Do Investors Pay Attention to Social Media? A Response to Christine Hurt, Socially Acceptable Securities Fraud

Abstract

In her paper, Socially Acceptable Securities Fraud, Professor Christine Hurt poses a critical question: should the securities laws distinguish between a company’s formal corporate statements and those it makes on social media? Professor Hurt offers an important and thorough analysis of social media in recent securities class actions brought under Rule 10b-5 of the Securities Exchange Act of 1934.

This question—and Professor Hurt’s contribution—are necessary and important for a number of reasons. First, social media today plays a significant role in mediating information that reaches investors. In addition, information dissemination today is largely multidirectional, meaning that almost anyone can become an information broker in today’s markets. However, despite the proliferation of social media as a medium for disseminating information in stock markets and the potential associated risks, little systematic study has been done on the interaction between social media and liability for issuers using social media. As Professor Hurt explains, while courts do treat social media statements as potentially actionable, they typically engage in a case-by-case analysis of whether issuer statements on varying platforms are false, material, or made “in connection with” securities under Rule 10b-5, creating substantial uncertainty for market participants and litigants. Professor Hurt ultimately proposes limiting the categories of speech that would give rise to securities fraud liability under Rule 10b-5, arguing that “there may be a level of socially acceptable securities fraud that must be tolerated in an information society.” Doing so, she reasons, will provide ex ante clarity to market participants and reduce the burden on courts.

Professor Hurt’s analysis will no doubt accelerate the conversation around liability for social media statements. It is an important dataset on which to ground much further study. And in accelerating the conversation, I believe that it reanimates two questions that have plagued securities regulation for decades: (1) who is the reasonable investor and (2) who bears the informational burden in stock markets?