the reasonable

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investor as having significantly altered the total mix

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of information made available.

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But making this determination has been notoriously thorny

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for courts not least

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because this reasonable investor figure

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has really alluded clear judicial

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or regulatory definition.

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However, there is existing guidance that does gesture

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to a reasonable rational investor, a very rational investor,

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one who is relatively financially sophisticated, maybe not

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to the level of an investment professional,

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but one who understands market concepts certainly

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and conducts financial

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and mathematical research on their own.

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And the standard has been criticized as creating this sort

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of mythical aspirational figure that is unrealistic.

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And similarly in dominant stock market microstructure

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theory, retail investors are thought of

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as these quote uninformed traders who act idiosyncratically

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and trade for reasons unrelated to information

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regarding the fundamental value of any given stock.

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In other words, traditional legal

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and economic theory has given little sort of thought

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to the retail investors' role in capital markets.

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But I've argued

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that retail investors are only growing in power

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and influence, and this effect is substantially amplified

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by the growth of influencing and combined.

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Their impact really is very wide ranging from shifting the

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kinds of information reflected in stock prices

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to driving corporate reactions and capital flow.

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And so perhaps it's unsurprising

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that a court would assess materiality from the perspective

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of a reasonable retail investor specifically.

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And this is precisely

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what the court did in in Reed Bath and beyond.

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The court pointed to quote the meme, stock subculture.

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The court considered Cohen specific relationship

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with his followers.

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In other words, the court did not consider

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Cohen's tweet in a vacuum.

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The court considered the total mix of information

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as would be salient to a retail investor

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and even more specifically to a meme investor

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activity as a result that might previously have been thought

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to occur near, but not directly in violation

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of securities laws such as tweeting emojis,

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purportedly meant as a joke,

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but which lead to follower activity, even when

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that effect is arguably unintentional, might be deemed

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material when viewed through the lens

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of a reasonable retail investor specifically.

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And ultimately, viewing materiality from this perspective

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of a reasonable retail investor

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potentially opens this path forward for the millions

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of retail investors who have been

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or might be harmed by influencer activity

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that falls into this gray area of the securities laws.

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This places primacy on retail investors', interpretation

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of influencer's, social media activity.

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And in doing so, this narrows a gap in securities oversight.

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And I argue that it demonstrates

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that existing securities laws can be flexible enough

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to deter and punish a significant portion

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of problematic influencer behavior.

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The ruling in in Reed Bath and Beyond.

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While preliminary has opened a potential path forward

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for courts to consider the reasonable retail investor,

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especially when considering influencer activity.

13:27.135 --> 13:31.225
Furthermore, if stronger protections against influencers

13:31.275 --> 13:34.105
exist, retail investors may feel more comfortable

13:34.545 --> 13:35.665
participating in the stock market,

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which will have broader macroeconomic benefits.

13:39.295 --> 13:41.785
This might also promote additional information sharing

13:41.785 --> 13:44.865
between influencers, corporations, and retail investors.

13:45.815 --> 13:48.865
Most importantly, it will better motivate influencers

13:48.865 --> 13:50.945
to take greater care in their communications

13:51.365 --> 13:54.825
and support better information generation and dissemination.

00:00 - These people are these entities that have outsized influence on investor decisions through social media. And this is really because of their reach, the reach of influencers, the reach of the retail investors that they engage with.

00:14 - Combined are really shifting today's stock market information ecosystem. And they're doing this because influencer and retail trading increasingly generate stock price movements that reflect their cultural values and preferences. Information is increasingly disseminated through social media and almost anybody can become an information broker or a influencer in today's stock markets. And a further consequence is

00:42 - that influencer's social media activity can generate stock price movements through followers trading activity, even when that influencer has not made any statements containing concrete information directly related to the stock price or the underlying companies or issuers prospects. So this paper really arose out of a ruling in a securities fraud case brought against the activist investor Ryan Cohen, who is also the founder of chewy.com and the chairperson in current CEO of GameStop.

