Can Twitter Raise Risk of Insider Trading Liability?


In the last couple of days, Compliance Week blogger Bruce Carton has raised interesting issues concerning Twitter and insider trading liability. Carton, a former Securities and Exchange Commissioner, first posed the questions as hypotheticals on his blog, asked his readers for their thoughts, and then went on to provide his best guesses at the answers. Before that, though, he did point out that the possibilities were endless, the situations were complicated, and he had not, at that point, researched the answers.


Essentially, Carton said that if a company executive "tweeted" that his company was about to be acquired and he was about to become rich, then his tip actually happened, the exec could be liable for insider trading under certain circumstances. If he only had five followers, those followers were family members and they acted on the tip, he could be liable just as if he had given the tip around the dinner table.


Similarly, if those five followers were strangers, he could also be liable, Carton said, just as if he had written the information on five pieces of paper, handed them to strangers, and then the strangers acted on the tip.


On the other hand, if the exec had 2,000 or more followers and some of them acted on the tip, he might not be liable. Carton explained:

It strikes me that at some level of followers, Executive's tweet becomes the functional equivalent of a press release, and analogous to the company making the acquisition public by posting the information on its website.

He then promised to pose the questions with law professors and other experts who would be better schooled in the subject. One of those experts was Wayne State's Peter Henning, who discussed the issues with Carton on a podcast Thursday.


It's definitely food for thought for those who think they can and should post anything they want to their Twitter feeds. It's not exactly wise if you're a corporate executive -- and it would behoove the rest of us to exercise restraint at times, too.