How effective are market regulations in controlling manipulations through Twitter

It would be no exaggeration to say that Elon Musk has a complicated relationship with Twitter. Musk’s egregiously public, and ultimately ill-fated, bid to acquire Twitter Inc. had the trappings of a reality TV show. The dramatic twists and turns of negotiating a corporate deal, which are typically confined to the boardrooms, were played out for the world at large, with Musk never shying away from expressing his views on the micro-blogging platform he wished to acquire.

Over
the course of a few months, Musk
accumulated a sizeable stake in Twitter, came close to joining its board of directors, made an offer to buy Twitter, criticised decisions taken by the company’s executives and triggered their online trolling, raised concerns about the
number of spam accounts among Twitter’s user data, and finally decided to terminate the deal. Musk’s millions of followers were afforded a ring-side view to this saga. The parties will now lock horns in court, as Twitter seeks to enforce the deal with
a reported break-fee of $1 billion.

This controversial takeover attempt is, of course, not the first time Musk’s free-spirited conduct on Twitter has had a litigious outcome. In 2018, his tweet about taking his publicly-listed electric car manufacturing company, Tesla Inc, private had attracted the ire of the Securities and Exchange Commission (SEC), the US securities regulator. At the time, Musk had paid fines and entered into a settlement agreement with the SEC, which required his tweets about Tesla to be vetted by lawyers. To the delight of his followers, this tangle with the SEC did not serve to diminish his enthusiastic use of Twitter. Over the years, Musk has continued to use the platform to broadcast his views on a variety of topics and grow his near-cultish fandom. One such recent tweet could well have added legions of football fans to his following.

On August 17, he
tweeted that he is “buying Manchester United”, a storied football club in England and a listed entity on the New York Stock Exchange (NYSE). Once a trophy-winning juggernaut, the Manchester United Football Club has been struggling on the pitch in recent years,
but continues to remain an immensely valuable brand. Nevertheless, its estimated valuation at $4.6 billion is practically pocket change for a man as wealthy as Musk. For four-and-a-half hours, fans of the football club dreamed about a return to the glory days, backed by Musk’s billions, before he clarified that he was not serious and merely stoking a “
long-running joke on Twitter.” During that time, the shares of Manchester United saw a 17% spike before settling around 3% above the previous trading day’s closing price on the NYSE.

Media reports suggest that while the SEC may probe this event, they would be hard pressed to
hold Musk liable for securities fraud under the US laws. It remains to be seen whether this assessment is tested in a court of law, but this incident has once again highlighted how the social media activity of influential business people can have very real-life effects.

Musk is a role model for countless aspiring start-up founders and promoters, and his actions have the ability to shape their philosophy and behaviour. In particular, the manner in which he has wielded Twitter to bolster his fame is bound to seem attractive to business-owners keen to expand their digital presence. In India as well, the trend of young business leaders and financial influencers (‘finfluencers’) using social media to build their brand, is on the rise. Unicorns and start-ups too have an increasingly lively presence on social media. To these new-age, tech-reliant businesses, the traditional routes of corporate communications – press releases, stock exchange disclosures, etc. – seem antiquated and the relics of a bygone era. Social media provides them with the opportunity to reach out directly to a wider audience and boost their market recognition by creating eyeball grabbing content. Given this scenario, an event akin to the Manchester United-Musk affair occurring in India, involving Indian actors and corporates, is well within the realm of possibility. How would the Indian securities law treat such an episode?

The Securities and Exchange Board of India (SEBI), India’s securities market regulator, has framed regulations that prohibit (and punish) market manipulation/ securities fraud: the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations). Unlike the SEC, SEBI does not have wire-tapping powers, which can enable it to access incriminating conversations between the perpetrators of fraud.

To offset this hindrance, a couple of jurisprudential and legal fixes have been developed historically to strengthen the regulator’s hand. First, the watering down of the evidentiary standard for civil liability to one of ‘preponderance of probability’ as opposed to the high standard of ‘proof beyond reasonable doubt’ required in criminal cases. In simpler words, this means a lower burden on the prosecutor (SEBI, in this case) to demonstrate that it was probable that the offence had occurred, by relying on circumstantial evidence when direct proof is unavailable. Second, the framing of the PFUTP regulations in a manner that deems certain actions to be fraudulent. For instance, knowingly planting false or misleading news that may induce trading in securities is
prima facie presumed to be fraudulent conduct. In such a fact pattern, the regulator need not delve into the mind of the perpetrator to determine their nefarious intent – it can proceed on the basis that the act itself proves the intent. The burden then shifts to the perpetrator to disprove the allegation of fraud, through evidence and alternative explanation of their conduct.

Indeed, while interpreting the aspect of deemed fraudulent conduct under the PFUTP Regulations, the Supreme Court has in the past (
SEBI v. Rakhi Trading) observed that “it is not necessary that the transactions entered into by the party was with intention to manipulate the market and that the market was in fact manipulated….. If the factum of manipulation is established, it will necessarily follow that the investors in the market have been induced to buy or sell and that no further proof in this regard is required.”

Applying the PFUTP regulations to the Manchester United-Musk incident makes for an interesting analysis. At the time he tweeted about buying the football club, Musk knew it to be a false statement. One can imagine a regulator would also expect someone of Musk’s financial sophistication to have known his tweet could impact the market. These two ingredients would be sufficient for SEBI to bring a charge of market manipulation under the PFUTP Regulations.

While a person charged under these regulations is provided an opportunity to defend himself/ herself, the proceedings inevitably consume time and resources. Vying for the attention of consumers is an intensely competitive activity and it may be tempting to resort to flippant humour à la Musk. But given the prevailing securities laws, founders and finfluencers in India would do well to tread cautiously when it comes to talking about listed companies on social media.

(The author, Rohan Banerjee, is Senior Consultant – Legal Learning & Research, Cyril Amarchand Mangaldas)