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SEBI logs on to social media to fight insider trading violations

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The capital and commodity market regulator is close to passing a final order on a case it has managed to piece together from various conversation threads on Facebook, reveals a source to Moneycontrol.

Even as SEBI intensifies its fight against violations of insider trading norms, it has begun looking into social media accounts of individuals.

The capital and commodity market regulator is close to passing a final order on a case it has managed to piece together from various conversation threads on Facebook, reveals a source to Moneycontrol.

The case in question involves an investment banker who had shared price-sensitive information regarding a soon-to-be merged company with a woman he met on a matrimonial website. Consequently, one of the woman’s relatives took a ‘huge position’ on the company whose merger deal was being managed by the investment banker.

SEBI’s probe, adds the source, proved to be a difficult, yet rewarding one, as it established a connection between the investment banker and the relative, who had allegedly made illegal gains from the bet, through their mutual friends on the popular social networking site.

As further details of the case are still under wraps, pending the final order, social media represents an unconventional front for SEBI.

A source close to the development told Moneycontrol: “SEBI is trying to curb insider trading and is using different means to crack down on insider trading. Nowadays, catching price manipulation is easy due to use of advanced technology in exchanges. But it is most difficult to catch insider trading. We are also started using unconventional method for catching insider trading violations.”

However, legal eagles aren’t sure if evidence found on social media could be taken as conclusive. RS Loona of Dhaval Vussonji & Associates, told Moneycontrol that while SEBI is empowered to ask telecom service providers for call data records or telephone numbers of the persons involved, the regulator is handicapped when it comes to accessing taped phone calls. “Similarly, SEBI can only connect the relationship via Facebook but it [such evidence] can’t be used as a strong lead anywhere in the case.”

To be fair, SEBI has used Twitter and Facebook accounts to try and identify price manipulators in the past. Currently, the regulator is also investigating another case where manipulators had allegedly used Facebook to trade sensitive information relating to a company. Underscoring the common difficulty which Loona had pointed out, SEBI will now be hard pressed to use the evidence it found on the social media as a legitimate point to argue in a court of law. Says a source to Moneycontrol: “We are trying to establish [Facebook] links and convince the Securities Appellate Tribunal of them.”

In 2015, SEBI tightened insider trading norms, and brought them in line with international practices. But the law needs to cover a lot of ground on social media and its role in insider trading.

“This will be an interesting space to watch out, especially when Supreme Court of India itself is hearing a question whether Right to Privacy is a fundamental and absolute right under the Constitution. Theoretically, SEBI does have power to seek information in cases of insider trading or securities fraud. Though provisions like SEBI Act are inbuilt in almost every other regulatory laws including tax laws.”

Agrees Sumit Agrawal, “Though the intent may be at right place, anyone will have to be extra careful on the regulatory stand. It is just about SEBI’s powers to seek information of chats from Facebook, Twitter or Google in such cases. The question is whether SEBI has the in-house capacity or manpower and should it claim to regulate social media for filtering enormous data of conversations.”

Analyzing public content on internet is different from probing into private conversations. If the regulator holds itself out doing that, the High Courts and Supreme Court may be flooded with PILs for SEBI’s inaction or non-uniformity in many cases while allegations against officials for breach of privacy in others, adds Agrawal.

All in all, it will be a tight rope for SEBI to walk on and some guidelines would be needed to say the least, he said.