SEC Sues Social Media CEO for Misleading Investors

The SEC charged the founder and former CEO of a social media platform with misleading investors in the sale of $170 million in preferred stock.

In the Complaint, filed in the United States District Court for Northern District of California, the SEC alleged that the CEO misled investors by inflating the size of the app's user base and concealing significant advertising expenses. The SEC said that the CEO claimed that the platform "had attracted 12 million purported users and achieved a high rank in the Apple App Store based on viral popularity and organic growth." The SEC alleged that these numbers were inflated due to extensive spending on "incent" advertisements, which offered rewards to users for downloading the app, rather than organic growth. The SEC argued that these incent ads, while driving download numbers, did not translate into long-term user engagement.

The SEC further alleged that the CEO and his former fiancée, (also a named defendant), misused the company's corporate funds for personal expenses, including luxury items, travel and costs associated with their wedding. According to the Complaint, investors were kept in the dark about these expenditures, as well as the true scale of the company's marketing costs.

The SEC charged the CEO with violating SEA Section 10(b) ("Regulation of the use of manipulative and deceptive devices"), SEA Rule 10b-5 ("Employment of manipulative and deceptive devices"), and SA Section 17(a) ("Fraudulent Interstate Transactions").

The SEC said it is seeking permanent injunctive relief, the return of allegedly ill-gotten gains and civil penalties against the CEO. The SEC is also seeking to bar the CEO from serving as an officer or director of a publicly traded company.