Insider Trading - White Collar Crime

Market Manipulation is still a crime - Credit: LegalMatch

Being an active trader on the London Stock Exchange, white collar crime and the offence of insider trading in particular are areas of personal interest. I recently came across an interesting case on Insider Trading (or dealing). In his book Stock Market Efficiency - Market Abuse, Paul Barnes details the case of Insider Dealing with a tip off related to Lord Alan Sugar's Company Viglen in 2000.

I have written a quick overview:

During this pre-dot com boom era a tip off was received by the Daily Mirror that Viglen was on the verge of venturing into selling it's products online. The Mirror published this in it's City Slickers Column, following with Viglen experienced a significant rise in its share price.

The day before the tip was received Piers Morgan, the then editor of the Mirror purchased £67,000 worth of Viglen shares. Investigating Viglen's booming share price the London Stock Exchange forwarded the matter to the DTI (Department for Trade & Industry) who considered whether there had been a breach of Insider Trading statue.

The investigation showed there had been Insider Trading conducted by Hipwell, Bhoryul and Shephard. The DTI's view was that the tip was a 'deliberate act of manipulating the market by ramping the share price from which they were able to profit.' (DTI, 2001).

Hipwell and Bhoyrul were sacked from the Daily Mirror for gross misconduct and the Press Complaints Commission criticised the actions of all three as well as Piers Morgan. Hipwell, Bhoryul and Shephard were charged with Consipiracy under s1(1) Criminal Law Act 1977 to contravene s.47(2) Financial Services Act 1986. This is only one of the few convictions for Insider Trading in England and Wales. The DTI did not pursue Piers Morgan for Insider Trading.

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I have outlined the majority of the current Insider Trading offences below.

There are two approaches to I.D. in UK Law:

1) Old approach - Insider Trading is a Narrow Offense

Pre 1989 EC Directive: 1980 CA and 1985 Companies Securities Act (inspired by US I.D. law)

Classical Theory of liability= founded on the insider’s fiduciary duty to company

...to disclose the information to the counter party... or not pursue dealing

Or with respect to passing inside information to another (tippee)... in breach of fiduciary duty to the company...

and where the tippee knows or should know that there has been a breach of fiduciary duty... thus the tippee is also affected by the same trusts as the insider.

Individual must have a fiduciary relationship to the company (usually only including Directors)

Directors owe a fiduciary duty to company as a whole...

2) Contemporary Approach - Insider Trading is a Wider Offense

Post 1989: 89/592/EEC & CJA 1993:

Fiduciary duty not a prerequisite

By managing I.D. (issue of CAPITAL MARKETS) with the provisions on I.D. it is clear that UK company law (with emphasis on fiduciary duty to the company) has migrated to securities law.

UK law on I.D. à Governed by: CJA 1993

- Influenced by EC Directive 89/592/EEC

- Designed to coordinate regulations in the EU on insider trading amongst member states (many of which didn’t have laws regarding it)

Outline of offenses

s.52 (1)

Insiders dealing in “price-affected” securities using “inside information”

Elements of the offense:

· Offense must be committed by an individual

· Individual must have information as an “insider”

· Individual must “deal”

· In “price-affected securities”

· “In relation to the information”

· As per s.52 (3) acquisition/disposal on the regulated market – dealing themselves/ professional intermediary...

Two Inchoate I.D. offenses

s.52 (2) (a) Insiders Encouraging others to deal in price-affected securities

Encouraging

· Offense must be committed by an individual

· Individual must have information as an “insider”

· Encourage another to “deal”

· In “price-affected securities”

· “In relation to the information”

· Knowing/having reasonable cause to believe the dealing would take place... As per s.52 (3) acquisition/disposal on the regulated market – dealing themselves/professional intermediary...

s.52 (2) (b) Insiders Disclosing the information to another person

Disclosing

· Offense must be committed by an individual

· Individual must have information as an “insider”

· Discloses it to another – other than in the functions of his employment

· In “price-affected securities”

· “In relation to the information”

Disclosing Offense(s)

s.52 (1)

Dealing in the price-affected securities

s.52 (2) (a)

Encouraging another to deal in the price-affected securities

s.52 (2) (b) + s.52 (3)

Disclosing information