Probably, it is for the first time that SEBI has treated ‘Facebook’ as a relevant factor to determine connections between persons or to establish connection. In instant case, SEBI observed that having "mutual friends" on Facebook will form the basis of determination of connection for the purpose of Insider Trading. Insider means any person who is (i) A connected person; or (ii) in possession of or having access to unpublished price sensitive information.
SEBI's order No: WTM/PS/152/IVD/Feb/2016 dated 4th February, 2016 held guilty Chairman and Managing Director (CMD) and Chief Executive Oicer (CEO) of Paired Technologies Ltd (PTL), a micro-cap which runs LatestOne.com, an online mobile accessories store. The PTL had run into financial diiculties and thereaer it decided to sell its business on a slump sale basis to another entity. The company decided to declare special dividend and also carry out a buyback of shares. Because of this, the shareholders received an amount far higher than the then ruling market price of the shares. Subsequently, the price of the shares also started rising substantially.
It was later on revealed through investigation that the CMD, CEO were part of a cartel of 15 people termed as 'insiders' and were in possession of unpublished price sensitive information (UPSI) on the basis of which they traded in the scrip of PTL. These persons allegedly connected had purchased the shares of PTL at the earlier low ruling price.
How the parties were found connected?
In the aforesaid case, connections with the other parties were found on various grounds. Mr.PS, the Chairman and MD of PTL was a connected person under the Regulations and the
company accepted that he, along with two other persons, were privy to the UPSI relating to slump sale. He was also accepted to be privy to the UPSI relating to special dividend. On scrutiny, it was also known that Mr. AK was found to be common director/promoter with the Chairman of another company which incidentally had also provided services to PTL. It was also revealed that several family members of Mr. AK had dealt with the shares of PTL while Mr. AK did not deal in the shares directly. SEBI concluded that such dealing of shares by the family members of Mr. AK was held to have carried out insider trading.
Further, SEBI noted that Mr. PA was also found to be connected to Mr. AK through mutual friendship basis on Facebook. Mr. PA was employed with Deloitte Tax Services, a group company of Deloitte Touche Tohmatsu India Pvt. Ltd which had conducted the due diligence of PTL during the slump sale. On investigation, SEBI considered connections on social media on internet between the parties, i.e., through Facebook as relevant factor to determineconnections between parties.
SEBI’s interim order:
SEBI issued orders eectively freezing the bank account and demat account of such parties till they deposited such amount, also quickly passed interim orders whereby the illegal profits made, along with interest till date of order, were impounded and required to be deposited till final orders are passed.
Comments: This case proves that the market Regulator has developed robust systems and procedures to allow for audit of all the trails of a particular company's trading and transactions and identified trades that may require further investigation. The passing of interim order impounding the profits and direction to frozen the demat and bank account are well thought moves as the final order passing sometimes get dragged for years as investigation gather evidences from multiple sources, including trading and phone records, to build up a strong case that can withhold challenges in Tribunal/Court. These kind of quick interim orders would provide a big morale booster for investors that the Regulator are providing them with a level playing field.