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Student projects and dissertations
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: Faculty of Business and Law
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: LLM International Banking and Finance Law
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: LLM Dissertation
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Project/dissertation title : To Critically Compare and Contrast UK and US
Approaches to Dealing with Insider Dealing.
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1
TO CRITICALLY COMPARE AND CONTRAST
UK AND US APPROACHES TO DEALING WITH
INSIDER DEALING
Name:
Student Number:
A dissertation submitted in partial fulfilment of the
requirements of the University of the West of England
for the degree of Master of Laws in International Banking and Finance Law
Bristol Law School, University of the West of England, Bristol
Date:
[Word count: 15,000]
2
Legislative and Enforcement Responses in the UK and US
Insider Dealing
TABLE OF CONTENTS
ACKNOWLEDGEMENT ............................................................................................. 5
ABSTRACT ................................................................................................................ 6
LIST OF ABBREVIATIONS ........................................................................................ 7
CHAPTER 1: INTRODUCTION .................................................................................. 8
I.
Market abuse and insider dealing .................................................................... 8
II.
Purposes and Objectives of the Study ............................................................. 9
III.
Methodology and Methods ......................................................................... 11
A.
Methodology .............................................................................................. 11
B.
Methods ..................................................................................................... 12
IV.
Thesis Structure ......................................................................................... 12
CHAPTER 2: INSIDER DEALING AND THE IMPORTANCE OF INSIDER DEALING
LAWS ....................................................................................................................... 13
I.
Ethical and economic characteristics of insider dealing ................................. 13
A.
Ethical considerations ................................................................................ 13
B.
Economic considerations ........................................................................... 18
II.
The importance of insider-dealing regulations ............................................... 23
CHAPTER 3: THE UNITED KINGDOM APPROACHES .......................................... 25
I.
II.
Legislative responses .................................................................................... 25
A.
Development of insider dealing legislations in the United Kingdom ........... 25
B.
Part V of the Criminal Justice Act 1993 ...................................................... 26
C.
The Financial Services and Markets Act 2000 ........................................... 37
Enforcement responses ................................................................................. 43
3
Legislative and Enforcement Responses in the UK and US
Insider Dealing
A.
Enforcement authorities ............................................................................. 43
B.
Criminal proceedings versus civil proceedings .......................................... 46
C.
Concluding remarks ................................................................................... 53
CHAPTER 4: THE UNITED STATES APPROACHES ............................................. 55
I.
Legislative responses .................................................................................... 55
A.
Development of insider-trading legislations in the United States ............... 55
B.
The Securities Exchange Act of 1934 ........................................................ 57
C.
The Insider Trading Sanctions Act of 1984 and the Insider Trading and
Securities Fraud Enforcement Act of 1988 ........................................................ 67
D.
II.
The US insider-trading theories ................................................................. 74
Enforcement responses ................................................................................. 77
A.
Enforcement authorities ............................................................................. 77
B.
Criminal proceedings versus civil proceedings .......................................... 83
C.
Concluding remarks ................................................................................... 87
CHAPTER 5: CONCLUSION ................................................................................... 89
APPENDIX ............................................................................................................... 93
BIBLIOGRAPHY ...................................................................................................... 99
4
Legislative and Enforcement Responses in the UK and US
ACKNOWLEDGEMENT
5
Insider Dealing
Legislative and Enforcement Responses in the UK and US
Insider Dealing
ABSTRACT
Insider dealing is a practice that not only academics but also regulators pay
great attention to. There are numerous debates on the nature of insider dealing and
the necessity of insider dealing laws. This comparative research using legal-cultural
methods considers both ethical and economic aspects of insider dealing, then
assesses the effectiveness of the UK as well as US approaches to tackle insider
dealing and determines the better system. Each system outperforms in several
criteria. While the UK legislative responses seem to be more effective, the US
enforcement responses might provide more actual effects.
