How social media complicate SEC crackdown on insider trading

Social media services such as Facebook and Twitter, which offer "so much that is great," also create challenges for regulators working to stop insider trading, says Securities and Exchange Commission Chairman Mary Schapiro, America's top stock market regulator.

Chat rooms posed the first wave of Internet-related challenges for regulators, said Ms. Schapiro, speaking Wednesday at a Monitor-hosted breakfast for reporters. “We actually started to see it when the Internet first became popular and … stocks would be hyped in chat rooms. And then we would find investors falling prey to all kinds of scams where those were insiders [in the chat room] pretending not to be insiders that were talking up the stock.”

Today's widespread use of Facebook, Twitter, and other social media services means “the incredibly low-cost ease of reaching millions of people through social media creates opportunities for mischief without question,” Schapiro said. 

Much of the mischief the SEC deals with is insider trading. The SEC’s own website defines illegal insider trading, in part, as buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of significant, nonpublic information about the security. Insider trading violations may also include "tipping" someone about such information or securities trading by the person who gets a tip.

One key difficulty regulators face, she said, is finding records of social media communications when it comes time to build a case against a suspect for insider trading. “Because we are very reliant when we do investigations on documentation, on e-mails, on telephone calls that might be taped by trading desks or by others, to the extent some of this [social media communication] is very ephemeral it makes it harder, I think, to build cases.”

Schapiro spoke approvingly of the Stock Act, which Congress passed earlier this month to prohibit insider trading by members of Congress. “On balance, the Stock Act is helpful to us, and I think it is particularly helpful as well that nothing in it diminishes our current capacity to pursue insider trading aggressively,” she said.