A few weeks ago I offered the following hypothetical and questions:

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:

1. Is Executive liable for insider trading “tipping” in any of these scenarios?
2. Are the followers who profited on the tip liable for insider trading in any of these scenarios?

I then foolishly added that I would weigh in later with my own take, but quickly realized that the questions were, well, really hard.  I procrastinated and tried to lay low but eventually had to face the music when a couple of readers properly held my feet to the fire on this.  So I’m taking a shot at this below with the following caveats up front.

First, I do not pretend to know the correct answer to the insanely novel issues below and have not researched this.  For all of you executives at ABC Corp. and those similarly situated, please keep in mind the immortal words of Mike O’Sullivan’s now-defunct Corp Law Blog: “If you need legal advice, consult with a lawyer instead of a blog.”

Second, let me reiterate that this is way tougher than I thought it was going to be, as the “relationships” between the people are novel and uncertain, and there are variables I didn’t consider.  For instance, I assumed only followers would learn of the Executive’s “tweet” but I was reminded here that tweets go out to a public timeline that, at least in theory, is available to the world.  I’m sticking with my original assumption here, however.

I also didn’t really consider the fact that the “strangers” who follow Executive actually have no idea if he is, in fact, who he claims to be.  He could just as easily be a 16-year-old girl in high school making up stories for all they know.  Anyway, here are my thoughts:

1. Is Executive liable for insider trading “tipping” in any of these scenarios?

I’ll go with yes in (a), yes in (b) and no in (c):

In (a), you have what appears to me to be a classic insider trading case.  It seems no different than if he told the family this around the dinner table or via email, so I say Executive is liable.

I find (b) much tougher.  Here you have followers who are total strangers.  This dynamic does not really exist in the off-line world, does it?  Why would Executive walk up to a stranger on the street and deliver that message?  Executive has no idea if these Twitter followers even pay attention to what he tweets, and has no idea if they believe he is, in fact, an executive with ABC Corp. as he claims and believe his statement about an imminent acquisition.  I think it is analagous to Executive writing the message on 5 pieces of paper and dropping the papers at the bus stop.  Maybe people will see it, maybe people will believe it, maybe people will act on it.

Having said all that, however, since the hypothetical is that someone did trade based on Executive’s tweet, I would say that Executive should have reasonably known that this could happen and is liable.  It is the opposite fact pattern in some ways to the Barry Switzer insider trading case.  Switzer attracted the attention of the SEC when, after overhearing a corporate executive discuss the imminent “liquidation” of a public company merger, he profitably traded on that information in advance of the liquidation. The SEC brought an enforcement action against Switzer alleging insider trading, but the court ruled that the necessary “duty” had not been breached because the executive was unaware that Switzer had overheard his discussion of the liquidation.  Here, by contrast, our Executive is aware that he has Twitter followers who presumably read what he writes.

Bottom line: I’m going with “yes” in (b).

In (c), I think the fact that Executive has 2,000 followers changes things a bit.  It strikes me that at some level of followers, Executive’s tweet becomes the functional equivalent of a press release, and analagous to the company making the acquisition public by posting the information on its website.  Couldn’t a follower who is questioned by the SEC after his profitable trades say that he reasonably thought the acquisition information was public because he saw it on Executive’s public Twitter feed that is followed by 2,000 people?  I think this brings up a host of other issues, unfortunately.  For instance, as I understand it, the SEC is still hashing out what type of online disclosure is adequate under Reg FD, and I’m willing to bet the Twitter feed of a random company Executive is not on the approved list.  For the sake of argument, however, I’m going with “no” on (c) on the admittedly shaky ground that Executive’s disclosure to 2,000 people makes the information public.

2. Are the followers who profited on the tip liable for insider trading in any of these scenarios?

Same answers as in Question 1, for the same reasons.

In short, I’m grasping here, as the issues are novel and seem to multiply at every turn.  I’m going to seek out some better-researched answers to these questions from law professors or private attorneys, and will let you know if I have any luck.