The Insider Dealers - the good and the bad
It only takes a little whisper here or there to get people interested – whether it is the latest bit of scandal or piece of information that no-one else knows.
Even with fairly strict laws in place the authorities in the UK are still convinced that there are individuals or dealing rings taking advantage of ‘inside information’ and taking profits away from others.
Under the Market Abuse Regulation 2016 such behaviour is defined as market abuse.
This is not just about market manipulation – such as major short positions being taken in certain stocks ahead of negative research information being put out into the marketplace – or even unlawful disclosure, but instead about ‘insider dealing’.
Insider trading is most definitely an example of market abuse.
At its simplest in description, it involves trading in equities or other instruments, using inside information to gain or give an unfair advantage on the securities market.
Since 1985 insider dealing has been a criminal offence. As such you can commit the criminal offence of insider dealing by:
1. Dealing in securities when you have inside information which may affect their price.
2. Encouraging someone else to deal in securities when you have information which may affect their price.
3. Disclosing inside information other than properly as part of your employment.
As a criminal offence it carries a penalty of either an unlimited fine or a prison term of up to seven years – it could also mean both. Proving such abuse needs distinct evidence.
Such market abuse, as insider trading, is also considered as a civil offence. That means that guilty parties could be banned from being involved in any regulated activities.
Furthermore, even if you are not being charged with criminal insider dealing, or even if you have been acquitted, you may still be subject to penalties for market abuse.
And as it is classed as a civil offence, the threshold is much lower for proving market abuse.
Exactly what is ‘inside information’?
Inside information is that information relating to a particular company that would, if published, be likely to have a significant effect on the price of shares in that company.
It will not necessarily be about the company for which the insider works. Instead it might be about a supplier or even a competitor – where, for example, there is unpublished news of the winning or loss of a big contract.
The insider will not commit the offence if they pass on general information about the market in which a company operates, however confidential that information might be.
As an example, if an insurance company director, tells a fellow golf club member that the company’s profits were going to be better than market expectations – then such an act leaves that individual liable.
But if the golf club colleague was told that the whole of the insurance sector was enjoying good times – that individual would not be imparting ‘inside information’.
So, for the basis of this article we can define ‘insider information’ as that which is a non-public fact regarding the plans or condition of a publicly-traded company that could provide a financial advantage when used to buy or sell shares of that or another company's securities.
What defences might be considered
Several defences may be available to someone charged with insider dealing, if they can prove that:
1. they did not expect the dealing to result in a profit by virtue of the price-sensitive information;
2. they reasonably believed that the information had been disclosed widely enough to avoid prejudicing other parties to the share transaction;
3. the person who bought or sold the shares would have done so without the information – because they needed to sell the shares to raise the cash, or to come within a permitted dealing period, etc.
If you can prove that your case falls into one of the situations outlined as a ‘defence’ to insider dealing, you will not be found guilty of the criminal offence.
If you are accused of dealing in securities or encouraging someone else to deal in securities based on inside information, the possible defences include:
· You did not think that you or the person doing the dealing would profit as a result of you having the inside information. For instance, you may have thought that what you knew would have no impact on the price of the securities being dealt.
· You did not realise that you were acting on inside information, for instance, because you thought this information was already in the public sphere.
· You or the person doing the dealing would have acted the same way without the inside information.
· It was reasonable for someone in your position to act the way you did in relation to inside information.
Disclosure of inside information
If you are accused of disclosing inside information, defences include:
· Stating that you did not expect the person to whom you disclosed the information to deal in securities as a result of your disclosure.
· Declaring that if you did expect that person to deal in securities as a result of your disclosure, you did not expect that the information you gave them would impact the price of the securities in which they were dealing.
Insider Trading is not always illegal
A company’s directors, officers and its senior employees – those who could be open to accessing confidential information, basically classed as ‘corporate insiders’ – are able to buy or sell shares in the company as long as they stay in line with Stock Exchange and legal regulations.
There are set dealing guidelines for corporate insiders and such dealings are able to be open to public knowledge.
Reporting those dealings is a compulsory function of both the company and the individual concerned.
How does the Stock Exchange monitor insider dealings?
