Business

Insider trading: When knowledge isn't power

Legal Notes

by Kerri-Anne MAYNE

Wednesday, April 25, 2018

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With reports that 2018 could be a grand year for the Jamaican stock market, the avid investor may look to capitalise on their knowledge of market activity in order to get maximum returns on their investments.

Knowledge of certain information in relation to a company which could affect the demand of stock may help investors gain potential profits or avert potential losses.

However, for some categories of individuals, knowledge of certain information isn't power. These individuals, when privy to information in particular circumstances, may be prohibited from using their knowledge to derive a benefit from trading on the stock market, or face penalties for their actions.

This was the reality of former chief information officer of the United States company, Equifax Inc., Jun Ying. Recent reports indicate that Ying sold his shares in Equifax for nearly US$1 million dollars before the company's massive data breach was revealed to the public and the stock prices plunged. Ying was charged with insider trading.

Individuals in the corporate arena in Jamaica, especially directors, senior executives, and their connected parties must be careful when trading in securities lest they face a similar fate.

WHAT IS INSIDER TRADING?

Insider trading can be defined as the dealing in securities relating to a company by a person connected with that company at a time when he or she is in possession of unpublished, price-sensitive information.

Price-sensitive information is information that is likely to materially affect the price of securities that is not generally available to the public.

WHO IS AN INSIDER?

An insider is a person who in the course of their employment obtains, or has access to price-sensitive information about securities. The law on insider trading also restricts dealings by people connected to the insider such as the insider's spouse, minor child, partner or a body corporate of which the insider or persons connected with him together have control.

PROHIBITED DEALINGS

It is important to note that the law on insider trading does not prevent insiders from trading in securities, but instead places restrictions on how they can engage in trading whilst in possession of price-sensitive information. The following are examples of dealings by insiders which are prohibited:

1. Dealing in securities of a company by a person who is, or in the preceding 12 months has been, associated with the company if his association with the company causes him to be in possession of price-sensitive information

2. Dealing in the securities of any company by a person who is, or in the preceding 12 months has been, associated with Company A in circumstances where by reason of being associated with Company A, he has price-sensitive information that relates to any transaction, actual or expected, involving Company A and the other company

3. Dealing in securities by a person who obtains price-sensitive information from another person and is aware or should be aware that the person who relayed the information is prohibited from dealing in the securities and both parties had an arrangement for the communication of the price-sensitive information with a view to either or both of them dealing in the securities

4. Dealings during the following “closed periods”:

• The period commencing from the time price-sensitive information is obtained up to the date of announcement of the matter relating to that information to the Jamaica Stock Exchange (JSE).

• Period commencing 30 days prior to due date of announcement of a company's quarterly results to the JSE up to the date the announcement is made.

• Period commencing from 60 days prior to the due date of announcement to the JSE of a company's annual results up to the date the announcement is made.

An insider cannot escape liability by causing another to deal in securities at a time when he is prohibited from dealing in securities.

Likewise, the insider should not, when prevented from dealing in securities, communicate price-sensitive information to any other person if trading in the securities is permitted on the JSE, and he knows or should have known that the other person would use the information to deal in or cause another person to deal in those securities.

PENALTIES

A person who is found guilty of insider trading may be subject to fine or imprisonment for up to 10 years. Additionally, the insider may be required to pay compensation to any person who suffers loss by entering into a transaction for the purchase and sale of securities with the insider or a person acting on his behalf.

It is important to note that the law on insider trading does not seek to punish or disadvantage individuals who seek to invest in companies of which they are a part. The aim of the law is to provide a level playing field as well as promote investor confidence in the securities market by discouraging people who are aware of unpublished price-sensitive information from taking advantage of their informed position.

Senior management should, therefore, ensure that their employees are informed of their legal obligations in relation to insider trading by creating an insider trading policy and training their staff on how to act in compliance.

Insiders must avoid the temptation of taking advantage of their informed position, because as an insider, knowledge of price-sensitive information is not a power they are at liberty to exercise for their own benefit or the benefit of others.

Kerri-Anne Mayne is an Associate Attorney-at-Law at Myers, Fletcher & Gordon, and is a member of the firm's Commercial Department. Kerri-Anne may be contacted via Kerri-Anne.Mayne@mfg.com.jm or www.myersfletcher.com . This article is for general information purposes only and does not constitute legal advice.

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