Whilst the number of cases in the UK seems to be small, it's worth noting that the custodial sentences are not. The FCA treats market abuse very seriously.
What is insider trading?
According to section 52(2)(b) of the Criminal Justice Act 1993, an individual who has information as an insider is guilty of insider dealing if they disclose this information, otherwise than in the proper performance of the functions of their employment, office or profession, to another person. Article 10 (1) of the Market Abuse Regulation (MAR) reinforces that such disclosure is unlawful.
What is inside information?
The MAR defines inside information as information of a precise nature that:
- has not been made public
- directly or indirectly relates to one or more issuers or one or more financial instruments and
- if made public, would be likely to have a significant effect on the prices of those financial instruments or the price of related derivative financial instruments.
How to reduce the risk of insider trading
1. Conduct due diligence
Investigate the background of potential and existing employees and suppliers. Be wary of red flags, including non-financial misconduct. It's essential that you know whom you are dealing with and how they behave.
2. Take extra care outside of the office
Especially at trade or social events, where you may be in close contact with other financial firms. Be sure to remove yourself immediately from any conversations that stray into sensitive topics or conversations that are off-limits. And when you're on the move, take extra data protection precautions.
3. Clearly define sensitive non-public information
Ensure that both employees and suppliers know what they are legitimately allowed to share with others to prevent unlawful disclosure.
4. Never disclose non-public information to outsiders
This includes but is not limited to details about takeovers, mergers, earnings, profit warnings, litigation, or security offerings.
5. Don't recommend or induce based on inside information
It is an offence under MAR to deal or attempt to deal in financial instruments or recommend or induce another person to transact based on inside information.
6. Be cautious in informal or social settings
Overlapping work relationships where staff socialise with former colleagues in other firms creates the risk of sharing improper information.
7. Promptly report any concerns
All employees should promptly report any insider trading, unlawful disclosure, or market manipulation concerns to their manager, HR, or the compliance team.
8. Probe & document the work history of job candidates
This evidence will be invaluable if suspicious activity is discovered later (for example, if a trader trades stock of a company owned by a business school acquaintance).
9. Watch out for irregular trading patterns
Be vigilant about trades outside normal buying patterns as they may indicate suspicious activity.
10. Organise blackout periods
Where traders are barred from purchasing securities, such as earnings announcements, at certain times.
Notable UK insider trading cases
A former Goldman Sachs analyst was charged with insider dealing and fraud by false representation.
Mohammed Zina and his brother were accused of making £142,000 from insider dealing in shares of companies, including Arm Holdings and Punch Taverns, in 2016 and 2017, according to the Financial Conduct Authority (FCA).
The pair were also accused of three counts of fraud related to loans totalling £95,000 taken out from Tesco Bank. The brothers allegedly told the bank they intended to use the funds for home improvements when the loans are said to have been used to fund their insider trading.
If found guilty of fraud, they face a fine and up to 10 years in prison. A guilty verdict regarding insider trading also carries a fine and up to seven years. Their trial is set for Southwark Crown Court in April 2022.
Fabiana Abdel-Malek was employed as a senior compliance officer by UBS in London. Ironically, she used a pay-as-you-go mobile phone to pass inside information to Walid Choucair, a family friend. He made a profit of approximately £1.4 million from the inside information. They were sentenced to 3 years imprisonment each in 2019. In addition to this, Choucair was ordered to pay £3.9 million in confiscation, which exceeds the illegal trading profits.
Former Deutsche Bank Managing Director Martyn Dodgson and accountant Andrew Hind were found guilty of insider dealing and sentenced to 4½ and 3½ years in prison. The court heard how the pair passed inside information to other accomplices who traded on their behalf, netting over £6.9 million from 2006-2010.
Their accomplices, Graeme Shelley, Paul Milsom and Julian Rifat, pleaded guilty at earlier dates. Traders Milsom and Rifat were given two years and 19-month sentences, respectively, with a £100,000 fine, while Shelley was handed a two-year suspended sentence.
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