Insider Trading Explained | What You Need to Know
Insider trading is the trading of a public company’s stock or other securities which is based on material information about the company which is not available to the public. Access to this information places an investor in a potentially unfair and preferential position to other investors who are without this knowledge.
Material information may pertain to matters such as prior knowledge of acquisitions or mergers, undisclosed dividends, or the leaking of financial statements.
A person who gains access to such information and engages in trading to the detriment of others may be guilty of committing a crime under the Criminal Justice Act 1993.
The Financial Conduct Authority (FCA) investigates and prosecutes insider trading activity in the UK. It works closely with the financial services industry to detect and prevent market manipulation and insider trading. The FCA has the authority to conduct investigations and undertake surveillance of markets, using data from reporting systems, order books, benchmark submissions and other market data. Additionally, also examines market algorithms to identify suspicious trading activities as well as investigating reported suspicious transactions.
Hamraj Kang of KANGS outlines the law governing insider trading.
The Relevant Law
The Criminal Justice Act 1993 provides as follows.
The Offence
Section 52
An individual, who has insider information is guilty of insider dealing if, under the following circumstances, he deals in securities that are price-affected by this information:
- encourages another person to deal in securities that are price-affected by the insider information, regardless of whether the other person is aware of this. They must know or have reasonable cause to believe, that the dealing would take place in the specified circumstances.
- discloses the insider information to another person, except when doing so as part of the proper performance of his employment, office or profession.
The circumstances referred to above are that the acquisition or disposal of the securities occurs on a regulated market, or that the person dealing relies on a professional intermediary or acts as a professional intermediary.
Dealing in Securities
Section 55
A person deals in securities if he:
- acquires or disposes of the securities, whether as principal or agent,
- procures, directly or indirectly, an acquisition or disposal of the securities by any other person.
What is Inside Information?
Section 56
Inside Information refers to information which relates to particular securities or issuers of securities, rather than securities or issuers of securities in general. This information is specific or precise, has not been made public and if it were made public, would likely have a significant effect on the price of securities.
Who is an Insider?
Section 57
A person has information as an insider if and only if it is insider information, he knows that it is inside information and he has it, and knows that he has it, from an inside source.
A person has information from an inside source if and only if he has it through:
- being a director, employee or shareholder of an issuer of securities or
- having access to the information by virtue of his employment, office or profession,
- the direct or indirect source of his information is a director, employee, shareholder or an issue of securities.
Defences
Section 53 of the Act provides a defence against accusations of insider dealing in securities if a person can show that he:
- did not expect the dealing to result in a profit attributable to the information being price-sensitive, or
- believed on reasonable grounds that the information had been disclosed widely enough to ensure that none of those taking part in the dealing would be prejudiced by not having the information or
- he would have done what he did even if he had not had the information.
The section also provides that an individual is not guilty of insider dealing by virtue of encouraging another to deal in securities if he can show the same criteria listed above.
An individual is not guilty of insider dealing by virtue of a disclosure of information if he can show that:
- he did not at the time expect any person, because of the disclosure, to deal in price affected securities or
- although he had such an expectation at the time, he did not expect the dealing to result in a profit attributable to the fact the information was price-sensitive information in relation to the securities.
References to gaining a profit also covers avoiding making a loss.
To explore all defence options for allegations of insider trading, it is crucial to seek specialist legal advice. The team at KANGS has specialist knowledge and extensive experience in supporting individuals facing such allegations.
Penalties for Breach
Where an individual has been convicted of insider dealing, he faces the following penalties:
on summary conviction before a Magistrates’ Court:
- a fine not exceeding the statutory maximum,
- imprisonment for a term not exceeding six months or
- both.
on indictment before a Crown Court:
- a fine,
- imprisonment for a term not exceeding ten years or
- both.
Additionally, a Civil Court may impose penalties and sanctions such as a ban against acting as a director or other company officer under the Company Directors Disqualification Act 1986.
How Can We Help?
KANGS enjoys an enviable international reputation for defending clients facing allegations of financial fraud of every conceivable nature, including insider trading.
If you are facing allegations of insider trading, it is important to seek guidance and representation from legal professionals with expertise and experience. The team at KANGS has extensive knowledge in defending individuals against accusations of insider trading and provides strategic legal support tailored to the complexities of each case.
Contact us using the details below for guidance on navigating this complex area of law with confidence.
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through video conferencing or telephone.
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