Insider trading on Twitter and Facebook

The crackdown on insider trading in the US recently hit a snag when the Court of Appeals, and subsequently the Supreme Court, quashed at least seven cases.

The US Attorney General is now left with no other alternative but to move for the dismissal of the charges against the parties involved—a completely different situation in July last year when the US saw 80 convictions.

This new twist will certainly make the task of our country’s watchdogs more difficult, or perhaps impossible, amid a move “to undertake a crackdown on stock market manipulations and Ponzi schemes as monitored from social networks like Facebook and Twitter.”

The PH’s version

In October 2012, the Securities and Exchange Commission (SEC) was reportedly hot on the trail of a listed company that saw its share price nearly quadrupling within just a month on rumors it was the target of a backdoor listing.

When made to explain about the sudden surge of its share price, the company gave an oft-repeated statement: “The company has no knowledge of any reason that could have triggered the unusual price movements.”

Not too long after, the company indeed became the subject of a backdoor listing and no further punitive action was taken against its officials.

There was also a major insider trading scandal in 1999, which some felt it “almost made the Philippine Stock Exchange to collapse.” The SEC filed insider trading cases against “11 individuals or brokers” implicated in the Best World Resources Corp. (BW) scandal.

Developments in the rise of BW fueled a speculative play that drove its share price to a dizzying ratio of 18,025 percent.

The stock play was astounding, yet bloody. The issue later played a crucial role in the impeachment proceedings against former President Joseph Estrada.

Later, fines and penalties “amounting to P30.05 million were imposed [on] some parties who were charged for culpable violations of the Securities Regulation Code (SRC), the corporation code and related laws.”

The PSE investigating body found businessman Dante Tan, among others, to have committed “manipulative schemes and devices that artificially pushed the price of BW upward.”

Bottom line spin

If my memory serves me right, no convictions have so far been made against the parties. According to one observation, “they were even then freely operating in the market.”

In the latest case in the US, a hedge fund manager and six staff analysts (who acted as cooperating witnesses that led to the convictions) were allegedly involved in insider trading. They were found guilty “of using inside information to make millions for their hedge funds.”

But the US Court of Appeals for the Second Circuit reversed their convictions by giving a “ruling about how close someone needs to be to the source of an illegal tip” to be found culpable.

The accused allegedly traded on tips they received from staff analysts, who pleaded guilty to wrongfully obtaining non-public information.

Yet, the US court ruled there must be proof “the person being accused of illegal trading was aware that the tipper received some sort of benefit, like cash or a job, in exchange for the information provided.”

Critics decried the decision just opened the door to improper trading as it does not penalize anymore “profiting from information understood to be wrongfully obtained as long as they were far enough removed from the original source.”

So, what are the chances now of SEC’s thrust to prosecute and convict insider trading violations made through tweets and Facebook posts?

(The writer is a licensed stockbroker of Eagle Equities, Inc. You may reach the Market Rider at [email protected], [email protected] or at www.kapitaltek.com)