Insider trading: In the age of social media, SEBI finds co-conspirators using Facebook connection

SEBI has examined Facebook profiles of suspects to gather information about connection in a few cases. The Securities and Exchange Board of India (SEBI) has passed an order* on 16 April, 2018 that is innovative in parts and perhaps even amusing in others. To determine whether two sets of persons were connected for purposes of insider trading, SEBI checked their Facebook profiles. It was found that the parties were ‘friends’. Furthermore, they had ‘liked’ the photos posted on Facebook of each other and/or their respective wives. Based only on this connection, SEBI has alleged that they are co-conspirators in insider trading. and they have been asked, by this interim order, to cough up and deposit profits allegedly made, plus interest @ 12% per annum. The interim findings of SEBI are as classic as can be found in matters of insider trading. To paraphrase and simplify what SEBI has alleged, there is a listed company engaged in oil exploration and allied/other activities. It was awarded three contracts for hiring of mobile drilling rigs over a period of several months. The process of award of contracts was such that it involved certain steps of tender, possibly some revision, opening of the bids and being declared as top (L1) bidder. This was then followed by a final and formal award. There was a gap of several weeks/months between the date of being declared as a top bidder and the formal award. The declaration as successful bidder, as per SEBI, made it more or less certain that the formal award would be granted. Hence, declaration as such was a vital event. Then SEBI checked the value of the contracts and found that they constituted a substantial%age of the total revenues of the company. Thus, this information about being awarded contracts was price-sensitive. Till this information was made public, company ‘insiders’ were barred from dealing in the shares of the company. SEBI, however, alleged that the managing director of the company had acquired shares of the company during this period before the information was made public. It thus alleged that he was guilty of insider trading. The deemed profits were calculated based on his purchase price and the closing price on the date when the information was made public. This difference was deemed to be profits. The MD has been ordered to deposit this profits plus interest @ 12% per annum in an escrow account. The question then was of another person, Sujay Hamlai, and a private limited company in which he was a 50% shareholder and his brother held the remaining 50%. The brothers were also directors of this private company. Sujay and this company both had bought shares during the period when the price-sensitive information was not yet made public. They sold the shares after it was made public and made profits. The MD and Sujay were asked whether they were connected. They both replied that they were socially acquainted but had no business connection. However, SEBI checked their Facebook profiles and found that the MD, Sujay and his brother were ‘friends’ and also they had ‘liked’ each other’s and/or their respective wife’s photos posted on Facebook. SEBI decided that this was sufficient to establish connection for purposes of the law relating to insider trading. Thus, Sujay and his company were both alleged to have engaged in insider trading. They both have been similarly ordered to deposit the profits allegedly made by them plus interest. This interim order also doubles up as a show cause notice. On the one hand it requires the MD to deposit Rs. 1.750000000, Sujay Rs 18.2000000 and the private limited company Rs 47.8600000 in an escrow account. On the other, it has asked them to reply to these allegations explaining why such amounts should not be formally disgorged and they be debarred from accessing capital markets/prohibited from dealing in securities for a specified period. This Order is not the first time SEBI has examined Facebook profiles of suspects to gather information about connection. By an order dated 4 February 2016, SEBI had similarly used such information to determine connections. In that case, there were allegedly other suspicious factors, too. In the case of Sujay, the Facebook connection is the only ‘connection’ found. This has, of course, been compounded by allegations that Sujay/his company had bought shares during the period when the price-sensitive information was not public and sold them after it was made public, at a profit. It has to be accepted that ‘connections’ on Facebook can often be casual and between persons who are for all practical purposes strangers. This goes for other social media forums like Twitter, Instagram, etc. too. Conclusions of ‘connections’ have to be very carefully drawn. It is also curious that after over two and half years, SEBI could find only this social media connection between the parties. We can now wait for further proceedings in this matter including possibly in appeal. Whatever may be the outcome, this is a also a lesson of caution for all of us of about whom we ‘associate’ with on social media. (*In the matter of Deep Industries Limited , Order Number SEBI/WTM/MPB/IVD/ID–6/162/2018 ) (The writer is a Chartered Accountant. He tweets @JayantThakur)