A guide to insider dealing

Insider dealing is a serious charge, one that comes with considerable consequences if an individual is found guilty. It’s a complex area of law which can create confusion.

In this guide, we look at insider dealing, defining what it is and the actions or behaviour that constitute insider dealing.

What is insider dealing?

At its simplest and most concise, insider dealing is a term given to the trading of stock or other assets, such as stock options or bonds, by people who have access to private information about the company.

If this information were to be published, it would likely impact the valuation of the company and its share price.

An insider has access to data that isn’t freely available to other investors, thus giving them an unfair market advantage.

The legislation regarding insider dealing means that anyone who trades on the basis of information that isn’t in the public domain is acting illegally.

Is insider dealing illegal?

There is an ongoing debate about whether insider dealing should be illegal.

This is partly because there is no obvious victim of the crime, simply the exercise of an unfair advantage.

As some people have pointed out, unfair advantages exist across business for all kinds of reasons, which the law does not get involved with.

That said, insider dealing has been illegal since 1980.

Indeed, the Financial Conduct Authority (FCA) maintains that insider dealing is not a victimless crime, and should be treated as fraud.

What might constitute insider dealing?

According to the legislation which makes insider dealing a criminal offence (the Criminal Justice Act 1993), an individual is committing a crime if they use price-sensitive information relating to shares and then deal them on a regulated market or via a broker.

In practice, this might mean selling shares before the release of business performance reports that seriously impact on the price of those shares or, conversely, buying stock prior to an announcement that sends the price considerably higher. 

A tip-off could constitute insider dealing.

In effect, the insider dealing legislation attempts to encourage self-restraint on behalf of those who may be party to commercial information that could be used to benefit them financially.

What is misappropriation of information?

If someone has access to sensitive information which they then use to give themselves an unfair marketplace advantage, then this could constitute misappropriation of information.

This might be a journalist or analyst, not employed by a company, but who are taken into the trust of people for professional reasons.

They use this professional relationship to access sensitive information which they use to their own advantage.

What is market abuse?

You might have heard the term ‘Market Abuse’ in relation to insider dealing.

It refers to unlawful behaviour that takes place in financial markets, including insider dealing, market manipulation and unlawful disclosure of inside information

In 2016, the Market Abuse Regulation (MAR) came into effect across the EU.

As the UK was then an EU member state, the regulation was adopted here.

When the UK exited the EU, MAR was ‘onshored’ into UK law on 31 December 2020 by the EU (Withdrawal) Act 2018 and is referred to by the FCA as UK MAR.

UK MAR’s  objective is identical to MAR : to prohibit behaviour involving insider dealing, market manipulation and unlawful disclosure of inside information. UK MAR is primarily a regulatory (civil) regime and because Market Abuse is more widely defined than insider dealing, behaviour amounting to a breach is more likely to be dealt with under this regime.

The FCA may launch a regulatory investigation if it can gather sufficient evidence.

What is market manipulation?

Market manipulation involves individuals releasing false or misleading information that may influence a share price.

Examples of market manipulation can include:

• Cornering – the acquisition of a certain commodity in enough capacity to gain control and then establish the price for it.
• Churning – this is where a trader buys and sells orders at the same price in an attempt to increase trading activity in a stock and generate interest.
• Ramping – this is the dissemination of a rumour or the creation of misleading activity that could push a stock price upwards.
• Bear raiding – this is when a trader attempts to short sell a security, in the hope of driving the price down and allowing people to buy it at a reduced price.
• Spoofing – where a trader submits and then cancels offers or bids in a security or commodity on an exchange or other trading platform with either (i) no intent or willingness to execute those orders when placed or (ii) intent to alter the appearance of supply or demand to artificially move the price and thus mislead – or spoof – other traders in the relevant security or commodity, and thus benefit his or her own trading position(s)

How is insider dealing considered a criminal offence?

The concept of insider dealing sounds straightforward, but when it comes to prosecutions it can be considerably more complex and difficult to prove.

The understanding of insider dealing leaves considerable grey areas and room for interpretation. This can result in what appears to be clear-cut cases of insider dealing going unpunished, and other examples being prosecuted when nothing untoward has gone on.

Executives, and other company insiders, buy and sell shares in their own companies on a daily basis.

Some of these transactions may coincide with sudden fluctuations in the share price, which can lead to unfounded accusations of insider dealing.

For instance, at the beginning of the Covid-19 crisis, hotel, airline, and travel stocks fell dramatically in price, whereas those in digital technologies rose sharply.

Were high-level employees of those companies most impacted by those fluctuations guilty of insider dealing if they were trading in their company shares around that time?

Sometimes chance, and coincidence, can give the appearance of insider dealing when none has taken place.

What are the penalties for insider dealing?

Being found guilty of insider trading can have a devastating impact on the individual.

Substantial fines can be applied, assets can be confiscated, and it can even lead to imprisonment.

You cannot be imprisoned for market abuse because it’s not a criminal offence, but the FCA can impose unlimited fines and it could prosecute you for an offence under the Fraud Act 2006.

Public censure for market abuse can have a major effect on the professional life of an individual, with severe and ongoing financial consequences as a result.

What the prosecution needs to prove

The key points to remember during an insider dealing prosecution are that it needs to be established that the defendant is either (a) dealing in securities when in possession of inside information or (b) has inside information and is encouraging  another person to deal or (c)

has inside information and is disclosing it to another person otherwise than in proper performance of employment office or profession

Who is an insider?

The 1993 Criminal Justice Act (Section 57) defines who is an “insider”, in the sense that they knew they had inside information and that they had it from an inside source.

Inside sources can be direct or indirect.

They may have been party to this information through their work, or have received it from someone within the company.

It has to be shown that the defendant knew that the information was sensitive and could give them an unfair advantage.

This can prove difficult to establish, because people are party to all kinds of information which they may deem has the potential to prove financially lucrative.

However, they may not be aware that it is not public or acting on it would be illegal.

For an insider dealing prosecution to be successful it must be demonstrated that a defendant understood exactly what they were doing.

What constitutes inside information?

Inside information in the case of an insider dealing prosecution is:

• Specific or precise
• Has not been made public
• Likely to have a considerable effect on the price of any securities if it were to be made publicly available
• Relate to particular securities or issuers of securities, and not to securities generally

How might a defence be mounted?

If someone is accused of insider dealing, there are three principal means by which they can challenge the accusation.

They can argue that they were not expecting the sensitive information to glean a profit, or they were under the impression that the information was widely known.

Finally, they can argue that they were going to buy or sell the same shares regardless of any information they may have received.

What to do if you are accused of insider dealing

As illustrated above, the lack of definition in insider dealing cases can mean that suspicion can fall where nothing untoward has taken place.

If you find yourself accused of insider dealing, it’s imperative that you seek professional legal advice as quickly as possible.

The experienced team at Jeremy Gordon have extensive, up-to-date knowledge of the legislation surrounding insider dealing and market abuse.

Get in touch today for confidential and sensitive advice about your particular circumstances.