WHAT TRANSPIRED?
The U.S. District Court for D.C. has recently declined a motion to dismiss a lawsuit centered on allegations of fraud in connection with an alleged “pump and dump scheme,” involving:
- An emoji in a tweet, claimed to have triggered a surge in the price of a meme stock.
- A 13D amendment following an issuer stock buyback, which didn’t disclose intentions to sell the stake.
- A Form 144 indicating “potential” sales and including certification of no material adverse information.
KEY POINTS
While the court’s ruling might be subject to appeal and the claims could be disproven during a trial, the decision underscores some important reminders:
- Caution is vital for individuals and insiders using social media platforms.
- Emojis can be considered as disclosures by courts. Due to the risk of misinterpretation, they should be avoided in public communications and market disclosures.
- When submitting a 13D amendment, all aspects should be carefully assessed for possible updating requirements.
- In Form 144, referring to sales as “potential” when the sale has already occurred should be avoided.
- Prior to selling stocks, affiliates should ensure the absence of material nonpublic information (MNPI), especially for sales that must be reported on Form 144.
IN-DEPTH EXAMINATION
Review of events. The factual assertions may ultimately be disproven, but were taken as true for the purpose of the motion to dismiss:
- After selling his online pet store, entrepreneur-turned-investor Ryan Cohen employed the $3 billion in proceeds to establish an investment portfolio consisting of “meme” and mainstream stocks. His influence grew among meme stock investors.
- In March 2022, Cohen acquired a 9.8% stake in Bed Bath & Beyond for $121 million and began publicly endorsing the stock, drawing in retail investors. The stock rose by 34% after his involvement was revealed.
- Despite Cohen’s recommendations, the company encountered difficulties and its investment rating dropped. The stock price fell well below Cohen’s purchase price.
- On August 12, 2022, CNBC tweeted a negative story about the company with an image of a woman at a Bed Bath store. In response, Cohen tweeted: “At least her cart is full” alongside a “smiley moon emoji.” The court interpreted this as an indication that the stock would rise and investors should buy or hold.
- On August 16, 2022, Cohen amended his Schedule 13D to report a change in his ownership percentage due to a change in the number of outstanding shares. He did not disclose plans to buy or sell shares.
- Investors saw Cohen’s filing as continued support for Bed Bath, leading to a stock price increase.
- On August 18, Cohen filed another 13D amendment, reporting the sale of his entire stake, resulting in a $68 million profit. The stock’s price dropped after the sale.
- The same day, he filed a Form 144, stating “potential sale” of common stock and call options.
Court’s findings:
- Emoji’s actionable nature: Emojis can convey actionable ideas, and the moon emoji was understood in the meme stock community to signify a stock’s rise. Investors relied on Cohen’s tweet, leading to stock price increase.
- Failure to disclose selling plan in 13D: Investors filing 13Ds must disclose concrete plans to sell. Cohen’s actions suggested a plan, and failure to disclose this in his amendment was misleading and material.
- “Potential” sales in Form 144 misleading: The plaintiff argued that Cohen had already sold shares when submitting Form 144. Hence, his reference to “potential” sales was misleading.
- Misrepresentation of no MNPI in Form 144: The plaintiff alleged Cohen had access to material nonpublic information, which wasn’t properly disclosed given his stock sales timing and interactions with insiders.
While the article’s assertion might ultimately be disproven, the court’s decision highlights the complexities surrounding emoji interpretation, disclosure obligations, and the potential legal implications for market participants and insiders.
