Insider trading Flashcards
(16 cards)
Definition
Insider trading is the buying or selling of a publicly traded company’s stock by someone who has non-public, material information about that stock. Insider trading can be illegal or legal depending on when the insider makes the trade. It is illegal when the material information is still non-public.
Laws
Laws: The Criminal Justice Act 1993 Part V Driven by EC Directive on Insider Dealing and the Financial Services and Markets Act 2000 (FSMA)
S57 CJA 1993
S57 Criminal Justice Act 1993 – A person has information as an insider if: s/he knew that the information they have is and knows it is insider information; s/he ‘has the information and knows that it comes from an inside source’
S57 Criminal Justice Act 1993 – A person is in possession of information from an inside source if: s/he has the information through being a director shareholder or employee of a company; s/he has the information by reason of their employment (e.g. auditor); The source of the information is from one of the above
CJA 1993 Part V
The Criminal Justice Act 1993 Part V (Schedule 2) defines what comes under the definition, essentially securities, stocks and shares.
CJA 1993 Part V Schedule 2
Prosecution needs to prove
The prosecutor needs to prove:
* The securities are in the definition
* It needs to relate to specific securities and not securities in general
* It must not have been made public
* It must be likely to have a significant impact on the price if it was made public.
S52 CJA 1993
S52 Criminal Justice Act 1993 - ONLY individuals can be liable.
If you pass on information in the course of your employment / position and that person uses the information, you are not liable, eg auditor
Penalties
Penalties :
Under the Criminal Justice Act 1993
* The contract buying and selling the shares is unaffected.
* Criminal sanctions including up to 7 years imprisonment and/or
* An unlimited fine
* Person or act has to have been in the UK.
Financial Servies and Markets Act 2000 Section 118 - Financial Services v Massey 2011
The Financial Services and Markets Act 2000 - Section 118; Civil sanctions (such amount as the Financial Conduct Authority think fit) Financial Services Authority v Massey [2011] indicates penalty will be profit+50%).
Intent
The Financial Services and Markets Act 2000 - Section 118; Civil sanctions (such amount as the Financial Conduct Authority think fit) Financial Services Authority v Massey [2011] indicates penalty will be profit+50%).
Encourage (CJA 1993 s52(2)(a))
It is also an offence to ‘encourage’ another person to deal (CJA 1993 s52(2)(a).)
Reasonable cause
It has to be shown that the defendant knows or has reasonable cause to believe that the deal will occur.
Defences
Defences: The Criminal Justice Act 1993 S53 Schedule A is specific about the burden of proof required. Defendant should ‘show’ the relevant facts on the ‘balance of probabilities’
CJA 1993 S53 Schedule A
The Criminal Justice Act 1993 S53 Schedule A:
* S53(2) provides the same defences to encouraging as dealing
* S53(3) provides defences to passing information:
* he did not expect anyone to deal as a result of the disclosure.
* he did not expect the dealing to result in a profit.
Market makers
Market makers (dealers) whose job it is to buy and sell shares on behalf of others can do so even if they have market sensitive information. However they cannot be exempt from encouraging others to deal.
Market abuse
Insider Dealing/Market Abuse is covered by CJA ’93 (criminal proof, 7yrs in jail & unlimited fine) and FSMA 2000 (civil proof, Massey indicates penalty will be profit+50%). Offences are dealing, passing info and encouraging. Only commit dealing offence if know price sensitive info. Defences as per Acts.
