Insider trading – big brother is watching!

Article_Insider-trading-wideIf you trade in a public company’s shares, bonds or other securities (on the JSE for example) be careful of our “market abuse” rules. They are wide enough that you could fall foul of them inadvertently, and as the penalties for non-compliance are harsh take specific advice in any doubt.

What is “inside information” and are you an “insider”?

“Insider Trading” is a commonly-encountered type of “market abuse”, but many company directors and other share investors aren’t entirely sure what is outlawed and what is allowed.

In short, inside information is any specific information which is “obtained or learned as an insider” and which, if it were made public, “would be likely to have a material effect on the price or value of any security listed on a regulated market.

You are an insider if you have such information through being a director, employee or shareholder, if you have access to it “by virtue of employment, office or profession”, or if you know that the source of the information was one of those people.

Big Brother is watching!

The JSE’s surveillance staff constantly monitors trading activity for any “unusual price and volume movements”.  Any suspicious activity is probed and if referred to the FSB (Financial Services Board), will be investigated by the ominous-sounding “Directorate of Market Abuse”, with its powers of interrogation and search-and-seizure.  The FSB’s Enforcement Committee can then impose administrative penalties on offenders or refer them for criminal prosecution.

The Court upholds R1m penalty

A new and important High Court decision (Zietsman and Harrison & White Investments (Pty) Limited v Directorate of Market Abuse and Financial Services Board, High Court Gauteng Division (Pretoria) case no. A679/14 available here: SAFLII) concerned an individual and a company who, as part of a strategy to acquire a controlling interest in a public company, bought tranches of its shares whilst armed with the non-public knowledge that the company had obtained a R99 million loan from the Industrial Development Corporation (IDC).

The buyers denied any wrong-doing but on the facts the FSB found them guilty of insider trading and handed them a R1 million penalty. The buyers were also ordered to pay the costs of the proceedings. This wasn’t a criminal prosecution so the FSB was able to act independently and quickly, bypassing the criminal justice system and evaluating evidence on a “balance of probabilities” rather than the “beyond a reasonable doubt” standard required for criminal conviction.

On appeal the High Court confirmed the FSB’s decision, giving it a useful precedent to continue imposing substantial penalties on offenders.  To rub salt into the offenders’ wounds, their share investments were subsequently rendered valueless when the company was liquidated.  Not relevant, said the Court, what counts is the rise in the share price when the inside information becomes public; later price movements are irrelevant.

Note: The original of this article appears on Ashersons Attorneys website, here.