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Legislative and Enforcement Responses in the UK and US
Insider Dealing
LIST OF ABBREVIATIONS
The United Kingdom
UK
The United States of America
US
The European Union
EU
The Financial Services Authority
FSA
The Financial Conduct Authority
FCA
The Serious Fraud Office
SFO
The Securities and Exchange Commission
SEC
The Department of Justice
DoJ
The Federal Bureau of Investigation
FBI
The Commodity Futures Trading Commission
CFTC
The Efficient Market Hypothesis theory
EMH
The Texas Gulf Sulphur
TGS
The Department of Trade and Industry
DTI
The London Stock Exchange
LSE
The Company Securities (Insider Dealing) Act 1985
CSA
The Criminal Justice Act 1993
CJA
The Financial Services and Markets Act 2000
FSMA
The Market Abuse Regime
MAR
The Securities Exchange Act of 1934
SEA
The Insider Trading Sanctions Act of 1984
ITSA
The Insider Trading and Securities Fraud Enforcement Act of
ITSFEA
1988
Deferred prosecution agreement
DPA
Non-prosecution agreement
NPA
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Legislative and Enforcement Responses in the UK and US
Insider Dealing
CHAPTER 1: INTRODUCTION
I.
Market abuse and insider dealing
Market abuse is a financial crime that creates giant profits for criminals or
wrongdoers, erodes public confidence, reduces market integrity and harms the
competition1. Among market-abuse offences, insider dealing (or insider trading) is an
abusive conduct that a person takes advantage of a company’s material non-public
information to trade on its securities for the purposes of making profits or cutting loss2.
Insider dealing is commonly believed to be illegal and harmful to market integrity as
well as public confidence3, so there have been more insider-dealing regulations4.
However, the fact that numerous regulations have been adopted does not justify
insider dealing’s illegality and harmfulness. Rather than arbitrage purposes such as
financial gains or loss avoidance, there are reasons that insiders might trade on their
Paul Barnes, 'Insider Dealing And Market Abuse: The UK’S Record On Enforcement' (2011)
39 (3) International Journal of Law, Crime and Justice 174-189.
2
Barnes (n 1); Iwona Seredynska, Insider Dealing And Criminal Law: Dangerous Liaisons (1st
edn, Springer-Verlag Berlin Heidelberg 2012); Rita Cheung, ‘Insider Trading Sentencing: An
Anglo-American Comparison’ (2014) 7 Journal Business Law 564-584; Michael Seitzinger,
‘Federal Securities Law: Insider Trading’ (Congressional Research Service 2016); Phillip
O’Hara, ‘Insider Trading In Financial Markets: Legality, Ethics, Efficiency’ (2001) 28
International Journal of Social Economics 1046-1062.
3
Barnes (n 1); Cheung (n 2); Matthew White, ‘The Implications For Securities Regulation Of
New Insider Dealing Provisions In The Criminal Justice Act 1993’ (1995) 16(6) Company Law
163-171; Zheng Weiwei, ‘New Challenges And Undertakings For Administrative And
Regulatory Reform: A Global Watch With Chinese Perspective – An Examination Of Legal
Regulations For Insider Dealing In The UK And The Lessons For China’ (2017) 12(4) Frontiers
Of Law In China 524-560.
4
Seredynska (n 2); O’Hara (n 2).
1
8
Legislative and Enforcement Responses in the UK and US
Insider Dealing
company’s securities5 such as business control or portfolio diversification6. Motives of
insiders should be considered, but it is not easy to determine or examine motives.
The question whether insider dealing must be prohibited has not been
satisfactorily answered. There exists a huge literature that captures multidimensional
arguments, and debates seem to continue. Thus, it is interesting to carry out a
research on insider dealing to examine why it is regulated and effectiveness of existing
insider-dealing laws.
II.
