Insider trading has always been surrounded by controversy, frequently making headlines and ruining reputations. Insider trading is also a prime example of discrimination, as it gives a small, privileged minority an unfair advantage over the majority who do not have access to the same information or opportunity. So what can happen when the CEO next to you in the business lounge starts talking about that big new deal?
Insider trading can be defined as ‘the illegal practice of trading on the stock exchange to one's own advantage through having access to confidential or non-public information about a company.’ In addition to financial data, inside information may include changes in the directors of a company through appointments or resignations, as well as incapacity of a senior director through, for example, serious long-term illness. It may also include the acquisition or loss of major contracts, labour issues or strikes, lawsuits, defaults and liquidations, Competition Commission investigations or rulings, qualified audits, and product malfunctions etc.
There are many examples and stories of those who have traded for gain after overhearing CEOs on a flight or in an elevator where price-sensitive information was being discussed; friends making small talk over dinner while a director boasts about an upcoming deal; bragging on the 19th hole after a day of golf and a few drinks; and not to mention the private conversation between close family members who pressure relatives for advice or tip-offs. These people can all become potential insider traders.
Persons found to be guilty of insider trading can face civil, criminal and administrative action. In a criminal court, a person convicted is liable to a fine not exceeding R50 million or to imprisonment for a period not exceeding 10 years, or both. Civil action can also be taken against the insider for any gains made or losses avoided from the insider information. These amounts will be recoverable from anyone who traded the price-sensitive information, traded on another’s behalf or encouraged a trade. These fines will be shared mostly between those who were prejudiced due to the offending trades.
The Johannesburg Stock Exchange has created various mechanisms implemented to detect suspicious trades. All trades made on the back of big announcements are monitored for any unusual activities in addition to meeting with the Financial Services Board on a weekly basis. As a result our financial regulators are highly rated internationally for the regulation of securities exchanges.
So, quite simply,next time you start to overhear the CEO on his phone in the business lounge, put your earphones in and crank up the volume on your iPod!