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This week’s podcast features Russ Berland of the law firm Stinson Morrison & Hecker talking about how to use new guidance from the Organization of Economic Cooperation and Development as a blueprint for better FCPA compliance programs. 
Chief Ethics & Compliance Officer
ERM in the Aftermath of the Credit Crisis
Risk Inventory
CEO, CFO Disclosure Certifications
The IFRS Ripple Effect
Hot Tips, Twitter and Insider Trading
As more people learn daily, Twitter is a way to get a message out to the entire world. The twist, of course, is that your message will only be seen by people who have chosen to follow your updates. A “tweet” by a person who has no followers is the proverbial tree falling in the forest with no one around to hear it.
I am interested in how Twitter may intersect with the insider trading laws, and would like to throw this hypothetical question out for your thoughts:
An executive at publicly-traded ABC Corp. learns that his company is about to be acquired at a significant premium to its current stock price. He goes on Twitter and posts the following:
“I’m about to become a rich man. My company, ABC Corp., will be acquired next week at a 50% premium to current stock price. Shhh!!”
Here are the scenarios for discussion. Assume in each scenario that many of the followers act on the tip by buying the stock of ABC Corp. that day:
(a) Executive has 5 followers, all family members.
(b) Executive has 5 followers, all strangers.
(c) Executive has 2,000 followers.
In fact, ABC Corp. is acquired the following week and the stock jumps from $20 to $30 on the public announcement, at which time the followers who traded sell their ABC Corp. stock for a big profit. My questions for you are:
- Is Executive liable for insider trading “tipping” in any of these scenarios?
- Are the followers who profited on the tip liable for insider trading in any of these scenarios?
I will weigh in with my take on this next week.
One perhaps tangential point I’d raise: I could be wrong since I’m a relative novice at Twitter but I don’t view lack of followers as being akin to a tree falling in the forest with no one to hear it fall, since I believe all tweets are posted to the ‘public timeline’ which can be seen the world over by anybody (follower or not?) unless you elect to ‘protect’ your account, in which case only your approved ‘followers’ can view it.
Therefore, a person’s or company’s communications via twitter could potentially be viewed by an unquantifiable audience (similar to general posting on world-wide-web, maybe?) plus tweets can be viewed in twitter search and chat rooms (even ‘protected’ account tweets, if retweeted by others).
I guess I’m sidestepping the question of liability which is outside my realm of expertise, just making observation about potential complexity in identifying or quantifying the number of people who may have had access to a particular tweet.
Comment by Edith Orenstein — June 26, 2009 @ 3:01 pm
Edith, excellent point that I had not considered about the public timeline. In practice, I don’t know how many people would ever see that but you are right that it (possibly) takes it out of the “tree falling in forest” realm.
Comment by Bruce Carton — June 26, 2009 @ 3:59 pm
Interesting question. My thought is that it would depend on whether tweeting would be considered “public disclosure” or “selective disclosure” according to Reg FD.
(a) and (b) seem iffy to me.
(c) might pass
Sure to be case law soon
Comment by sysin3 — June 26, 2009 @ 4:25 pm
Easy
All scenerios.
Even if he had 1 follower he is guilty of releasing Non public information, to the benefit of a limited number of “friendlies”
Comment by dax — June 26, 2009 @ 4:30 pm
Leaking any information about your company that has not been publicly announced is forbidden. In my opinion, this is done intentionally for personal gain by the one leaking info. “Pump and dumb”. Make an announcement that the company is going to be doing something good for the stock price and people listen to this information buying up shares and create a temporary spike in stock price. It’s wrong and people listening to tips should not be held liable, but should do their homework on a company before making a purchase and the person leaking information true or not should be prosecuted.
Comment by Joshua — June 26, 2009 @ 4:32 pm
Scenario a) Exec is Tipping and Investors are Insider Dealing
Scenario b) Exec is Tipping but Investors are defence-able public domain (same as following a blog)
Scenario c) Tipping and Misuse of Inside Information (plus other offences of Fiduciary Duty to shareholders/employers), but Investors even more defence-able public domain (same as following a blog)
Comment by Francis Hellawell — June 27, 2009 @ 7:45 am
OK, Carton.
You promised your “take” two weeks ago.
Please oh Great Oracle, impart wisdom!
Comment by Paul Gallagher — July 13, 2009 @ 4:30 pm