Over the past week, Tesla’s CEO Elon Musk made headlines again after the company disclosed it received a new subpoena in November 2021 from the U.S. Securities and Exchange Commissions.
The financial regulator is trying to determine whether Elon Musk and his electric car maker complied with a revised settlement agreement that the agency struck with them in 2019. According to a regulatory filing made public, Tesla said that the SEC sought “information on our governance process around compliance” with a settlement that had previously been reached with the agency.
The subpoena was issued just 10 days after Musk triggered a stock sell-off when he asked his Twitter followers if he should sell 10% of his stake in the company. The results saw Tesla’s stock price dip by around 16% over two days of trading which followed the tweet.
Elon Musk’s dispute with the SEC is nothing new at this point.
Back in August 2018, the SEC issued their first subpoena to Tesla over Elon Musk’s tweet saying he had secured funding to take the company private at $420 a share. This prompted the regulator to charge Musk with securities fraud, alleging that his claims about the potential deal “lacked an adequate basis in fact.” The SEC also charged that Tesla didn’t have procedures and controls in place regarding the disclosures in Musk’s tweets.
The SEC settled with the company and with Musk back in September 2018. As part of the settlement, Tesla committed to putting in place new oversight to monitor some of Musk’s tweets.
Regardless of the Tesla CEO’s battle with the SEC, there’s no denying that a single tweet can move markets.
During a span from Jan 26-29, 2021, Musk sent out tweets that made Bitcoin’s value jump more than 20%, surged Etsy’s stock rise by 9%, and catapulted GameStop into meme-stock lore. During Donald Trump’s term at the White House, the former President often sent stocks crashing after calling out companies online.
For most of us, there’s little worry that sending a tweet about a company – especially one you own or work for – will send shock waves on Wall Street. However, these scenarios spark a growing national security concern over extreme market volatility from social media content. Here are a few situations that may play out over the next few years if we don’t have the necessary precautions in place.
National Security Scenario 1: Hack Thursday
The threat of accounts being hacked by bad actors isn’t a surprise and we know its effects can become detrimental. When Colonial Pipeline was hit with a ransomware attack in May 2021, it sent millions of Americans scrambling to the gas pumps and became one of the largest disruptions by US critical infrastructure.
A similar situation can be plausible if hackers can gain access to a stock market influencer’s social media account, whether it’s a prominent investor, a reliable news organization, or a politician. Hackers can try to use these influential accounts all at once to inject false price quotes into data feeds or publish “fake news” through social media channels to set off a panic among investors. We know firsthand how possible stock markets can tumble when a reliable source is hacked. On April 23, 2013, the Dow Jones industrial Average tumbled by 143 points when a hacked Associated Press account tweeted that the White House had been hit by two explosions and that then-President Obama was injured. The market recovered within a few minutes of the misunderstanding, but the case study shows just how hacked accounts can plummet stocks if a more calculated account takes place.
National Security Scenario 2: Pump & Dump Cyber Warfare
A second hacking situation that can bring disruptions to capital markets is a pump and dump scheme carried out through foreign actors.
Pump and dump schemes are not new in the world of investing. They’re a manipulative ploy that attempts to boost the price of a stock or security through fake recommendations. The perpetrators of a pump-and-dump scheme would establish a position in the company before the attack and then will sell their positions after the hype has led to a higher share price. This simple, yet effective strategy has led to bad actors making millions, including The Wolf of Wall Street himself, Jordan Belfort.
In a world where foreign countries are looking to get a leg up from the United States, this scheme can be utilized in several different ways.
One way this can play out is by tapping into social media influencers and celebrities. The marketing world has made a career into tapping into these influencers to push out their products to the masses. There’s no reason that a country like China or Russia can’t enter into partnerships or coerce influencers to push out stock propaganda for their own gain.
Another scenario stems from the world of cryptocurrency. Over the last few years, these decentralized digital currency coins have exploded in popularity and the number of options consumers can invest in is over 10,000. Because of these vast numbers, foreign countries can either push disinformation or partner with influencers to seek financial gain. In January, celebrities Kim Kardashian, former NBA star Paul Pierce, and boxer Floyd Mayweather were accused of using their fame to hype a new cryptocurrency for their own gain.
For now, pump-and-dump schemes for cryptocurrency are not illegal. While the SEC oversees investigations of securities scams such as pump-and-dump schemes, they do not have similar rules in place for crypto security. While current SEC Chairman Gary Hensler hopes 2022 will be the year that the agency takes the next step to regulating these exchanges, there have been changes as of this writing. This brings good news for foreign countries looking to take advance of stealing finances from unsuspecting American investors.
With rising inflation, a volatile market, and growing geopolitical tensions popping up across the world, it’s important to remember that our capital markets are not fully stable entities and attacks may be imminent. Although you or I don’t have the sway to influence markets, we must be prepared to weather the storm if these cyberwarfare scenarios disrupt U.S. markets.
