Insider dealing and market abuse
Insider dealing is essentially the trading in company securities on a recognised stock exchange, with a view to making a profit or avoiding a loss, by someone who has confidential information about those securities that if that information were widely known would affect their price.
It was only with the Companies Act 1980 that there was the first legislative intervention in the United Kingdom to combat insider dealing. Other jurisdictions came to this problem much earlier on, for example, the USA in the Securities Exchange Act 1934. Previously, the relevant UK legislation was contained in the Companies Securities (Insider Dealing) Act 1985 and the Financial Services Act 1986.
Legislation has altered the law on insider dealing to take account of the EC Directive on Insider Dealing (89/592). The law is now contained in Part V of the Criminal Justice Act 1993 and Schedule 1 of that Act.
The securities covered by the legislation are set out in Schedule 2. They include shares and gilts. The law for the most part only covers dealings on a regulated market so that the law does not generally extend to unlisted companies. Certain off-market deals are caught.
There are two categories of insiders caught by the legislation – primary insiders and secondary insiders or tipees.
Primary insiders are persons who have information as an insider obtained through:
(a) being a director, employee or shareholder or an issuer of securities; or
(b) having access to the information by virtue of employment, profession or office.
Secondary insiders are those who have received or obtained information from a person who is an insider either directly or indirectly.
A person is not a secondary insider or tipee merely by virtue of being procured to deal in securities. He must have inside information and must know that it is inside information and he must know that it is from an inside source (s 57).
The legislation prohibits dealing in securities by a person whether by himself or as an agent for another person. There is also a prohibition on encouraging or procuring another person to deal and also of disclosing information except in the performance of one’s duties or on showing one did not expect the person to act upon the disclosure. Inside information is defined as specific information that is not in the public domain and that is unpublished. It must be information which, if published, would have an effect on the price of the securities (s 56).
The legislation requires that there should be an intention to make a profit or to avoid a loss. The new law, however, tilts the balance towards the prosecution in that it is presumed that persons who deal in securities with the relevant knowledge have the intention to make a profit or avoid a loss. Thus the legislation places the burden on the defendant of disproving the intention. There are certain limited defences (s 53 and Sched 1).
There is no civil remedy for insider dealing. The contract itself remains intact. The maximum criminal sanction that applies on indictment is seven years’ imprisonment and/or an unlimited fine. On summary conviction, the maximum penalty is a fine and/or six months’ imprisonment (s 61).
Various criticisms have been made of the UK law on insider dealing.
The fact that there was no civil remedy was often the subject of criticism. By contrast, in the USA there has been a civil remedy ever since the Securities and Exchange Act 1934 whereby the person who has sold shares to an insider (or possibly bought from an insider) is able to sue for the profit made by the other or the loss avoided by the other. There was no civil remedy in the United Kingdom. It is possible that there may be an indirect remedy. Under the Powers of the Criminal Courts Act 1973 and, in Scotland, the Criminal Justice (Scotland) Act 1980, any victim of a criminal offence may be awarded compensation under the Act. This occurred, for example, in Scotland in Procurator Fiscal v Bryce in 1981 (unreported).
The market abuse provisons of the Financial Services and Markets Act 2000 provide for civil penalties in the form of injunctions and restriction orders.
Insofar as directors profit from their use of inside information, there may be a remedy available to the company against the directors for breach of duty.
It must be borne in mind, however, that the term ‘insiders’ encompasses more than directors and also there may be difficulties with the company suing directors where the directors are in control of the company. In any event, as Suter notes, in The Regulation of Insider Dealing in Britain, 1989, London: Butterworths, p 122:
There is no reported decision in Britain on a claim by a company to recover insider dealing profits from an insider. Hence, the issue of whether insiders are accountable to their companies for such profits is unresolved.
A second major criticism made of the legislation in the United Kingdom is that there is no institution that has been set up specifically to deal with the matter of insider dealing. There is such an institution in the USA, namely the Securities and Exchange Commission. There have been calls from the Stock Exchange for an insider trading agency. At present most prosecutions are carried out by the Department for Business, Innovation and Skills on the basis of evidence gathered by the Stock Exchange.