01:16 - And he is a classic influencer. And this study is trying to investigate the scope of the current securities laws as applied to the sort of gray area that has arisen as a result of influencer activity in the stock markets. Existing securities laws primarily target lies. They're designed to target clear deceit or manipulative intent. And the two main provisions of the securities laws that do this are section nine A

01:48 - and section 10 B, along with section 10 Bs accompanying rule 10 B five of the Securities Exchange Act of 1934. Section nine A targets manipulation and effectively its reach hinges on the manipulator elicit purpose. Rule 10 B five has largely been used to police deceit and misrepresentation. And really what that means in practice is that it looks for fraud.

02:20 - Again, their focus is on lies. And this has created something of a gray area with respect to influencer accountability because less clear is the application of securities laws to situations where a FI influencer does not share false information or where a influencer arguably doesn't share any concrete information at all. But nevertheless, stock prices are reacting to something about the influencers behavior and the growing ubiquity of influencing has created this

02:55 - concern that influencers can influence their followers And profit off their followers trading while essentially steering clear of the securities laws. And retail investors are disproportionately harmed by this kind of gray area activity. And re Bed Bath and Beyond has had a recent ruling on a motion to dismiss, which opens a potential path for accountability in precisely these gray area or borderline situations. And that's the fundamental argument of this study

03:30 - in Reed Bath and Beyond is the latest NA series of cases and sort of regulatory actions that adjudicate the scope of wrongdoing in sort of today's modern trading context. However, previous examples of influencer litigation primarily involve traditional pump and dump schemes. In a traditional pump and dump scheme, a manipulator purchases stocks at a low price that manipulator shares false information about

03:58 - that stock or about the company. This prompts others to buy the stock. The price gets inflated and then the manipulators will, shell sell their shares at a profit. And the securities laws are very well equipped to handle these traditional pump and dump schemes regardless of the medium on which they're perpetrated. Whether you're calling somebody to manipulate

04:20 - or whether you're doing it on Reddit, for example. However, this recent district court ruling in, in Reed Bath and beyond indicates that the securities laws may also be flexible enough to handle wrongdoing in the influencer gray area, where again, statements may not be factually untrue, but you have situations where those statements can be interpreted as being misleading enough depending on the context and the particular beliefs held

04:50 - by the influencers social media followers. And this brings us to Ryan Cohen and specifically Enri Bed Bath and Beyond. So Ryan Cohen is the founder of chewy.com, the current chair of GameStop's board and it's CEO. He is this powerful influencer. He is known to his followers as Papa Cohen. He's been referred to as a meme stock king. He's got nearly 400,000 followers, all of whom pay close attention to his social media activity.

05:20 - They try to sort of divine hidden information on future corporate decisions or stock price movements simply based on his social media activity. And as with other influencers, even when Cohen's social media activity contains no information directly related to the underlying issuer or company, stock prices move in response nevertheless. So on August 12th, 2022, in response to A-C-N-V-C story stating that Bed Bath

05:50 - and Beyond faced these grim financial prospects, which included a picture of a woman with a shopping cart at the at Bed, bed Bath and beyond, Ryan Cohen tweeted the following, at least her cart is full, followed by a smiley face moon emoji. Four days later on August 16th, Ryan Cohen filed a Schedule 13 D with the SEC stating his current holdings in Bed Bath and beyond, which included roughly a 10%,

06:20 - 11% stake in the company. And these are essentially the same positions Cohen had previously disclosed in March of 2022, about five months prior. Nevertheless, upon learning of Cohen's filing, retail investors purchased around $73 million in Bed Bath and Beyond stock. The share price jumped nearly 70% that same day Ryan Cohen started selling and he sold his entire stake in Bed Bath and Beyond,

06:47 - and Ryan Cohen made profits of around $68 million. Ryan Cohen then disclosed the sale, the price of Bed Bath and Beyond plummeted. And Cohen, along with others, was sued by plaintiffs for alleged securities fraud. And in the lawsuit at Issue was the meaning of his August 12th tweet with his smiley face moon emoji. And Cohen filed a motion to dismiss. He argued that his tweet was neither material nor misleading.

