Background
Imagine this.
Over coffee for potential business, a director of public limited company A (“Company A”) incidentally told Ms. Potterhead (a prominent litigator who previously represented Company A in some legal disputes) that her colleagues from the Mergers & Acquisition department of her law firm have been engaged to represent Company A in acquiring trendy up and rising tech company T (“Company T”). They both then went on to speak about the business potential of Company T, solely out of interest and hobby.
Post-coffee, Ms. Potterhead knew that the chances of Company A’s share prices sky-rocketing post-acquisition are high. She decided to ask her boyfriend to buy
the shares of Company A while the acquisition is still impending and kept confidential. She genuinely did not think that there would be any conflicts of interest since she was not involved in the acquisition.
When Bursa Malaysia Berhad, the primary securities-exchange facility in Malaysia, announces the acquisition, Company A’s share prices surged, as speculated by Ms. Potterhead. Ms. Potterhead made a profit so handsome that the luxury car she had been eyeing for a while, became hers.
However, it was not long before she received a visit from the Securities Commission Malaysia (“SC”), the country’s capital markets regulator, for an alleged commission of insider trading under the the Capital Markets and Services Act 2007 (“CMSA 2007”).
What has she done wrong, she wonders.
The Law
Insider trading is prohibited under Section 188(2) of the CMSA 2007, which provides:
“(2) An insider shall not, whether as principal or agent, in respect of any securities to which information in subsection (1) relates-
acquire or dispose of, or enter into an agreement for or with a view to the acquisition or disposal of such securities; or
procure, directly or indirectly, an acquisition or disposal of, or the entering into an agreement for or with a view to the acquisition or disposal of such securities.” (emphasis added)
“(1) A person is an "insider" if that person-
possesses information that is not generally available which on becoming generally available a reasonable person would expect it to have a material effect on the price or the value of securities; and
knows or ought reasonably to know that the information is not generally available.
Section 188(4) of the CMSA 2007 provides the sanctions for persons contravening the restriction to be:
“… punished on conviction to imprisonment for a term not exceeding ten years and to a fine of not less than one million ringgit.”(emphasis added)
As a matter of policy, such a prohibition exists to prevent market abuse and manipulation by unscrupulous persons. The gravity of such a safeguard cannot be understated because the lack of such a prohibition would cause a ripple effect towards corroding investors’ confidence in the transparency and fairness of the market when trading.
Applying the law to Ms. Potterhead’s situation, the information communicated to Ms. Potterhead is obviously not information generally known to the public. In fact, all parties involved in materialising the acquisition (including Company A, Company T, the directors and managers of these companies, the financiers, lawyers, auditors, accountants, etc.) would have signed confidentiality agreements so that their knowledge of the impending deal are to be used solely for the purposes of closing the deal, and absolutely nothing else.
By communicating such information to her boyfriend, Ms. Potterhead is essentially making him her agent to assist in buying the relevant shares for her personal gains. It does not matter whether Ms. Potterhead actually knows that the information would have a substantial effect on the price of the shares or that such information was not publicly available (although, let’s not kid ourselves, given her experience, she’s obviously aware). Section 188 of the CMSA imposes objective standards so that it is good enough that a reasonable person would know.
In reality
Based on a publicly available information published by the SC circa April – October 2017 (1), between 2014 to 2017, the SC has filed approximately 370 charges against individuals for insider trading and was said to have retrieved a sum amounting to almost RM8.0 million from these charged individuals.
Takeaways
The easiest way to not violate the insider trading prohibition is perhaps by, well, if not already obvious, simply not trade securities based on information that one knows is probably not publicly available and, if acted upon, would have some sort of impact on the value of the securities.
If one is not allowed to act on it, then similarly, one should not try to circumvent the restriction by asking friends, family, or any other person to buy or sell the securities under their names either. One will still ultimately be liable as a principal.
For professional advisers (such as lawyers, accountants, valuers, bankers, consultants, etc.) working on the deal who will inevitably possess inside information, they would need to be extra careful in not incidentally disclosing it to people who are not involved in the deal, including colleagues of other departments.
Companies and firms, from the employer’s perspective, must also play a role in facilitating an effective governance and control system to ensure substantive confidential information are always safeguarded. This would include taking steps to train their employees to create awareness, and to put in place virtual barriers between departments so that information does not leak around.
Reference:
The publication can be accessed at https://www.sc.com.my/api/documentms/download.ashx?id=63b958c3-1774-451a-ae6e-49f31659e5f5
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