Facebook Inc (FB): How It Keyed, Then Stopped a $3M Inside-Trade Scheme

Facebook Inc (NASDAQ:FB) is the platform that can lead to lots of sharing. Since there aren’t 1 billion interesting lives out there, there are bound to be some uneventful, maybe even boring, things shared on Facebook.  But it could be one of these posts, seemingly innocuous and something that you or very few people will care about, that might actually  be the catalyst to serious  illicit activity.

Facebook Inc, on the one hand, served as the platform that initiated an insider-trading scheme worth about $3 million. How did that happen? First of all, there was a comment made by an employee of an investment bank who was bidding on a deal involving a Chinese firm buying Smithfield Foods Inc. (NYSE:SFD), a deal that went to another bank. Well, this person posted about the deal weeks before it was announced. That information found its way to this person’s former employer, who took the information and put in about $90,000 in options on Smithfield Foods and came out with $3 million when the purchase agreement was announced and Smithfield stock skyrocketed.

On the other hand, Facebook Inc had a hand in finding and bringing down the scheme because of the post, which created the connection between the person making the post and the person who did the insider trade. The Securities and Exchange Commission got wind of this options play when it noted that this individual had controlled almost 30 percent of Smithfield’s average May daily volume. When that flag went up, the SEC acted and quickly froze the $3 million when the individual tried to withdraw his windfall just this past Monday.

What can be taken away from this? A couple things. First of all, and probably pretty importantly, be very careful about what you post or what your read on Facebook Inc and how you respond to what you post or read. Second, the SEC has been making insider-trading a priority in its enforcement, and it has shown an ability to crack down  on this behavior. Also, this entire scheme happened in a matter of a few short weeks, and the SEC was able to shut it down quickly, which shows the increased emphasis on this behavior and related fraud.

And there is one last point we can all learn from this.

And the last part? The power of Facebook Inc and other social media in that the SEC used this trader’s own Facebook friends list to pinpoint his connection with the Smithfield transaction, showing what a vital role social media can play in investigations such as this. We are all connected more than we might realize, and the SEC was able to leverage that knowledge and  seize the opportunity quickly.

Give us your thoughts about this case and about the role of Facebook Inc in crime-prevention and law-enforcement efforts in the comments section below.