United States: Regulators And Industry Fight For Integrity On Social Media Platforms

Last Updated: January 7 2019
Article by Herzog Fox & Neeman

The FTC Settles with PR Firm and Publisher over Undisclosed Sponsored Posts

The FTC has published that it has settled with two Georgia-based companies and their principals with regard to allegations of their having misrepresented product endorsements as independent opinions, and commercial advertising as editorial content (you can read more about influencer-marketing in our special client update titled "Influencer Marketing - Rules of Engagement").

According to the FTC's complaint, Creaxion Corporation ("Creaxion"), a marketing and public relations company, and its CEO, were hired by HealthPro Brands Inc. ("HealthPro") to help in the launch and promotion of an organic mosquito repellent. Creaxion collaborated with Inside Publications, the publisher of Inside Gymnastics magazine, in order to obtain athletes to endorse and otherwise promote the product. Subsequently, Creaxion and Inside Publications engaged two Olympic gold medalists as endorsers, who each received several thousand dollars for their promotional activities, which included social media posts of the product.

According to the FTC's allegations, in numerous instances, the endorsements did not disclose the spokespersons' paid promotional relationships with HealthPro. In addition, Inside Publications reposted those statements on social media, without such disclosure being made. Inside Gymnastics also ran paid ads for the products that were disguised as features or other articles of interest to its readers. In addition, according to the complaint, Creaxion reimbursed employees and "friends" for buying the product and posting positive reviews.

As a result, FTC's complaint alleges that the respondents violated the FTC Act by: (i) falsely representing that the endorsement represented their independent opinions; (ii) failing to disclose material connections between the endorsers and the marketer, specifically, that they were paid or reimbursed for the publications; and (iii) falsely representing that paid ads were independent statements and opinions.

The proposed settlements prohibit:

  1. misrepresentations regarding the status of any endorser or reviewer;
  2. making any representation as to any consumer or other endorser of such product or service without clearly disclosing any unexpected material connection between the endorser and any respondent, or other individual or entity affiliated with the product or service; and
  3. any misrepresentation that paid commercial advertising constitutes a statement or opinion from an independent or objective publisher or other source. In addition, the proposed settlements require the respondents to take steps to monitor endorsers acting on their behalf.

Instagram Fights Inauthentic Activities

Instagram announced that it is taking several steps in order to reduce inauthentic and fraudulent behaviour. In this regard, Instagram disclosed that some accounts have been using third-party software in order to artificially increase their audience. These tactics harm the real and genuine experience that users seek, and also renders these accounts less secure. Accordingly, Instagram stated it would begin to remove inauthentic 'likes', follows and comments from accounts that use third-party apps in order to boost their popularity, and using a machine-learning tool that the company has built, which is able to identify accounts that use such services.

Accounts identified as inauthentic will receive an in-app message alerting them to the fact that Instagram has deleted the unauthentic content. In addition, Instagram will advise users, who may have unintentionally used third-party services such as these, to secure their account by changing their password. Instagram added that it will continue to monitor these kinds of activity in the future, and that it is about to publish more updates on additional measures taken by the company in order to remove inauthentic activity on its platform.

SEC Charges Giga Entertainment Media and Several Former Offices and Directors with Fraud in Connection with an Advertising Scheme to Mislead Investors

The US Securities and Exchange Commission ("SEC") announced it has filed a complaint against social media technology company, Giga Entertainment Media ("Giga"), and five previous officers and directors of the company for deceiving investors regarding the company's Apple Store download ranking, and faking documents to cover up the fact that one of its officers has a criminal record.

According to the complaint, during 2016 Giga acquired more than 559,600 downloads from outside marketing firms in order to boost the profile of the company's mobile app. Consequently, Giga received "a shortcut" to boost its app among Apple Store download standings, while it misled its investors into believing that the high ranking is the outcome of a successful advertising.

Furthermore, when the company ceased to pay for the app's downloads, resulting in a significant decrease in its downloads, the company and its stakeholders fraudulently informed investors that the number of downloads continued to increase at the same rate. Additionally, the SEC alleges that Giga's stakeholders were also dishonest and distorted documents, such that the investors would not know of the company's "de facto CEO" previous criminal charges of mail fraud.

The SEC stated that this complaint should remind companies that they cannot "buy their own crowd" and then claim to be popular, but rather, they must be honest with investors. According to the SEC, the former Giga offices pleaded guilty to violating antifraud and securities laws. Two of them will each pay $25,000 in penalties and a third officer will pay $15,000, with several others agreeing to a five-year bar, and the court will later determine the penalty applicable to the other stakeholders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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