Purposes and Objectives of the Study
This thesis considers insider-dealing characteristics, then discusses legislative
and enforcement responses of authorities. The research aims at analysing insiderdealing laws in the UK and US. Its objectives are to gain understanding of two different
legal approaches and to determine the better system. Evaluative frameworks are
established on different criteria. A framework to evaluate legislative responses will
assess the extent to which regulations cover insider-dealing offences; the clarity and
legal certainty of wordings; the ease for authorities or jurists to initiate legal
proceedings; the degree of protection for market participants and the market.
Meanwhile, enforcement responses are evaluated on the basis of enforcement of
criminal and civil sanctions; number of convictions; imposition of sanctions on
Yulong Ma and Huey-Lian Sun, ‘Where Should Be Line Be Drawn On Insider Trading
Ethics?’ (1998) 17(1) Journal of Business Ethics 67-75; Rozeff and Zaman, ‘Market efficiency
and insider trading: New evidence’ (1988) 61 Journal of Business 25–44; Jenter, ‘Market
timing and managerial portfolio decisions’ (2005) 60 Journal of Finance 1903–1949; Nihat
Aktas, Eric De Bodt, Herve Van Oppens, ‘Legal insider trading and market efficiency’ (2008)
32 Journal of Banking and Finance 1379–1392.
6
Managers may buy stocks to increase their stockholding, which improves their voting power
and control over the corporate. Insiders may buy or sell the company’s stocks to diversify their
portfolios or to meet their temporary financial need. See Ma and Sun (n 5).
5
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Legislative and Enforcement Responses in the UK and US
Insider Dealing
corporates and individuals; actual compliance of individuals and organisations, actual
level of protection for investors or shareholders.
The research question is ‘to critically compare and contrast UK and US
approaches to dealing with insider dealing’. Following sub-questions help answer the
main question.
•
Why is insider dealing regulated?
•
What are legislative and enforcement responses in two countries?
•
How effective are those approaches?
There are two reasons why UK and US approaches are chosen. Firstly, both
legal systems are common-law based. Choosing two generally similar systems might
avoid analysis and comparison of incomparable criteria. Secondly, UK and US
financial systems are among the most developed ones. Stability in those systems has
significant impacts on not only economic development of the UK and US but also
global economy7. Insider dealing in the UK and US system should be studied as it is
widely considered as a market-abuse offence that harms financial markets. Besides,
UK and US are ‘two of the largest and most successful securities markets in the world’
whose insider-dealing laws become a benchmark for other jurisdictions8.
7
The fact that UK and US financial systems are in turmoil will result in globally economic
recession or even depression. For example, the 2008 financial crisis originated in the US
subprime mortgage market, then spread to the UK and EU.
8
McCoy and Summe, ‘Insider trading regulation: A developing state’s perspective’ (1998) 5
(4) Journal of Financial Crime 311 – 346 at 311.
10
Legislative and Enforcement Responses in the UK and US
III.
Methodology and Methods
A.
Methodology
Insider Dealing
This dissertation is a comparative research in which legal-cultures approach is
used. Comparative research provides knowledge of different legal approaches9,
improves domestic legal system by learning from other countries’ solutions or
settlement10 and supports unification11. Comparative methodology is appropriate for
this dissertation. Firstly, the research’s objectives match functions of comparative law.
By accessing to new dimensions of other legal cultures and systems, researchers can
reflect back into their familiar systems to make ‘taken-for-granted’ or tacit norms and
values become explicit12. As a result, they can understand both systems and enhance
their skills of critical analysis. By establishing evaluative frameworks to compare and
contrast two systems, researchers can determine the better system. Secondly, there
is a lack of comparative research on insider dealing between the UK and US laws.
Comparative studies are usually carried out between the EU and the US or among EU
countries. Comparative research between UK and US systems is necessary.
9
Blerton Sinani and Klodi Shanto, 'Methods And Functions Of Comparative Law' (2013) 9(2)
AUDJ; Mark Van Hoecke, 'Methodology Of Comparative Legal Research' (2015) Law and
Method; Mark Van Hoecke and Mark Warrington, ‘Legal Cultures, Legal Paradigms and Legal
Doctrine: Towards a New Model For Comparative Law’ (1998) 47 International and
Comparative Law Quarterly 495-536; John Reitz, ‘How to Do Comparative Law’ (1998) 46 The
American Journal of Comparative Law 618-636.
