Insider trading is the process of trading company stocks and shares by using non-public information about the company, otherwise known as insider information. Moreover, the huge development in internet usage has led to an acceleration in the speed that insider trading can occur – making it more difficult to control too.
This may sound familiar, and this is because it was the focus on the ITV drama, Cleaning Up, starring Sheridan Smith in January 2019. The programme featured two cleaners that used their place within the business to exploit the stocks and shares trading in order to make money – insider trading.
Although the rules and laws around insider trading vary across the world, in the majority of countries it's illegal due to the fact that it's seen as unfair on the investors that don't have insider information. A person who becomes aware of insider information and then trades on that basis may be guilty of a crime.
The term 'insider trading' has been labelled as a 'criminal offence' ever since 1980 – insider trading is a criminal offence in the UK. In all developed markets around the world, it is seen not only as the biggest offence against the ethics of business but also a way to destroy the confidence that the public has around the stock exchange.
Insider trading is legal once the confidential information has been released to the public, at which time the insider has no direct advantage over any other investor – until then, it is illegal.
The laws around insider trading come from the Criminal Justice Act 1993 and the Financial Services and Markets Act 2000. Although there are small differences between them, both need to be taken into account when considering if insider training has occurred. It is sanctioned by civil law under the control of the Financial Services Authority, the FSA.
The FSA is a non-governmental organisation that fights against market abuse. They have a model code that companies need to abide by. The code isn't directly binding for directors of a company, but the company has to adopt it.
The main restrictions in the model code are:
- A director must not deal in securities (stocks and shares) within a period of 60 days preceding the preliminary announcement of the final results (in this case, the results are the insider information).
- A director must not deal when he or she knows price sensitive information that has not yet been published.
- A director must seek clearance from the chairman prior to entering into a transaction.
- Clearance to deal in any securities must not be given during a prohibited period; it is during a period when price-sensitive information is unpublished but is known.
The Criminal Justice Act 1993 consists of three criminal offences:
1. An insider who disposes of information is guilty of insider trading if, under the specified circumstances, he deals in securities (stocks and shares), and provided that the information is made public, would then have had a significant effect on the price of the securities
2. An insider encourages another person to trade in stocks and shares, using insider information to make a profit through someone else
3. An insider discloses the information to another person
If found guilty of insider training, an individual can be sentenced up to seven years in prison, as well as facing hefty fines. Additionally, the FSA can issue a public announcement that the individual engaged in insider trading – something that can have a huge impact on reputation.
Work of the FSA
The activity of the FSA cannot be ignored, as they have demonstrated highly publicised arrests linked to insider trading. One example of this is Malcolm Calvert, a retired partner of Cazenove – a British stockbroker and investment bank.
Mr Calvert, 65 years old, was sentenced for 21 months after being found guilty of five counts of insider trading in three different companies ahead of public takeover announcements. He was also ordered by the judge to pay more than half a million pounds in confiscation and costs.