Thanks to technological advancements providing easy access for any person, especially young investors, to open a trading account, stock trading came out as everyone’s weapon of choice. In 2020 alone, there were ±488,000 new trading accounts (a 93 percent increase), and most of them are retail traders. Unfortunately, using a weapon without the underlying proper knowledge of its mechanism comes with great risk.

However, while incompetent, those new traders do not come out in a cold sweat when trading stocks regularly. Why? The clue lies in the so-called “stock influencers” who willingly and confidently hand out stock picks to those inept stock traders through social media. No charts, no technical analysis, no thorough fundamental analysis, only stock picks, and pleasantly enough, no questions asked to the shepherd. Luckily enough, most of them were bull’s eye.

Skeptically glancing at such a trend, one should raise a mere simple question: How did those stock influencers come up with their picks, while frequently hitting a home run? Optimists may say it was a fluke due to a bullish market, pessimists may say it was insider trading.

To begin with, who is actually eligible to give stock recommendations? Legally speaking, it should be investment managers of securities companies. Those are professionals (commonly referred to as market makers) who frequently publish recommendations on “Buy”, “Hold” and “Sell” of certain stocks on the front-page of financial newspapers.

However, not all people are qualified to act as investment managers. In order to assume such a role, one should meet certain prerequisites, including having adequate knowledge and expertise in capital markets, as demonstrated from possession of a certificate of expertise and professional work experience.

Those stock influencers, evidently, are not licensed investment managers. Nonetheless, may they still pass stock endorsements under the auspices of “freedom of expression”? Since, they might not be licensed professionals, but wouldn’t they still be allowed to share personal interest on a certain stock? Here comes the tricky part.

Fundamentally, it is correct that anyone is allowed to hand out stock recommendations, as long as he/she is not trading on insider information (insider trading). What constitutes insider information? Based on our Capital Market Law, insider information refers to any non-public material information (of a public company/issuer) which is possessed by an insider.

As for insiders, they are divided into three parties: 1) Corporate organs (directors and commissioners) or employees of a public company/issuer; 2) Shareholders who, directly or indirectly, hold 20 percent of voting rights at minimum; and 3) Individuals who, based on their position or profession or business relationship with a public company/issuer, possess insider information, e.g. lawyer and public accountant.

Based on such a framework, it should be impossible for stock influencers to be criminally charged based on insider trading, shouldn’t it? Albeit being insiders, they may still be classified as tippees.

A tippee is a non-insider party who receives insider information from the tipster. Arguably, a tippee may be anyone, including relatives and friends, so long as they hold insider information.

Tracing back, we have collected data showing that most recommended stocks skyrocketed after the “pump”. In addition, there were three separate peculiar events: 1) A celebrity who recommended a stock after having a discussion with the CEO of an issuer; 2) A clergy member who described that he received non-public information on a trillion-rupiah transaction from the “sky above”; and 3) An entrepreneur who is closely affiliated with higher-ups, casually recommended state-backed issuers.

Did they hold insider information? Unfortunately, that is not a question of law, but a question of fact, and further investigation is needed for an answer. Nevertheless, even if they possess insider information, will there be any liability in relation to those events? It is still highly arguable.

If referring to the United States’ legal approach on tippees, based on the Dirks Test, there are several criteria for a tippee to be held liable. First, the tippee discloses insider information. Second, the tippee knew or should have known that the tipster had committed a breach of fiduciary duty resulting in personal benefit for the insider. Personal benefit itself may vary from cash to reciprocal information or reputational benefit, which will lead to future earnings of the tipper.

For example, A receives information on a huge merger proposal of an issuer from a tipping insider, and then A passes on such information to B, which eventually leads to B executing the trade. A cannot necessarily be held liable for insider trading, unless A knew that the insider had disclosed such insider information in order to yield personal benefit for him/her.

Needlessly, the current Indonesian Capital Market Law is yet to address tippee liability. Under Article 96, emphasis is put on the tipping insider, not the tippee. Hence, criminal liability may only be imposed against the insider.

Now, whether or not those stock influencers hold insider information may only be determined based on investigations from the authorities, either the Indonesia Stock Exchange or the Financial Services Authority. Yet, even if they acted as tippees and hold insider information, under the current regime, they are practically immune from legal liability.

In conclusion, the stock influencer phenomenon should raise public awareness that a major capital market reform is needed, starting from amendment to the quarter-century Capital Market Law. Hopefully, this will be addressed under the proposed omnibus bill on the financial sector.

 ***

The writer is a stock exchange legal analyst.