10
Sinani and Shanto (n 9); Hoecke (n 9); Gutteridge, Comparative Law: An Introduction to the
Comparative Method of Legal Study & Research (2nd edn, Widly and Sons Limited 1971);
John Bell, ‘Legal Research and the Distinctiveness of Comparative Law’ in Mark Van Hoecke
(ed), Methodologies of Legal Research: Which Kind of Method for What Kind of Discipline?
(Hart Publishing 2011).
11
Ibid.
12
Hoecke and Warrington (n 9); Reitz (n 9); Maurice Adams, ‘Doing What Doesn’t Come
Naturally. On the Distinctiveness of Comparative Law’ in Mark Van Hoecke, M. (ed),
Methodologies of Legal Research: Which Kind of Method for What Kind of Discipline? (Hart
Publishing 2011).
11
Legislative and Enforcement Responses in the UK and US
B.
Insider Dealing
Methods
Legal-cultures approach, which analyses legal responses in the context of
cultural, historical, political, ethical and socio-economic perspectives13, is used in this
dissertation. Rather than ‘law as rules’, this method is associated with ‘law as cultures’
in which social practices establish perception of and attitudes toward legal concepts
and regulations14. Cultural approach is appropriate for this research, as it takes nonlegal elements such as ethics and economic efficiency into great consideration.
Evaluative frameworks to assess effectiveness contain socio-economic factors
including actual protection for investors, deterrent effects.
In this thesis, primary sources that are insider-dealing legislations, regulations
and cases can be found on the official websites of UK and US authorities. Secondary
sources are academic books, journals and articles that provide legal and non-legal
analysis on insider-dealing laws.
IV.
Thesis Structure
There are five chapters. The first chapter is introduction, while the second
chapter analyses economic as well as ethical considerations of insider dealing and
determines the importance of insider-dealing regulation. Chapter 3 and 4 focus on the
UK and US approaches to insider dealing. The final chapter is conclusion that
summarises the thesis and provides some implications.
13
Sinani and Shanto (n 9); Hoecke (n 9); Hoecke and Warrington (n 9); Reitz (n 9); Adams (n
12); Michael Salter and Julie Mason, Writing Law Dissertations: An Introduction and Guide to
the Conduct of Legal Research (Pearson Longman 2007) 182-212; Jaakko Husa,
‘Comparative Law, Legal Linguistics and Methodology of Legal Doctrine’ in Mark Van Hoecke
(ed), Methodologies of Legal Research: Which Kind of Method for What Kind of Discipline?
(Hart Publishing 2011); David Nelken, ‘Comparative Legal Research and Legal Culture: Facts,
Approaches, and Values’ (2016) 12 Annual Review of Law and Social Science 45-62.
14
Hoecke and Warrington (n 9); Nelken (n 13); David Nelken, ‘Using the concept of legal
culture’ (2004) 29 Australian Journal of Legal Philosophy 1–26.
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Legislative and Enforcement Responses in the UK and US
Insider Dealing
CHAPTER 2: INSIDER DEALING AND THE IMPORTANCE
OF INSIDER DEALING LAWS
Insider dealing is primarily assumed to be an unethical and unfair phenomenon
that erodes public confidence among investors, efficiency and integrity of financial
markets. Meanwhile, the assumption is rebutted and arguments supporting insider
dealing are found in numerous studies15.
I.
Ethical and economic characteristics of insider dealing
A.
Ethical considerations
1.
