TwitterUserCan'tNixSECSuitOverPennyStockPloy
By Katryna Perera
Law360 (September 27, 2023, 5:38 PM EDT) -- A New York federal judge has kept alive a U.S. Securities and Exchange Commission suit accusing a popular Twitter user of running a $3.4 million scheme in which he manipulated stocks using the social media app, saying that the user had a duty to disclose his holdings and "tell the whole truth."
U.S. District Judge P. Kevin Castel issued an order Tuesday rejecting all of Steven M. Gallagher's arguments for dismissal. The SEC's suit, filed in 2021, claims Gallagher violated federal securities laws by using his account on Twitter, now known as X, to encourage his followers to purchase certain penny stocks without disclosing that he was selling or would soon be selling his own shares, in a scheme known as "scalping."
The SEC also alleges that Gallagher issued false and misleading statements and engaged in manipulative trading.
Gallagher moved for dismissal last October, arguing that the SEC's claims fail because he was not required to disclose his stock sales to his Twitter followers. He also argued that those disclosures were not material to reasonable investors.
But Judge Castel disagreed Tuesday, saying Gallagher's argument "misses the mark." The SEC's case is not about a "freestanding duty to disclose," the judge said, but rather it's about misstatements and omissions Gallagher made about his intent to sell his own shares of the same stocks he was encouraging others to purchase.
"This case is controlled by the 'well-established precedent in this circuit that once a person or company choses to speak on an issue or topic, there is a duty to tell the whole truth, [e]ven when there is no existing independent duty to disclose information on the issue or topic,'" the order states.
"Once Gallagher chose to publicly recommend the purchase of certain stocks on Twitter rather than remain silent, he assumed a 'duty to tell the whole truth' and 'to be both accurate and complete' as to material issues," Judge Castel said.
The judge added that the SEC has plausibly alleged that Gallagher's omissions of his intentions to sell were material to investors since "a reasonable investor would have found this fact important to their decision of whether to buy, as it could have cast doubt on the credibility and soundness of his advice."
Gallagher also argued in his dismissal motion that the SEC's scalping allegations cannot be a basis for scheme liability and that the commission has failed to allege that he obtained money or property from the scheme.
The judge rejected both arguments on the grounds that the court had already determined that the SEC had alleged materially misleading statements, and because the operative complaint raises the inference that Gallagher's omission of his intent to sell caused a stock price increase, which in turn allowed Gallagher to profit from the sale of his shares.
According to the order, Gallagher also argued that the First Amendment protects his tweets and that the SEC failed to allege that he engaged in manipulative trading. Judge Castel rejected both of these arguments on Tuesday, saying the SEC's manipulative trading claims are adequately pled and that "the First Amendment does not shield fraud."
The SEC declined to comment on Wednesday and counsel for Gallagher did not immediately respond to requests for comment.
According to Tuesday's order, Gallagher was arrested in connection with a criminal complaint filed by the U.S. Attorney's Office for the Southern District of New York on the same day the SEC launched its suit against him in October 2021.
The order states that Gallagher pled guilty to the criminal charges that he used Twitter to misrepresent the nature of his personal financial stake in SpectraScience Inc. securities and persuaded others to purchase the stock in order to drive up the share's price so that he could reap a profit once he sold his own shares.
Gallagher was sentenced in June 2022 to six months of house arrest and three years of supervised release, along with a $10,000 fine, according to the order. He was also ordered to forfeit roughly $21,000.
The SEC is represented in-house by Abigail Elizabeth Rosen, Thomas Wentworth Peirce Jr. and Richard R. Best.
The case is Securities and Exchange Commission v. Gallagher, case number 1:21-cv-08739, in the U.S. District Court for the Southern District of
–Additional reporting by Hailey Konnath. Editing by Michael Watanabe.
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