Ever since the first case of insider trading through online messaging about two decades ago, insider trading in the digital era has gained new contours over the years. In India, the advent of instant messaging services with end-to-end encryption has turned them into a new venue for communication of unpublished price sensitive information (UPSI). According to the SEBI (Prohibition of Insider Trading Regulations), 2015, UPSI means any information relating to a company or its securities that is not generally available, and is likely to materially affect the price of the securities upon becoming generally available. The “WhatsApp Leak Case” in 2017 saw SEBI investigate into this new venue to penalize and curb communication of UPSI related to different companies. Over the past month, SEBI has issued a series of orders deciding the liability of communication of UPSI by the Noticees involved in the case. These orders have implications on the evidentiary threshold for information to constitute UPSI and the possibility of a “Heard on Street” defense, wherein a Noticee may claim that the communicated information was speculative market gossip and not UPSI.
SEBI launched a preliminary investigation into the WhatsApp leak case in December 2017 consequent to news articles reporting circulation of UPSI on private WhatsApp groups. Through a search and seizure operation, SEBI seized several mobile devices and examined the WhatsApp chats extracted from them. SEBI found that the earnings estimates of around 12 companies being circulated in the WhatsApp chats were a match with the actual earnings announced to stock exchanges subsequently. The members who forwarded these messages to other contacts were given notices and their liability was decided in these orders.
Implications on Evidentiary Threshold
The end-to-end encryption provided by WhatsApp imposed certain constraints on SEBI’s investigation. As by WhatsApp communicated to SEBI, the encryption ensures that third parties including WhatsApp itself cannot read messages or search for messages. WhatsApp also clarified that it does not store information regarding the sender and recipient of a message. Resultantly, the source of the information could not be tracked down. The Noticees had received these messages and forwarded them to others along a chain of communication, the origin of which could not be traced. Due to these technological constraints, SEBI had to rely solely on the earnings figures circulated on WhatsApp in order to decide whether the information therein constituted UPSI. SEBI compared the estimates with the actual figures that were subsequently released. Upon finding that the figures matched almost exactly with the estimates, SEBI decided that the information circulated on WhatsApp was in fact UPSI.
At no point was it established that there was an actual leak of UPSI from the respective companies. Instead, the assessment of whether the circulated information constituted UPSI was on the basis of probability. SEBI reasoned that figures with such narrow deviation from the actual results would be UPSI. In all the matters so far, except Ambuja Cement, the Noticee had submitted that some of the estimates by analysts and broker firms available publicly on Bloomberg closely matched with the actual figures as well. It was argued that there was no cause for suspicion that the circulated information was UPSI due to the close match between the estimates from the actual figures. SEBI dismissed this submission as an afterthought as the Noticee had not established a “demonstrable and verifiable trail of events” for relying upon one of the many available research estimates. However, this demonstration that a research estimate could almost match the actual figure was not taken into account when assessing the probability of the information being UPSI. SEBI also did not account for the contention that only a few of the messages closely matched the actual figures into their test of probability. Despite acknowledging that market estimates could in fact closely match actual figures, SEBI applied its single test of narrow deviation to decide whether the information in question was UPSI.
The Heard on Street Defence
The Noticees in these orders had claimed that the information in the WhatsApp messages was not UPSI, but “Heard on Street” (HOS) information. The noticees submitted that HOS is a practice wherein unsubstantiated market gossip and speculations are shared in the media, including on WhatsApp and other channels.
It was argued that the messages were shared as well as perceived as estimates, and the Noticee reasonably believed that the information was market gossip and not UPSI. It was further contended that while such information is generally shared in newspapers, the same was being shared over WhatsApp due to advancement of technology.
In these orders, SEBI held that market estimates that are published in the newspaper or by brokerage houses without any disparity in public access would in fact constitute HOS information. Such information may not constitute UPSI even if it matched with the actual results. However, the availability of such information in a closed set of few individuals in a private WhatsApp group would be discriminatory access, and thus would not be HOS information. Hence, according to SEBI, even market gossip which may not be UPSI necessarily needs to be shared to the public on a non-discriminatory basis. Finally, SEBI observed that merely mentioning that one of the publicly available Bloomberg estimates matched the information on WhatsApp does not exhibit that the WhatsApp information was generally available as well.
Here, SEBI has not accounted for the pervasiveness of WhatsApp and its use a medium of news dissemination. The matched figures may have been directly sourced from the generally available estimates but privately shared and forwarded. The issue here is one of attribution. It appears that in order to comply with SEBI regulations, one would need to attribute any estimate received in private messaging to its initial source, i.e., the publicly available information from an analyst or a brokerage firm. Further, such estimate should be relied upon through a demonstrable trail. This implied that the attribution to a brokerage firm must be corroborated before the information is shared. Non-compliance with this act would entail the risk of such information being classified as UPSI in hindsight based on a close match with the actual figures.
SEBI also observed that the Noticees were financially literate persons associated with the securities market. Hence, they should have been alarmed upon the results subsequently matching and not continued the chain of communication. This raises the question of whether a code of conduct for such persons working in the securities market should be put in place so as to regulate private communication of information and curb communication of UPSI.
To summarize, the implications of these orders on financial information communicated through encrypted messaging services are as follows:
- Whether the information in question constitutes UPSI, in the absence of any other evidence due to encryption, depends on how closely the circulated estimates match the actual figures released subsequently.
- In order to prove a generally available estimate as the source of the information or that such estimate was relied upon before forwarding the information, a demonstrable and verifiable trail of events for relying on such estimate must be put forth.
- Without such trail, mere match between the generally available estimate and the communicated information would not establish that the latter was generally available given that it was shared in a private medium.
- HOS information is such information that is speculative but also generally available. Such information would not be deemed UPSI even if it matches with the actual figures.
The orders lay precedent for strict interpretation of SEBI regulations in instances of communication through private messaging services. The need for this strict interpretation is the consequence of the technological constraints imposed by end-to-end encrypted services. At the outset, the orders seem to limit the right to free speech among market participants who would now have to verify the source of heard on street information that they receive in any private communication. It can be argued, however, that through the corroboration of sources that may now be required, SEBI would be able to clearly distinguish between UPSI and speculative HOS information in future cases. The orders also raise the question of whether a code of conduct is required, and how it could be framed in a manner that reconciles the right to free speech with the concerns of evolving technology.
– Pranav Mihir Kandada