Fairness
Insider dealing is considered as an unfair phenomenon16. Unfairness occurs
when an investor having inside information trades with others who do not possess
same pieces of information17. Informational asymmetry is the essence of insider
dealing. Privileged information brings opportunities for insiders to make profits or cut
loss, and/or engage in market manipulation by creating misleading information, which
15
Ma and Sun (n 5); Henry Manne, Insider Trading and the Stock Market (New York 1966);
Cinar, ‘The issue of insider trading in law and economics: Lessons for emerging financial
markets in the world’ (1999) 19 (4) Journal of Business Ethics 345–353; Martin and Peterson,
‘Insider trading revisited’ (1991) 10 (1) Journal of Business Ethics 57–61; Werhane, ‘The
ethics of insider trading’ (1989) 8 (11) Journal of Business Ethics 841–845; Salbu, ‘Insider
trading and the social contract’ (1995) 5 (2) Business Ethics Quarterly 313–328; Jennifer
Moore, ‘What Is Really Unethical About Insider Trading?’ (1990) 9 (3) Journal of Business
Ethics 171-182.
16
Barnes (n 1); White (n 3); Werhane (n 15); Salbu (n 15); Moore (n 15); Cho and Shaub, ‘The
consequences of insider trading and the role of academic research’ (1991) 10 Business and
Professional Ethics Journal 83–98; Shaw, ‘Shareholder authorized inside trading: A legal and
moral analysis’ 1990 9 (12) Journal of Business Ethics 913–928; Kim Lane Scheppele, ‘”It’s
Just Not Right”: The Ethics Of Insider Trading’ (1993) 56 (3) Law and Contemporary Problems
123-173; Ben Dubow and Nuno Monteiro, ‘Measuring Market Cleanliness’ (2006) FSA
Occasional Paper, Financial Services Authority; Patricia Werhane, ‘The Indefensibility of
Insider Trading’ (1991) 10 Journal of Business Ethics 729 – 731.
17
Seredynska (n 2); Charles C. Cox and Kevin S. Fogarty, ‘Bases of Insider Trading Law’
(1988) 49 (2) Ohio State Law Journal 353 – 372; Sarah Baumgartel, ‘Privileging Professional
Insider Trading’ (2016) 51 Georgia Law Review 71 – 119.
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Legislative and Enforcement Responses in the UK and US
Insider Dealing
discourages other investors18. Nevertheless, informational asymmetry is the common
phenomenon in the society19. Some investors possess superior information over
others since they use their skills, experience and knowledge, invest their time and
even money to do specific analysis and acquire information20. Thus, a more practical
discussion should be that insider dealing involves an unequal access to information21.
As long as investors carry out sufficient research on market conditions and
macroeconomic factors, they should have equal access to all information that helps
them valuate securities more accurately22.
Unfairness should be analysed from the perspective of harmfulness. Insider
dealing is assumed to cause losses to small investors and consequently discourage
them from making investment23. However, no evidence of discouragement was found.
Despite many discoveries of insider-dealing cases, there was still a substantial
increase in the number of small investors in the US in the 1980s 24. Theoretically,
insider dealing does not harm ‘outsiders’ in the market. Investors do not know whom
they are trading with, so it is impossible to identify insider-dealing victims when all
transactions are anonymous25. An outsider entering into agreement with an insider
18
Barnes (n 1).
For example, a person applies for a job because he/she knows a company’s recruitment
news from his/her relatives; or a person learning from his/her acquaintance about a shopping
discount can benefit from that special offer. A journalist discovering material news from private
sources publishes it rather than share it with other colleagues. In reality, these circumstances
are not regarded as unfairness. See Robert W. McGee, ‘Applying Ethics to Insider Trading’
(2008) 77 Journal of Business Ethics 206; Peter-Jan Engelen and Luc V. Liederkerke, ‘The
Ethics of Insider Trading Revisited’ (2007) 74 Journal of Business Ethics 502.
20
O’Hara (n 2); Moore (n 15); Barry A.K. Rider, Insider Trading (Jordan Publishing 1983).
21
Scheppele (n 16).
