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2022 was the year that the SEC started to get serious about cracking down on social media influencers peddling worthless stocks and cryptos. The high-profile case that got everyone buzzing, of course, was the $1.26 million fine that the SEC levied against top influencer Kim Kardashian for a single Instagram post urging her followers to buy a near-worthless crypto called EthereumMax.
But that was hardly an isolated incident. The SEC recently brought an enforcement action against eight social media influencers involved in a $100 million stock manipulation scheme. According to the SEC, the eight influencers fed followers a “steady diet of misinformation” designed to prop up the value of different stocks before the inevitable collapse of those stocks. In many ways, these influencers just recycled a version of the classic pump-and-dump scheme, while utilizing a number of different tools from the social media era to make it as convincing as possible.
The SEC takes on the big social media influencers
In many ways, it’s getting harder and harder to spot a stock market scam, and social media is to blame. First of all, it’s very difficult to tell when an “influencer” is really just a scammer trying to pump up the value of a certain stock. Take the example of the $100 million stock manipulation scheme: one of the ringleaders (“PJ Matlock”) had over 338,000 followers on Twitter, and even had a blue check mark next to his name. His profile photo looked legit, too: it was a young guy in a tuxedo. In between tweets about the market, he also included some tweets about the geopolitical situation in Ukraine, so it was clear this wasn’t some kind of bot account. And it looked like this account was also interacting with a number of other different individuals who also appeared to be market experts. The account even made it clear to point out that “posts are opinions only, I’m not a financial advisor,” so it looked legit.
On the surface, then, there were no obvious signs that this was a fraudulent account. But what people did not realize was that the eight members of this scam were all working together. Using Discord and Twitter, they carefully put out fraudulent price targets and told their followers when to buy and sell. By carefully coordinating their predictions, they were able to create the illusion that they were “expert traders” who knew how to analyze stocks and make a profit at just the right time. But it was all just a massive pump-and-dump: once they had used social media to take a stock as high as it could possibly go, they started selling in order to cash out first before the stock collapsed.
Why is the SEC getting involved?
If you’re skeptical, you might be wondering why the SEC is deciding to crack down now, and using a high-profile influencer like Kim Kardashian as an example. One answer might be that the SEC recognizes that the scale of the game has forever changed with social media. In the pre-social media days, the only way to pull off a true pump-and-dump scheme was by making cold calls via the telephone, and so you were limited in how many people you could contact at any time. How many people could you possibly call in a single day?
But just look at what Kim Kardashian can accomplish with a single Instagram post. She has 328 million followers, so if only 1% of those followers decide to buy her favorite crypto, that’s still more than 3 million people inflating the value of something that’s worthless. With social media, it is becoming easier and easier to move the market, simply given how ubiquitous these platforms are today.
Moreover, social media has almost zero barrier to entry, since all the major platforms are free. Since tweets are free, the cost of putting together a crypto or stock market scam is also free. With social media, it’s remarkably easy to amass thousands of followers almost overnight, thanks to the fact that it’s possible to outright buy followers in the open market. Given that most people are impressed with a huge audience size, it only makes sense that people are going to trust someone who has tens of thousands of followers. Even better if all of their friends also have tens of thousands of followers. This solves the whole problem of trust.
So caveat emptor (“let the buyer beware”) out there if you’re looking to use social media as a way to make money in the markets. Beware of anyone telling you that a particular stock or crypto is “going to the moon,” or if anyone pressures you into the FOMO (“Fear of Missing Out”) of a big trade. With social media, it has just become so ridiculously easy to manipulate the market that it makes sense the SEC is trying to stop things before it really gets out of control.