Saturday, December 17, 2016
One of the more … striking ... habits of President-Elect Trump is his tendency to use Twitter to attack specific companies that have displeased him in some way. For example, after the CEO of Boeing criticized him, he tweeted:
Boeing is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!— Donald J. Trump (@realDonaldTrump) December 6, 2016
After Vanity Fair published a scathing review of Trump Grill, he tweeted:
Has anyone looked at the really poor numbers of @VanityFair Magazine. Way down, big trouble, dead! Graydon Carter, no talent, will be out!— Donald J. Trump (@realDonaldTrump) December 15, 2016
And other times, Trump seems to simply be reacting to whatever he sees on the news.
These tweets might explicitly threaten to harm their targets through the exercise of government power – such as the threat to cancel Boeing’s Air Force One contract – but even if they don’t, the implicit possibility is there. As a result, Trump’s tweets move the market. Boeing’s stock reacted negatively to Trump’s tweet (though it rebounded). Shares of Lockheed Martin dropped dramatically after Trump criticized one of its fighter jets as too expensive.
Wall Street traders have begun building a Trump tweet effect into their models. One anecdotal report says that compliance departments have lifted bans on trader Twitter usage, aware that presidential-tweet monitoring is now a necessary part of the job.
The Wall Street Journal even published a blog post recommending four proactive steps all businesses take in anticipation of a Trump twitter attack.
All of this has prompted some accusations of market manipulation and insider trading. For example, it’s been reported that some lucky trader started dumping shares of Lockheed Martin six minutes before Trump tweeted, though that could simply be the result of hedge funders correctly predicting where Trump would tweet next.
For the sake of argument, let’s say that Trump’s tweet attacks – at least some of them – are calculated to drive down stock prices in order to allow someone (maybe Trump himself, maybe someone in his circle) to make a profit. Is there anything illegal here?
[More under the jump]
Well, certainly to the extent that Trump is falsely accusing these companies of perfidy, that’s a violation of Section 10(b) and Rule 10b-5(b) of the Exchange Act, and Section 17(a)(2) of the Securities Act, which prohibit false statements in connection with securities transactions.
But most of Trump's tweets are more in the line of negative opinions, coupled with threats of the actions Trump will take once in office. It’s a lot less clear that these kinds of tweets would amount to false statements. There’s nothing false in them; if Trump does plan to take the actions he says he will take, they are 100% truthful.
The closest analog I can find is to stock touting, where traders buy up a stock, talk it up to people seeking investment advice, and then dump it. Even if no false statements are made, the SEC has accused such actors of fraud either because by recommending stocks they create an investment advisor relationship that carries fiduciary duties to disclose, or because making stock recommendations without disclosing one’s conflict of interest is itself a misleading statement. See, e.g., Complaint filed in SEC v. McKeown; Jill I. Gross, Securities Analysts’ Undisclosed Conflicts of Interest: Unfair Dealing or Securities Fraud?, 2002 Colum. Bus. L. Rev. 631.
One might go further and say that if you’re recommending stock so that you can dump it, you’re making a false statement about your opinion of the stock – and that’s a violation of Rule 10b-5(b), as well.
But that isn’t exactly what Trump is doing, because he’s not making stock recommendations. He’s criticizing companies, with the power of his office behind him. The tweets presumably influence the market less because people trust Trump’s opinion than because they believe Trump may use the power of his office to carry out retaliatory threats.
But what if Trump is tweeting explicitly for the purpose of causing the stock to drop, so that he, or someone else, can profit?
If so, we have to think about whether the entire plan – both the tweets, and the trades – constitute illicit scheme to defraud under Rules 10b-5(a) and (c). If it’s a scheme, the SEC wouldn’t necessarily need to show that Trump made a false statement; prohibitions on schemes reach more broadly. But, generally speaking, forms of manipulation that consist solely of public statements about a security don’t constitute “schemes” under 10b-5(a) and (c), precisely because courts fear this sort of end-run – taking statements that aren’t actionable under 10b-5(b), and turning them into securities violations by calling them schemes. See SEC v. Kelly, 817 F. Supp. 2d 340 (S.D.N.Y. 2011). So I'm not seeing a violation here.
We might also ask whether our behind-the-scenes trader violated Section 10(b)’s prohibitions on insider trading. If the trader learned of Trump's plans due to his/her status as a member of Trump's inner circle and decided to trade on them, very possibly; the trader would likely be misappropriating confidential information from Trump himself.
But what if Trump voluntarily disclosed the plans, or Trump is doing the trading?
Right now, Trump is a private citizen, and he can share his plans – or not – as he chooses, and for whatever purpose he likes. But once he’s sworn in, Trump becomes an executive branch employee, subject to the STOCK Act. (Interestingly, the Office of Government Ethics released a memo on Thursday summarizing the STOCK Act's application to the President.) Under that Act, Trump’s plans in his official capacity become, essentially, the confidential information of the United States, held in trust for the American people, and neither he nor his associates are permitted to trade on it. Which begs the question whether Trump’s tweets will be information derived from his position as President. What if he only uses his personal Twitter account? Or attacks publications that critically review his private businesses?
It would certainly raise thorny immunity issues – on the one hand, if he was truly acting in a private capacity, he wouldn’t be immune; but then, he also wouldn’t be violating the STOCK Act. At this point, it’s worth nothing that the SEC was recently locked in a battle with the House of Representatives over whether the Speech and Debate clause precluded an investigation into STOCK Act violations by a former staffer. The House gave up the fight, however, after a district court judge ruled in the SEC’s favor.
So, it's all a bit unsettled. Let's just say these and other novel legal questions regarding the Trump administration are sure to provide endless fodder for academic analysis in the coming years.