There various ways that the market tracks insiders:
Market surveillance – This is probably one of the most important ways of identifying insider trading. The use of sophisticated tools helps to detect such trading, especially around the time of important events such as trading updates, result reports and other key corporate developments.
Particularly large orders, over the average dealing numbers, are also easily identified and create flags as to whether they are ‘suspicious trades’ and worthy of further investigation.
Tips and complaints: Several insider trading cases have been started through a telephone call from a market professional ‘wrong-footed’ by an insiders dealing.
Whistleblowers: Another example of important base information has been the increase in the number of aggrieved whistleblowers, those who have knowledge of others dealings but regret not being involved in such transactions. Instead they can gain from identifying to the authorities those dealers and their dealings and gain some form of information reward.
Market firms: Now with such advanced software analysis programmes brokers and market makers have the ability of identifying unusual trades or trading patterns. After their own initial investigation they are obliged to inform the LSE and, even, the FCA of anything that concerns them.
However, those methods of gleaning market abuse are just the start of building up an insider trading case. Such proof is nearly always circumstantial – but joining up the dots helps to get a prosecution underway.
Some notable ‘Insider Dealing’ cases
Case 1 – Christopher McQuoid
Solicitor Christopher McQuoid was employed by TTP Communications. In May 2006 he was confidentially told that Motorola was about to bid for the company. He passed on that information to James Melbourne, his father-in-law.
A couple of days before the bid was made Melbourne paid 13p a share for a line of TTP shares.
The bid came out at 45p and the father-in-law made £50,000 profit on his dealing. Three months late he gave McQuoid a cheque for exactly half that sum.
Melbourne’s trade was identified as being suspicious and the FSA was informed. A prosecution followed, McQuoid got eight months inside while Melbourne, who was 75, was given the same but suspended for a year.
Case 2 – Matthew and Neel Uberoi
Matthew Uberoi was working for stockbrokers Hoare Govett, where he became party to various pieces of confidential information about imminent takeovers.
Matthew started to feed such information over to his dentist father Neel.
The duo made a number of trading profits using the inside information and they were caught. The dentist got two years and the son just one.
Matt Uberoi stood as Labour’s candidate for the London constituency of Chelsea and Fulham in last December’s General Election.
Case 3 – Messrs Dodgson, Harrison, Hind, Parvizi and Anderson
Accountant Martyn Dodgson had a career in investment banking, working at Cazenove, UBS, Lehman Brothers and Deutsche Bank.
While he was at Lehman he passed on to accountant Andrew Hind a number of tips concerning the details of the takeovers of Scottish & Newcastle and the Paragon Group. It was alleged that Hind then passed on the tips to ‘day trader and professional gambler’ Iraj Parvizi and his stockbroker colleague Ben Anderson.
It was alleged that the information was circulated by way of the use of encrypted memory sticks, the use of nicknames and pay as you go ‘burner’ mobile phones. Those various devices were used to cover up insider dealing.
Lawyer Andrew Harrison, who worked at UBS, Panmure Gordon, Lloyds Banking and Altium Capital, became a member of the ‘ring’. He met Hind through Dodgson, with whom he had worked at UBS.
Harrison, it was alleged, told Hind of a bid for internet security company nCipher, upon which Panmure Gordon was advising.
All five men were prosecuted in 2016 in what was then headlined as the UK’s biggest ‘insider dealing ring’ case - Dodgson was found guilty, Harrison was acquitted, Hind was proved guilty, while Parvizi and Anderson were both acquitted.
Case 4 – Fabiana Abdel-Malek and Walid Anis Choucair
Former UBS compliance executive Abdel-Malek received a three-year jail sentence for passing on insider details to a family friend and former trader Choucair, he received a similar three years imprisonment.
The duo were ‘spotted’ some years before a case was brought up against them. Using burner phones Abdel-Malek passed on information about a number of potential mergers to Choucair.
Some five different deals, between 2013 and 2014, were featured by the FCA in their case early last year.
He placed his market bets using contracts for difference through his account that was a British Virgin Islands company with a Swiss trading address – even so they were both caught and prosecuted.