Paul Pereira, former CEO and co-founder of Alfi, Inc, has been charged by the SEC over making materially false and misleading statements on social media about the company’s financial and performance metrics to try and boost the now-defunct company’s stock price.
The SEC said Pereira violated his legal obligation of candor and fair and full disclosure to investors.
According to the SEC’s complaint, while serving as the CEO of Alfi, a Florida-based advertising technology company, Pereira allegedly posted under the pseudonym “Uptix12” shortly after Alfi’s May 2021 initial public offering. He said that he “wouldn’t doubt” that Alfi “has $10m to $20m in revenues already in their back pocket”. In reality, the company was set to report only $17,450 in revenue.
Soon after, in another alleged attempt to boost Alfi’s stock price, Pereira stated in a YouTube interview that the company was entering into a contract with the founder of a successful restaurant chain to deploy Alfi technology.
It is alleged that the restaurant chain founder never discussed such a contract with Pereira or any other Alfi personnel.
Social media statements
The complaint further says that, on August 17, 2021, with the company’s stock price opening at its lowest level in nearly two months, Pereira made false and misleading statements on social media and in a company-issued press release about the company’s advertising inventory. These included one saying that “available advertising inventory by the end of 2021 is expected to be in excess of $100 million”.
Contrary to Pereira’s statements, according to the complaint, the company had less than $5m in advertising inventory at the time, and Pereira did not have a reasonable basis to believe that Alfi would achieve $100m in advertising inventory by the end of 2021. The company filed for bankruptcy in October 2022.
Alfi was in the business of creating technology that purportedly used artificial intelligence and big data analytics to measure and predict human responses to advertisements.
As part of its business strategy, Alfi developed advertising technology for tablets and kiosks, and attempted to contract with brands and advertising firms to display advertisements on the devices.
Initial Public Offering
By November 2020, however, the company had generated no revenue and was running out of funds to operate the business. To raise money, Pereira, other members of Alfi management, and the Board of Directors decided to conduct an initial public offering (IPO) of Alfi stock in May 2021.
In the months following Alfi’s IPO, the company received attention from members of the press and retail investors on social media, who began to describe Alfi as a so-called “meme stock.”
The term “meme stock” generally refers to equity securities that experienced extreme price volatility during the periods of 2020 and 2021 due, at least in part, to abnormally high volumes of buying and selling in the stock by retail investors. And Alfi’s stock price certainly experienced significant price and volume volatility.
Pereira posted information on Stocktwits about Alfi multiple times per week and, often, multiple times per day, without identifying himself by name or his association with Alfi, the SEC alleged.
On the day of its IPO, Alfi’s common stock opened at a price of $3.60 per share. By June 16, 2021, the stock price had increased to $9.22 per share and, on June 28, 2021, the stock was trading at more than $22 per share before declining steadily through July 2021.
According to an SEC filing made by the company in April 2021, the technology was able to “determine the age, gender, ethnicity, geolocation and emotion” of someone in front of an Alfi-enabled tablet or kiosk, and then deliver, in real time, advertisements suited to that viewer based on the viewer’s profile.
In media interviews, Pereira explained that Alfi-enabled devices were able to detect, for example, a 25-year-old female wearing a pair of yellow sunglasses in front of the device, and then show Louis Vuitton products or Gucci sunglasses to her instead of ads on retirement homes.
Increasing Alfi’s visibility on social media platforms with a large retail investor audience became a priority for Pereira, the SEC’s complaint alleges.
Account on Stocktwits
On or around May 18, 2021, Pereira created an account on Stocktwits under the “Uptix12” moniker and spent the next five months, in violation of Alfi’s social media policy, posting information about Alfi multiple times per week and, often, multiple times per day, without identifying himself by name or his association with Alfi, the SEC alleged.
He often made posts praising Alfi’s technology and strategy and, at times, he disparaged other Stocktwits users who criticized Alfi, the SEC said. He claimed Alfi had certain revenue streams that he knew or should have known were not true, the SEC said.
On October 22, 2021, the company’s Board of Directors placed Pereira on administrative leave and authorized an independent internal investigation conducted by a special committee of the board regarding certain corporate transactions unrelated to the allegations in the SEC’s Complaint.
The board’s special committee found that, in addition to corporate governance abuses and related misconduct by Pereira, inaccurate social media posts were made from a pseudonymous account using Pereira’s computer. On February 2, 2022, Pereira resigned his position as a director and as CEO, and on October 14, 2022, Alfi filed for bankruptcy protection.
GRIP comment
Section 17(a) is a key anti-fraud provision in the Securities Act, and 17(a)(2) imposes liability on anyone who directly or indirectly obtains money or property by means of a misrepresentation or omission.
Section 10(b) and Rule 10b-5(b) of the Exchange Act sanctions the use of any means or instrumentality of interstate commerce, or of the mails, to knowingly or recklessly make untrue statements of material facts or omit to give material facts necessary to make the statements made not misleading, in connection with the purchase or sale of any security.
The SEC is asking that Pereira pay a civil money fine and be barred from serving as an officer and director of any SEC-registered business.
To ensure SEC-regulated businesses communicate about investments with fairness and transparency, businesses also need to mindful of the SEC’s marketing rule, Rule 206(4)-1, regarding what they can and cannot do on social media platforms.
Front and center in this rule is the prohibition to making false or misleading statements about a company’s financial condition, performance, or future prospects.
The rule requires businesses to ensure that all material information shared on social media platforms is accurate and balanced and does not omit important facts that may affect investment decisions, And it reminds public companies that they must adhere to the same rules regarding the timely disclosure of any new, material information on social media platforms – just as they would with traditional communication channels.
Such “material” includes information about financial results, mergers and acquisitions, significant contracts, regulatory developments, or any other data that could affect investors’ perception of the company’s prospects.
A clear and up-to-date social media policy and effective training provided to all employees are critical in this arena, but so too is providing real-time monitoring and sign-offs of social media communications made by absolutely everyone – including the CEO. The reviewers can oversee the firm’s social media activities as a whole and provide guidance on compliance best practices, assess truthfulness, clarity and balance in the messaging, and determine what “new, material information” might be needed.
No one should be exempt from these oversight and approval components of an effective social media policy, and audits of how well these practices are working are integral aspects of the marketing and social media compliance program as well.
Finally, the right financial technology tools can help monitor and detect any transmission of inaccurate, misleading or insider information from employees, influencers, or others associated with your organization.
