The Securities Appellate Tribunal recently set aside orders passed by SEBI in early 2020, where the regulator had penalised the act of forwarding WhatsApp messages containing yet-unreleased quarterly financial results of certain companies.
The data contained in these messages may have been prescient, but the messaging networks it passed through were so securely encrypted and labyrinthine, that SEBI was unable to get down to tipper zero despite an extensive investigation as well as forensic reviews by the concerned listed companies.
Given these limitations, SEBI's orders could effectively only shoot down the messenger and penalised those who received these texts and then shared in onwards onto other groups. In doing so, SEBI lassoed them into the Insider Trading Regulations and proceeded on the premise that recipients or tippees ought to have been circumspect about such texts and hence, should be liable even if they were unaware of the origins of the information chain.
In its order a few weeks ago, though, the SAT expressly disregarded the position taken by SEBI and held that knowledge and state of mind are essential and unless parties were aware of the unpublished nature of the information, no charge can be fastened for their acts since the recipient's liability is neither independent nor absolute.
At first glance, the SAT's decision may appear to endorse the "heard on street" principle as a cultural truism, but that would be a somewhat convenient misreading of the tribunal's findings.
Clearly, the SAT's order is premised on the specific conduct of the individuals, their degree of separation from a potential direct source, SEBI's investigative process, and its failure to ascribe due weightage to other, exculpatory factors that mitigated the culpability of the persons charged.
Now whether SEBI chooses to haul this to the doors of the Supreme Court or not remains to be seen, but this is no doubt a reminder to the regulator that alternative information markets thrive across the world today and the inherent constraints our regulators operate under.
Now a permanent appendage to human life, commerce, and industry across the globe, the use of messaging platforms has been a matter of great unease for regulators and organisations alike, with penalties being issued over the years to employees who were discovered to have shared client information on instant messaging platforms.
Financial firms have constantly wrestled with competing demands of employee privacy and creating institutional deterrents for such reckless information sharing, especially in an environment where constant and uniform patrolling is unachievable.
The nature of such communication may vary from general speculative, chatter to specific intelligence regarding the goings-on within companies or fund houses and in both cases, ethical guardrails are difficult for regulators to create when they must contend with a boundless onslaught of market chatter and estimates flowing through Twitter handles, anonymous sources and multiple encrypted messaging platforms.
Such market conduct is also often difficult to classify as "insider trading" or "communication of price sensitive information".
For reasons well-articulated out by the SAT in WhatsApp orders, much of this behaviour is unlikely to satisfy specific standards under insider trading laws because these instances hover closer to irresponsible dealings with information that may not always be market-moving in nature.
The passing on of confidential intelligence as speculative data or dissemination of market rumours is not easy to peg as price-sensitive, more so when it does not emerge from a source within or related to, the company.
Currently, SEBI has a couple of circulars and a set of FAQs on the issue of unauthenticated rumours, which is consistent with global best practices and requires all licensed intermediaries to have a specific set of policies to check the dissemination of unauthenticated news by their employees.
These circulars also require brokers and other licensed market players to implement training programs, codes of conduct and encourage a more behavioural approach in nudging participants towards a desired form of collective behaviour.
There is no similar proscription on market rumour mongering (yet) issued by SEBI to the wider trading community beyond just its licensed subjects and that is perhaps a problem it will be looking to swiftly fix.
Until then, despite the SAT's deliverance, the continuing saga of these WhatsApp cases must serve as a cautionary tale for the entire trading community on the use of instant messaging platforms.
(The author is Partner - Financial Regulatory, Trilegal.)