Federal Judge Dismisses Indictment Against Eight Individuals Accused of $100 Million Stock Manipulation Scheme on Social Media – SEC Fails to Provide Sufficient Evidence for “Scheme to Defraud”
A significant development took place in a securities fraud case as District Judge Andrew Hanen of the United States District Court for the Southern District of Texas dismissed an indictment against eight individuals, which included seven Twitter users and a podcaster, who were accused of masterminding a $100 million stock manipulation scheme over social media.
Background: Social Media Influencers and Stock Promotion Scheme
The Securities and Exchange Commission (SEC) alleged that these social media influencers employed a lucrative “pump-and-dump” scheme using the messaging app Discord. They reportedly used this platform to promote certain stocks to their substantial followings, which numbered in the hundreds of thousands. Subsequently, these individuals would sell off their positions once a noticeable increase in stock prices occurred.
One of the defendants whose account was reviewed by News Finder at the time of the suit had discussed Gamestop and AMC, two stocks that gained considerable public interest and trading in 2021. These stocks were often referred to as “meme stocks.”
The Ruling: Judge Hanen’s Decision and the Definition of a Scheme to Defraud
In his order dated Wednesday, Judge Hanen determined that while the defendants may have intended to swindle their followers out of their money, the evidence presented did not support a finding of securities fraud or conspiracy to commit fraud. The judge wrote:
“The key question is whether one statement by one of the co-defendants that ‘we’re robbing … idiots of their money,’ which is alleged in the Indictment, is sufficient. This statement sufficiently alleges ‘intent to defraud’ … but does not on its own sufficiently allege that Defendants executed, or conspired to execute, a ‘scheme to defraud’ investors of money or property” as defined by court precedent.
Traditional fraud cases involve the direct theft of money from victims, whereas in this case, the SEC claimed that investors were deprived of essential market information.
Consequences: Indictment Dismissed Without Prejudice
The indictment was dismissed without prejudice, meaning that the SEC could potentially amend and refile charges if they are able to provide sufficient evidence for a “scheme to defraud.” The SEC did not respond to a request for comment.
Takeaways:
The dismissal of this indictment raises important questions regarding the regulatory landscape surrounding social media and its impact on securities trading. The judge’s decision highlights the challenges involved in proving a “scheme to defraud” when relying on indirect evidence and the potential influence of public sentiment on securities trading.
