By Dr AbdelGadir Warsama, Legal Counsel
The Stock Market Laws prohibit insider trading and, based on this, disclosure or usage of insider information is punishable by law. The disclosure and or usage of insider information by the top management of a company or by any person having access to such information by virtue of his official post (ex-officio) is legally, commercially and ethically not acceptable under any circumstances.
Furthermore, it is important to mention that unauthorized disclosure of classified or confidential information, unless allowed by law, opens the door for civil litigation in addition to criminal proceedings against violators. Legally speaking, insider trading is an illegal act worldwide and there is lot of legal literature and continuous litigation in this respect.
I recall a recent American case wherein the CEO of an investment bank was charged, in a criminal complaint filed in a US Federal Court, with conspiracy and insider trading for allegedly passing on confidential classified information to a lady. This official was charged, in a criminal complaint filed in a Federal Criminal Court, as explained, with conspiracy against his company and committing securities fraud for allegedly passing on confidential insider information. This official, by virtue of his post, came to know that some banking mergers were in the pipeline. He knew this confidential information because his investment bank has been consulted to assist and to finalize the process.
This classified information should have been kept in close and strict confidence. However, the official did not respect his position and the trust conferred on him and broke the secrecy rules for personal interest. By doing this, he exposed himself to legal action. The lady to whom he passed on the classified information was, also, charged in the complaint.
Based on the insider information and tips given to her by this senior official, the lady bought the shares of the companies targeted for potential takeovers by clients, just prior to the announcements of the planned mergers by several banks. By doing this, the lady took the advantage of benefiting from the classified information passed to her. Her benefit was at the cost of other innocent competitors, because all potential buyers should have the same level of access to the required information.
This lady, and her accomplice, made illegal profits that they could not have made without the information divulged by the official. The lady also tipped off another man who allegedly made illegal profits based on the information passed on to him for no legal cause and at the cost of other potential buyers. In fact, insider information, once broken travels fast from one person to another and many people may benefit from such information. This makes the law more tough and firm in facing insiders who break the secrecy cycle.
In another case, the Chairman disclosed certain information regarding an initial public offering (IPO) by his company which was expected to generate a lot of money for the firm. In response to his unauthorized revelations, the company cancelled the IPO and took the Chairman to the court. Above cases, among others, show how insider information and insider trading affects business in general and the internal affairs of each company in particular.
According to the law, insider trading in stocks is totally prohibited as illegal act and criminal proceedings as well as civil can be taken against any person breaching the law. In this connection, it would be interesting to mention that the authorities, in some countries, announced that their stock market is suffering from insider trading activities and such illegal activities are very dangerous for the future and they are making the trading environment completely unhealthy. In a bid to control insider trading, as illegal activity, the authorities therein, are now preparing draft laws to counter insider trading activities and to penalize those who break the rules and disclose insider information. All stock markets are required to issue tough rules and regulations to counter and criminalize insider trading activities. This is a very important point for developing healthy markets and for the protection of potential investors in these markets.