As social media companies and businesses rely more heavily on their social media platforms to make important company announcements, state law claims asserting negligent misrepresentation or failure to adequately disclose information relating to announcements made on these outlets are bound to arise.
For instance, Pope Trading LLC recently filed a complaint in California Superior Court against Twitter Inc. alleging negligent misrepresentation based on Twitter’s early release of its financial results for the first quarter of the 2015 fiscal year. Everything that gives rise to this claim appears to take place within a seven-hour time period on April 28, 2015. The allegations state that Twitter tweeted the following on its handle at 10:08 a.m. EST:
Twitter Q1’15 earnings today after market close. Listen to our call at 2pm PT via @twitterIR or investor.twitterinc.com. #TWTRearnings
Pope Trading alleges that it relied upon this announcement in purchasing almost $10 million of Twitter stock after the tweet was made on April 28, 2015, with the plan to sell that stock later that same day prior to the market close. However, Shareholder.com Inc., the NASDAQ-owned company hired by Twitter to handle the release of its quarterly and annual financial reports, prematurely released Twitter’s financial results on Twitter’s investor relations portal at 3:07 pm that day. Selerity Inc., a real-time content analytics and media company, discovered this information and sent it to its Wall Street clients before tweeting the information to the public at large. The financial results reported failed to meet Wall Street’s expectations. The allegations state that, as a result of the early release of the results, the price of Twitter’s shares dropped significantly by the time market closed and Pope Trading sustained losses.
Much of the claim rests on the allegation that Twitter did not have reasonable controls in place to prevent the early disclosure of its financial results and knew, or should have known, that such early disclosure would take place. As an example, Pope Trading cites the fact that Shareholder.com has made at least one other inadvertent early disclosure of financial information and also cites instances where other companies’ financial results were prematurely released for various reasons.
This claim raises the question as to what steps Twitter should have taken prior to making its tweet. If Twitter had verified the timing of the disclosure with Shareholder.com prior to its tweet at 10:08 a.m., it is not clear how Twitter knew or should have known that the early disclosure would occur, or how Twitter would not have had a reasonable ground to believe that its tweet was true when made. Perhaps Twitter’s procedure was to simply instruct Shareholder.com as to the proper timing of its releases prior to, or concurrently with, the submission of its results to Shareholder.com. In that case, then what other steps, if any, should Twitter have reasonably taken to ensure that its instructions were properly carried out? It would appear that Pope Trading is suggesting here that Twitter should have had a policy of not even submitting the results to Shareholder.com until after the market closed, however, that type of control would not seem practical.
There are also questions as to causation presented here that the parties will likely wrestle with. For example, was it the timing of the actual release of the financial results that really caused the drop in Twitter’s stock and Pope Trading’s alleged resulting damages, or was it the content (i.e. Twitter’s poor financial performance)? Presumably, if Twitter had instead reported blockbuster numbers then its stock price would have likely risen in value, even if the results were released prematurely. Perhaps Pope Trading will argue that it would not have made the purchase at all in the absence of the tweet, in which case it still would have had the $10 million in cash that it originally paid for the shares.
Although Pope Trading alleges that they relied upon the tweet in purchasing the shares, Pope Trading’s claim also appears to have some attributes akin to a “holder’s action” for negligent misrepresentation. Pope Trading might argue that, as of 3:07 p.m. (immediately before the results were prematurely made public) they had been forbearing from selling their acquired shares, in continued reliance upon the tweet (i.e. they had been wrongfully induced to hold the shares through 3:07 p.m.), and although they had not yet pulled the trigger, they still intended to sell those shares later in the trading day prior to the market close. Although some courts in other jurisdictions might be concerned that such a claim presents an undue risk for potential speculative, frivolous lawsuits (i.e. from other Twitter shareholders who might conjure up claims in hindsight that they, too, intended to sell prior to the market close that day), given the California Supreme Court’s decision in Small v. Fritz Companies, Inc., 30 Cal.4th 167 (2003), which rejected similar policy-based arguments, Pope Trading selected a relatively receptive forum by suing in California state court. It will be interesting to see how the parties and the court address issues of causation and damages in future filings in this case.
In any event, putting aside the merits of this particular claim, the lesson learned is to always be careful about what information is disseminated by your company on its social media accounts and be prepared to show, if necessary, that the company had reasonable grounds to believe the veracity of any representations made through such outlets. Having procedures in place that document the steps that the company has taken prior to posting and tweeting, such as fact-checking and verification of relevant information, may help prevent and avoid or minimize claims based on such posts and tweets. Although certainly not a new lesson, this case is yet another illustration that as the public at large increasingly relies upon what companies state on social media, companies are at an increased risk of claims alleging negligent representation based on such statements. Public companies, especially those headquartered in or with other significant ties to California, should be particularly vigilant where such information may be potentially market moving or otherwise relied upon by investors.