Regulators across the globe are finding it difficult to fix insider-trading based on WhatsApp chats.

Recently, according to a Bloomberg report, the US Securities and Exchange Commission (SEC) asked money managers for details on who at their firms oversees retention of electronic communications. The query is part of a letter that the regulator sent recently to some of the largest players in the industry seeking information on policies and key staff whose texts and emails are supposed to be archived. 

Under SEC rules, money managers face less expansive record-keeping rules than brokerages, with retention focussed on documents related to investment advice. However, like banks, investment firms are required to monitor communications involving their business to head off improper conduct, said the Bloomberg report. 

While SEC is trying to tighten the noose around insiders using WhatsApp texts, a similar exercise by the Securities and Exchange Board of India has hit the wall. 

(In)famous WhatsApp case

SEBI recently suffered a set-back in a WhatsApp leaks case. The Supreme Court rejected SEBI’s appeal to penalise a senior employee of a Mumbai equity brokerage house for sharing stock-price sensitive data on WhatsApp on the grounds that the regulator went behind the secondary source of the leaked data and could not find the primary source of the message. 

In 2017, SEBI found forecasts by several brokerages that seemed to have knowledge on price-sensitive information such as financial results ahead of official announcements from companies. This list includes blue chips like Dr Reddy’s Lab, Axis Bank and Tata Steel. 

Following this, SEBI had conducted raids on 26 suspected entities and investigated nearly 190 phones of individuals at brokerages and found that the messages by them were a close approximation of actuals. SEBI suspected this to be an alleged insider trading and cracked the whip on them. It imposed ₹15 lakh penalty against Neeraj Kumar Agarwal and Shruti Vora, then employees of Antique Stock Broking, for forwarding the messages. 

Setback at SAT 

The individuals then moved Securities Appellate Tribunal (SAT), which, while dismissing the regulator order, said: SEBI failed “to prove any preponderance of probabilities that the impugned messages were unpublished price-sensitive information, that the appellants knew that it was unpublished price-sensitive information and with the said knowledge they or any of them had passed the said information to other parties”. Accordingly, the tribunal set aside SEBI’s orders in the case. 

SEBI then escalated the issue with Supreme Court, which also declined to entertain the regulator’s arguments, saying: “They are secondary chain. They have just forwarded the messages. It would mean upsetting everything and putting the burden again on them, which we are not willing to do… On the facts and circumstances of the case, we find no reason to entertain the appeal.”

Following these verdicts, SEBI also on its own has disposed of similar cases that it was pursuing. 

Does this set-back mean SEBI cannot not rely on WhatsApp and other electronic trails that can offer corroborative evidence to fix insider-trading? Though the SEBI approach was clear, it could not conclusively convince the higher judicial authorities with the data that it had collected. 

Despite these set-backs, SEBI should actively pursue e-trails and as Supreme Court said, it should go after primary sources of such leaks which can be easily done in this advanced technological era. For that, it has to strengthen its data analytics team which should work in tandem with other regulatory bodies, concerned authorities and India Inc to nab the culprits.

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