Brief Insights On The White-Collar Crime Of Insider Trading

Oct 05, 2023

Insider Trading

This article will provide a brief insight on the “white-collar” crime of Insider Trading. Insider trading can be generally described as the act of trading in a company’s securities whilst in possession of confidential information relating to the said company. In such cases, criminal lawyers often play a pivotal role in understanding, defending against, or prosecuting allegations of insider trading.

The mischief of insider trading lies in its inherent unfairness. Indeed, a market trader who is in possession of confidential information would be better placed to make trades as compared to a market trader who is not in possession of confidential information.

An offence of insider trading will often involve the misappropriation of confidential information by a company officer (for instance, a company director or a company secretary). It should be noted that a company officer is defined as a “connected person” under Section 218(5) of the Securities and Futures Act (“SFA”).

Insider trading committed by a “connected person” is defined under Section 218 SFA, the relevant portions of which read as follows:

“(1) Subject to this Division, where —

• a person who is connected to a corporation possesses information concerning that corporation that is not generally available but, if the information were generally available, a reasonable person would expect it to have a material effect on the price or value of securities or securities‑based derivatives contracts of that corporation; and
• the connected person knows or ought reasonably to know that —
  • the information is not generally available; and
  • if it were generally available, it might have a material effect on the price or value of those securities or securities‑based derivatives contracts of that corporation,

subsections (2), (3), (4), (5) and (6) apply.

…

(2) The connected person must not (whether as principal or agent) —

• subscribe for, purchase or sell, or enter into an agreement to subscribe for, purchase or sell —
  • the securities or securities‑based derivatives contracts mentioned in subsection (1); or
  • the securities, securities‑based derivatives contracts or CIS units mentioned in subsection (1A); or
• procure another person to subscribe for, purchase or sell, or to enter into an agreement to subscribe for, purchase or sell —
  • the securities or securities‑based derivatives contracts mentioned in subsection (1); or
  • the securities, securities‑based derivatives contracts or CIS units mentioned in subsection (1A).”

In summary, an offence of insider trading is made out when the following elements are fulfilled:

• A connected person must possess information concerning the corporation that was not generally available;

• If the said information were generally available, a reasonable person would expect it to have a material effect on the price or value of securities of that corporation;

• The connected person knows or ought reasonably to know that the said information was not generally available;

• The connected person knows or ought reasonably to know that if the said information were generally available, it might have a material effect on the price or value of those securities of that corporation;

• The connected person then proceeds to subscribe/sell/purchase those  securities of that corporation OR procure another person to subscribe/sell/purchase those securities of that corporation.

Crucially, under Section 220 of the SFA, there is no need for the Prosecution, one of the parties involved in the Criminal Justice System, to prove that the offender had intended to use the said information.

Further, in recognition of the fact that company officers are placed in fiduciary positions, and hence should be held to higher standards, Section 218(4) of the SFA provides a rebuttable presumption:

If the Prosecution proves that a connected person was in possession of information concerning the corporation that was not generally available, it is presumed until the contrary is proved that the connected person knew that (a) the information was not generally available; and (b) if the information were generally available, it might have a material effect on the price or value   of those securities of that corporation.

The following discussions will define certain key elements of an offence of insider trading (as defined in Section 218(a) of the SFA), namely:

• What is “information”?

• When is information considered to be “generally available”?

• What is the meaning of “material effect”?
  
  

What is “information”?

“Information” is broadly defined in Section 214 of the SFA:

““information” includes —

• matters of supposition and other matters that are insufficiently definite to warrant being made known to the public;
• matters relating to the intentions, or the likely intentions, of a person;
• matters relating to negotiations or proposals with respect to —
  • commercial dealings; or
  • dealing in capital markets products that are securities, securities‑based derivatives contracts or CIS units;
  • [Deleted by Act 4 of 2017]
• information relating to the financial performance of a corporation or business trust, or otherwise;
• information that —
  • a person proposes to enter into, or had previously entered into, one or more transactions or agreements in relation to any securities, securities‑based derivatives contract or CIS unit; or
  • a person has prepared or proposes to issue a statement relating to any securities, securities‑based derivatives contract or CIS unit; and
• matters relating to the future;”
  
  

When is information considered to be “generally available”?

Section 215 of the SFA defines “generally available” information in the following terms:

“For the purposes of this Division, information is generally available if —

• it consists of readily observable matter;
• without limiting paragraph (a) —
  • it has been made known in a manner that would, or would be likely to, bring it to the attention of any of the following classes of persons:
    • persons who commonly invest in securities of a kind of which the price or value might be affected by the information;
    • persons who commonly invest in securities‑based derivatives contracts of a kind of which the price or value might be affected by the information;
    • persons who commonly invest in CIS units of a kind of which the price or value might be affected by the information; and
  • since it was so made known, a reasonable period for it to be disseminated among such persons has elapsed; or
• it consists of deductions, conclusions or inferences made or drawn from either or both of the following:
  • information referred to in paragraph (a);
  • information made known as referred to in paragraph (b)(i).”
  
  
  

What is the meaning of “material effect”?

Section 216 defines the test of what it means for the information to have a material effect on the price of value of securities (the essence of the test is highlighted bold and underlined):

“For the purposes of this Division, a reasonable person would be taken to expect information to have a material effect on the price or value of securities, securities‑based derivatives contracts or CIS units, if the information would, or would be likely to, influence any of the following persons in deciding whether or not to subscribe for, buy or sell those securities, securities‑based derivatives contracts or CIS units:

• the persons who commonly invest in the securities, securities‑based derivatives contracts or CIS units;
• any one or more classes of persons who constitute the persons mentioned in paragraph (a).”
  
  

Punishment for Insider Trading

There are both civil and criminal penalties for an offence of insider trading.

The criminal penalty provision is found in Section 221 of the SFA, which reads as follows:

“A person who contravenes section 218 or 219, shall be guilty of an offence and shall be liable on conviction to a fine not exceeding $250,000 or to imprisonment for a term not exceeding 7 years or to both.”

The civil penalty provision is found in Section 232 of the SFA. In brief, the Monetary Authority of Singapore can, with the consent of the Public Prosecutor, bring an action in Court against the offender. Then, if the Court is satisfied on a balance of probabilities that the person has committed an act of insider trading, the Court may make an order against the person for the payment of a civil penalty of a sum not exceeding the greater of the following:

• 3 times –
  • the amount of the profit that the person gained as a result of the contravention; or
  • the amount of the loss that the person avoided as a result of the contravention;
• $2 million

Notably, the civil penalty must not be less than $100,000 if the offender is a corporation, and, in any other case, must not be less than $50,000.