07:19 - The court rejected his argument. The court explained that you have these online community communities who understand this smiley moon emoji to mean things like to the moon or take it to the moon, right, that the court thought it was plausible that Cohen was telling his hundreds of thousands of followers that the stock was going up and that they should buy the stock, right? That their, that Cohen's followers perceived

07:46 - the smiley face moon emoji as a ri rallying cry to buy the stock, even though Cohen had already soured on Bed Bath and Beyond. And what's really happening, and the paper makes the argument that the court is really assessing these questions of materiality in today's context of social media and influencing the court considered the meme, stock subculture, which associated according to the court a moon emoji with the implication

08:14 - that a stock will rise. And the court considered co Cohen's particular relationship with his followers, including his identity as a powerful influencer. The court noted for example, that investors may have reasonably seen Cohen as this insider who's sympathetic to them that they had this specific relationship with Ryan Cohen or viewed themselves as having this specific relationship with Ryan Cohen.

08:42 - And ultimately the court relies significantly on this relationship between Ryan Cohen, this influencer and his followers, and focused on how his followers would interpret Cohen's tweet given those followers specific community beliefs. And more interestingly, the court did so for a communication that otherwise could be argued to contain no concrete information at all. This is precisely the kind of influencer communication

09:12 - that falls within the gray area under the securities laws that, we previously discussed. And this then opens this path for the reasonable retail investor to take primacy in future securities litigation against influencers. So the reasonable investor generically has a long history in securities laws central to a securities fraud action is the requirement of materiality.

09:40 - And the test for materiality involves determining whether there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. But making this determination has been notoriously thorny for courts not least because this reasonable investor figure has really alluded clear judicial or regulatory definition.

10:12 - However, there is existing guidance that does gesture to a reasonable rational investor, a very rational investor, one who is relatively financially sophisticated, maybe not to the level of an investment professional, but one who understands market concepts certainly and conducts financial and mathematical research on their own. And the standard has been criticized as creating this sort of mythical aspirational figure that is unrealistic. And similarly in dominant stock market microstructure

10:45 - theory, retail investors are thought of as these quote uninformed traders who act idiosyncratically and trade for reasons unrelated to information regarding the fundamental value of any given stock. In other words, traditional legal and economic theory has given little sort of thought to the retail investors' role in capital markets. But I've argued that retail investors are only growing in power and influence, and this effect is substantially amplified

11:15 - by the growth of influencing and combined. Their impact really is very wide ranging from shifting the kinds of information reflected in stock prices to driving corporate reactions and capital flow. And so perhaps it's unsurprising that a court would assess materiality from the perspective of a reasonable retail investor specifically. And this is precisely what the court did in in Reed Bath and beyond. The court pointed to quote the meme, stock subculture.

11:49 - The court considered Cohen specific relationship with his followers. In other words, the court did not consider Cohen's tweet in a vacuum. The court considered the total mix of information as would be salient to a retail investor and even more specifically to a meme investor activity as a result that might previously have been thought to occur near, but not directly in violation of securities laws such as tweeting emojis,

12:19 - purportedly meant as a joke, but which lead to follower activity, even when that effect is arguably unintentional, might be deemed material when viewed through the lens of a reasonable retail investor specifically. And ultimately, viewing materiality from this perspective of a reasonable retail investor potentially opens this path forward for the millions of retail investors who have been or might be harmed by influencer activity

12:47 - that falls into this gray area of the securities laws. This places primacy on retail investors', interpretation of influencer's, social media activity. And in doing so, this narrows a gap in securities oversight. And I argue that it demonstrates that existing securities laws can be flexible enough to deter and punish a significant portion of problematic influencer behavior. The ruling in in Reed Bath and Beyond. While preliminary has opened a potential path forward

13:18 - for courts to consider the reasonable retail investor, especially when considering influencer activity. Furthermore, if stronger protections against influencers exist, retail investors may feel more comfortable participating in the stock market, which will have broader macroeconomic benefits. This might also promote additional information sharing between influencers, corporations, and retail investors. Most importantly, it will better motivate influencers to take greater care in their communications

13:51 - and support better information generation and dissemination.

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