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D&O risk amid the frenzy of social media stock trading influence

Financial, Executive and Professional Risks (FINEX)
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By John M. Orr | February 17, 2021

Recent social media activity impacting stock valuation and trading presents risk to affected organizations and their directors and officers.

For more than a decade, social media platforms have established their influence in the flow and manipulation of information and in the discourse of social and political issues. Their influence in the manipulation of stock valuation and trading emerged like a tidal wave over the past several weeks, leading to swift and significant increases in the stock prices of several high profile companies, and to litigation against securities transaction platforms for the halting of trading of these stocks.

The impact of the phenomenon to hedge funds and other investment vehicles who shorted affected stocks, believing the value of these companies would fall, not rise, may be significant. In addition, the spectacle is highlighting a struggle between the influence of “Wall Street vs. Main Street,” as well as calls for government oversight into stock price manipulation and trade halting. Caught in the crossfire, however, are companies whose stocks are wildly fluctuating, in many instances due to factors outside their control. To what degree does this present risk to these organizations and their directors and officers?

We have developed this alert with the understanding that the underlying narrative continues to evolve, and the complete scope of developing risk issues remains to be seen. From the perspective of director and officers (D&O) liability, consideration may be given to the issuance of risk disclosures involving the social media influence on stock price fluctuation. This may be particularly prudent for companies engaged in or contemplating the public offering of securities, as the absence or inadequacy of risk disclosures may provide the basis for liability under the Securities Act of 1933. As of this writing, we are aware of litigation filed against trading platforms relating to the halting of trades; however, we are not aware of shareholder litigation against companies whose stocks have been impacted.

For now, we are monitoring developments on numerous fronts, including:

Regulatory scrutiny: The federal securities laws preclude dissemination of false or misleading information with the objective of manipulating investors into buying or selling securities. Will regulators scrutinize social media platforms as to whether they were utilized in any manner that could be construed as unlawful? Was the posted information at issue “false” or “misleading,” or was it not materially different in substance than the information investment firms and financial advisors use to guide clients and to transact trades on their behalf? The U.S. Securities and Exchange Commission (SEC) may feel pressure to review the practice; however, an agency in transition from one administration to another could create uncertainty in the short term.

Legislative oversight: One can hardly conceive of many other issues in which politicians from different ideological stripes have had a similar reaction. Legislators from Alexandria Ocasio-Cortez to Ted Cruz recently expressed support for congressional hearings into the halting of transactions by trading platforms. Beyond investigating the platforms, will legislation follow? Will this be an area for regulatory scrutiny and rulemaking as well?

Litigation: Multiple lawsuits against trading platforms have already been filed. Will suits from shareholders of targeted organizations come next? At this early stage, we suspect that litigation against companies caught in the middle through no fault of their own will be minimal. Having said that, companies may wish to consider addressing disclosures going forward, especially those organizations engaged in or contemplating the public offering of securities.

We urge companies to confer with their counsel on the scope and timing of advisable risk disclosures. We also urge them to confer with their insurance brokers to review their D&O programs – and any and all other impacted corporate insurance programs – including program structures and policy wording. Proactive measures such as this serve to enhance the likelihood of comprehensive policy recovery should a claim arise.

Disclaimer

Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed subsidiaries of Willis North America Inc., including Willis Towers Watson Northeast Inc. (in the United States) and Willis Canada, Inc.

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D&O Liability Coverage Leader, FINEX

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