An increasing amount of securities fraud is perpetrated using social media. A common scheme involves a pump-and-dump, where a perpetrator purchases stock at a low price, shares false information about the issuer’s future prospects that prompts others to buy the stock thereby inflating the price, and then dumps their shares at a profit. Social media provides a convenient means to reach—and defraud—thousands of investors. Still, established securities law doctrine prohibits pump-and-dump schemes regardless of the medium used to disseminate misleading information.
A recent case has called the longstanding prohibition of these schemes into question. United States v. Constantinescu raises a structural barrier to liability for pump-and-dump schemes that effectively immunizes fraud perpetrated on social media. By effectively ruling that a victim must have directly surrendered property to the fraudster, the Constantinescu court all but guarantees that any investor who purchased stock in the stock market on the basis of a social media fraudster’s misinformation cannot recover—even if they lost money. This ignores longstanding tenets of economic theory and contradicts established securities law doctrine. Further, the reality of today’s markets means that nearly every pump-and-dump scheme using social media will involve investors purchasing stock on the stock market.
Author
Albert J. Ruffo Assistant Professor of Law, Santa Clara University School of Law.
Copyright 2024 by Sue S. Guan
Cite as: Sue S. Guan, Fraud on the Social Media Market, 119 Nw. U. L. Rev Online. 206 (2024), https://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?article=1347&context=nulr_online.