Ade Coker, a director of Carbo Plc had received information that an investor with an astute brand influence planned to invest a huge amount into the company. He encouraged some shareholders of the company to sell their shares in the company as the company was on verge of bankruptcy. They sold their shares to him. Following the investment by the investor, the price of the company’s shares witnessed a surge.
What is insider trading?
The scenario above illustrates the concept of insider trading, a phenomenon that is not new to capital markets. Experts say it is one practice that has bedeviled the growth of the securities market in many countries.
Black’s Law dictionary defines insider trading as the use of material, non-public information in trading the shares of a company by a corporate insider or other person who owes a fiduciary duty to the company.
In order to ensure fairness in market prices and maintain a level playing field for stakeholders and investors in the Nigerian securities market, Section 111 (1) of the Investment and Securities Act 2007 (ISA) and Rule 110 (e) of the Securities and Exchange Commission Rules 2013 (SEC Rules) prohibits insider trading.
It is the profitable trading in securities based on some confidential information or special knowledge that is unavailable to the general public that makes the practice unfair and illegal.
Who is an insider?
The SEC Rules define an insider as any person who is connected with the company during the preceding six months as a director of the company or related company, an officer of the company, or a related company.
It also refers to an employee of the company or a related company, a person in a position, involving a professional or business relationship with the company, any shareholder of the company who owns 5 percent or more of any class of securities, or any person who is or can be deemed to be an agent of any of the persons listed above.
Rule 17 of the Securities and Exchange Commission Code of Corporate Governance Rules provides that an insider includes a director’s immediate family including spouse, son, daughter, mother, or father.
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What is unpublished price-sensitive information?
This is information that is capable of affecting decisions to be made in relation to a company. It is information that if made available to the public may affect their dealings with the company. Such information is capable of affecting the value of shares of a company.
Is insider trading an offence?
Section 115 ISA states that it is a criminal offense and any person who commits such an offense is liable on conviction to a fine in the case of an individual of not less than N500,000 or an amount equivalent to double the profit derived or loss averted from the use of the information obtained, or imprisonment for a term not exceeding 7 years.
In the case of a body corporate, N1,000,000 or an amount equivalent to twice the amount of profit derived by it or the loss averted. Section 116 ISA adds that a person found guilty shall also be liable to pay compensation at the order of the commission or the Tribunal to any person who suffers a loss as a result of such trade.
Why is insider trading an offence?
As an information-driven market, the misuse of confidential information of a company poses serious danger to the capital markets.
It has been opined that the prices of financial assets such as shares, stock, and bonds, are a reflection of the information that are made known to the public. Information guides the public towards its dealings with a company, and the type of information available will influence decisions with regard to dealings with the company.
Price-sensitive information is therefore information that materially affects the value of securities. Section 112 of the ISA 2007 prohibits the abuse of non-public price-sensitive information obtained in an official capacity.
Are private companies exempt from insider trading?
In Nigeria, there seems to be no clear framework on insider trading for private companies. The various laws prohibiting insider trading seem to speak only about public companies.
However, where a private company does acts that are similar to that of a public company, then such a company for the purpose of insider trading could be treated as a public company without any public listing as seen in some climes. For instance, a private company offering stock options to its employees could be treated as a public company if the issue of insider trading arises.
However, the law has not taken any position on this. Section 22 (1) – (2) of the Companies and Allied Matters Act (CAMA) 2020 provides that a private company is one whose memorandum states that it is such and that subject to the provisions in its Articles of association, it may restrict the transfer of shares. Where the provisions of a company’s Articles restrict the transfer of shares, such a company cannot offer shares for sale.
The repealed 1990 CAMA strictly prohibited the transfer of shares in private companies. But with the new 2020 law, private companies may transfer or sell shares provided it is allowed for by their article of association. A private company will not be doing anything wrong if it sells shares or offers stock options if the Articles of the company allow for it.
The United States Securities and Exchange Commission recognizes that the law against insider trading applied to private companies. In an announcement made on 12 December 2011, the US SEC announced an enforcement proceeding that serves as a useful reminder that the federal laws against insider trading and misrepresentation applied to private companies purchasing stock from employees and other shareholders as it is done in the public companies.
By this provision, a private company that is registered in the US and Nigeria could be liable in the US if it breaches insider trading rules.