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Will Google redefine insider information/trading?
Submitted by Scott Cleland on Wed, 2010-03-17 12:24
Google's unprecedented mass-accumulation of material non-public information may force a re-thinking and broader definition of the concept of insider information/trading and related securities laws/regulations, in order to continue to ensure the integrity of public markets.
- Public statements by Google's CEO Eric Schmidt last week unwittingly unveiled a new and potentially very serious material weakness in the oversight and integrity of public markets, that should trouble those responsible for policing insider trading and other public securities laws at the SEC, CFTC, FERC, Treasury and the DOJ.
- From Jon Fortt's outstanding not-to-be-missed post in Fortune: "Top 5 moments from Eric Schmidt's talk in Abu Dhabi:"
- Google CEO Eric Schmidt: "One day we had a conversation where we figured we could just try and predict the stock market..." "and then we decided it was illegal. So we stopped doing that."
Public market regulators responsible for protecting the integrity of public markets are likely to be concerned by this public admission by a publicly-traded Fortune 200 CEO, especially when the statements are put in a broader perspective by connecting the relevant dots.
- Dot one: Mr. Schmidt's tense uses, "then we decided" and "so we stopped doing that..." implies that there may have been some period of time that Google was, in fact and in an organized way, trying "to predict the stock market" before they "decided it was illegal."
- Regulators should want to know:
- How extensive and far along were their actual stock market predictive efforts;
- What types of non-public information was accessed by what methods, with what authorizations, and analyzed by whom;
- What/who led to the revelation/decision that the Google activity "was illegal;"
- Were there any trades consumated that generated gains, or was any data collected to prove that Google could accurately predict the stock market; and
- What breakdowns in Google's management and internal controls allowed this illegal activity to occur and was any disciplinary action taken.
- Dot two: Google is a unique entity that public market regulators should now have on their risk management radar screen, because Google is the only entity in the world with the market power to know and analyze in real time:
- The aggregated private intentions of over a billion Internet search users, (70% share in the U.S. per DOJ, and 90% in Europe per EU;)
- Which websites and which particular web pages ~90% of all Internet users are visiting and how long they are reading/viewing certain information -- via near universal adoption by websites of Google Analytics and Google-DoubleClick's ad-serving tracking; (This includes the click tracking of the particularly relevant subset of Internet users, i.e. users of Google Finance and most stock related websites which use Google Analytics and DoubleClick.)
- (This unique de facto Internet behavior omniscience is precisely how Google can claim to more accurately predict flu outbreak trends several days/weeks before local public health officials or the Centers for Disease Control.)
- What search keywords are increasing or decreasing in value via Google's monopoly search advertising auction business of Adwords/AdSense;
- (This de facto public market is a complete "black box" with no independent oversight or audit to protect against a monopoly market-maker front-running or self-dealing, given Google's near perfect market information of global supply and demand for most all keywords for search advertising.)
- Dot three: Google has an well-established record of pushing the boundaries of the law and responsible corporate practices.
- The DOJ blocked Google's proposed ad agreement with its #2 competitor Yahoo, by threatening to file a Sherman Section 1 & 2 monopolization case against Google, per the DOJ lead prosecutor.
- The DOJ has twice opposed Google's proposed Book Settlement as an assault on antitrust, copyright and class action law. (See here and here.)
- Google also has been serially sued for infringing on others intellectual property by: wire services, publishers/authors, studios, Viacom, and trademark owners, to name just the most prominent.
- Dot Four: In addition, Google has a well-documented aversion to accountability.
"We try not to have too many controls." "People will do things that they think are in the interests of the company. We want them to understand the values of the firm, and interpret them for themselves." Nikesh Aurora, Google Head of European Operations Financial Times: 9-21-07
In sum, given the unique amount of non-public, material, meta-inside-information available to Google, Google employees and potentially Google partners -- regulators at the SEC, CFTC, Treasury, DOJ, and FERC (Google was just approved to trade energy services) who want to be aware of and stay on top of emerging risks to the integrity of public markets -- should be interested in ensuring that Google has the appropriate management and internal controls to address this serious material weakness and ensure that Google or its employees do not engage in any additional illegal public market behavior in the future.
Regulators should also begin thinking about whether Google's public release of meta-data that it collects via Google search, analytics and other means, could be market moving and thus be subject to additional safeguards against market manipulation, just like the Government has internal controls and established protocols for the release of its market moving infomation: e.g. Commerce GDP growth releases; Labor unemployment figures; Treasury bond sale intentions; or Fed interest rate decisions.
Lastly, given that Google has decided to publicly release aggregated non-public meta-data that it has collected from users and websites for predicting flu trends, what is the Google framework and standard for choosing what types of non-public meta-data will be released in the future?
- If predicting the stock market is illegal for Google, what other financial-related analysis/predictions are problematic as well?
- Simply, what is Google's standard for how it uses non-public material information that it collects without the meaningful consent of Internet users?
For more information on the problems of Google's lack of transparency and accountability, see Precursor's sister site: www.GoogleMonitor.com.