In an earlier post, I had written about how being connected as ‘friends’ on Facebook was deemed by SEBI to be significant enough to allege that the parties were ‘connected’ for purposes of insider trading. In that case, however, there was other alleged connection too. SEBI has yet again examined Facebook profiles for to pass a similar interim order. It found that a businessman and his brother/spouse were ‘friends’ on Facebook with the Managing Director (MD) of a listed company. They had also liked each other’s photos posted on Facebook. This was the only connection SEBI could find. The parties had denied any business connection but admitted being ‘social acquaintances’. SEBI deemed this sufficient to allege that the businessman was ‘connected’ with the MD for purposes of insider trading.
The MD had purchased shares of the company during a period during which SEBI alleged that unpublished price-sensitive information existed. He was alleged to be guilty of insider trading and asked to deposit the profits made plus interest @ 12% per annum.
In the businessman’s case, SEBI found that he and a private limited company (where he and his brother held 50% shares each and were directors) had purchased and sold shares of this listed company. SEBI alleged that the Facebook connection with the MD was sufficient to alleged them to be a “connected person’ for Insider Trading Regulations too. Hence, it asked them both too to deposit the profits plus interest.
This order is an interim order making these allegations and impounding these profits and also doubles up as a Show Cause Notice. The parties are asked to reply why a final order be not passed not only to disgorge the profits with interest but also to debar them from accessing the securities market and prohibit them from dealing in securities.
Whatever the final outcome – whether in final order or in appeal, if any – in this particular case, it is apparent that SEBI is examining and relying on social media ‘connections’ to make serious allegations/conclusions. Social media connections, however, can be casual and parties may not even know each other personally/professionally. Often, it is a matter of ‘following’ or clicking on ‘confirm friendship’ button. There are persons with thousands of such ‘connections’. Further, such reliance, once precedents are created, can be used not just for making allegations under other Securities Laws (price manipulations, frauds, acting in concert, etc.) but even by other regulators/authorities. Apart from Facebook, there are other social media sites like Twitter, Instagram, Linkedin, etc. where the ‘connection’ too can be casual and between strangers. Thus, one hopes SEBI and appellate authorities lay down broad principles of relying on such ‘connections’.
I have also written a detailed article on Firstpost here.