22
O’Hara (n 2); Seredynska (n 2); Mohammad Abdolmohammadi and Jahangir Sultan, ‘Ethical
Reasoning and the Use of Insider Information in Stock Trading’ (2002) 37 (2) Journal of
Business Ethics 165-173.
23
Nancy Reichman, ‘Insider Trading’ (1993) 18 Crime and Justice, Beyond the Law: Crime in
Complex Organizations 57.
24
David S. Young, ‘Insider Trading: Why the Concern?’ (1985) 8 Journal of Accounting,
Auditing and Finance 178 – 183.
25
Seredynska (n 2); Laura Hansen, ‘ “Gossip Boys”: Insider Trading and Regulator Ambiguity’
(2014) 21 (1) Journal of Financial Crime 29-43.
19
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Legislative and Enforcement Responses in the UK and US
Insider Dealing
might not be harmed, because he/she might simultaneously trade with others 26 and
benefit from those deals before price-sensitive news is released27. Therefore, insider
dealing is victimless28.
The perception of unfairness significantly depends on individual viewpoints and
social norms29. People from various cultures or even people sharing similar cultural
backgrounds perceive differently about fairness30. Insider dealing in China is more
acceptable than in the US and Taiwan31, though China and Taiwan are similar in terms
of culture. More finance professionals in China than in the US believe insider dealing
is acceptable32. Empirically, not everyone believes that insider dealing is an unfair
behaviour33. For example, corporate managers ranked insider dealing at almost the
least unethical behaviour34. Students who put a high value on ethics or feel guilty will
less likely to participate in insider dealing, and students are more likely to engage in
26
There is no pressure on any investor to enter into transactions, so they only trade when they
believe there are benefits. If a person does not transact with an insider, he/she will trade with
others. See Ma and Sun (n 5); McGee (n 19); Robert W. McGee and Walter Block, ‘An Ethical
Look at Insider Dealing’ (2006) Andreas School of Business Working Paper, Barry University
5; James D. Cox, ‘Insider Trading and Contracting: A Critical Response to the “Chicago
School”’ (1986) Duke Law Journal 628, 635.
27
Seredynska (n 2).
28
Hansen (n 25); McGee and Block (n 26).
29
Hansen (n 25); Steven E. Kaplan, Janet A. Samuels, Linda Thorne, ‘Ethical Norms of CFO
Insider Trading’ (2009) 28 Journal of Accounting and Public Policy 386-400; Hersh Shefrin
and Meir Statman, ‘Ethics, Fairness And Efficiency In Financial Markets’ (1993) Financial
Analysts Journal 21-29; Meir Statman, ‘The Cultures of Insider Trading’ (2009) 89 Journal of
Business Ethics 51-58.
30
Shefrin and Statman (n 29); Statman (n 29); Bolton, Keh and Alba, ‘Culture and Marketplace
Effects on Perceived Price Fairness: China and the USA’ (2008) Working Paper of Wharton
School, University of Pennsylvania.
31
Meir Statman, ‘Local Ethics in a Global World’ (2007) 63 (3) Financial Analysts Journal 32
– 41.
32
Huang, ‘An Empirical Study of the Incidence of Insider Trading in China’ (2007) Working
Paper of University of New South Wales.
33
Ma and Sun (n 5); Hansen (n 25); Kaplan et al. (n 29); Statman (n 29); Manne (n 15); Cinar
(n 15); Martin and Peterson (n 15); Werhane (n 15); Salbu (n 15); Moore (n 15).
34
Ekin and Tezolmez, ‘Business Ethics in Turkey: An Empirical Investigation with Special
Emphasis on Gender’ (1999) 18 Journal of Business Ethics 17 – 34.
15
Legislative and Enforcement Responses in the UK and US
Insider Dealing
insider dealing to cut losses rather than make profits35. So, criticisms on unfairness
seem to be inconsistent36.
2.
Fraud
Arguments relating to fraud include consideration of violation of property rights
and breach of fiduciary duty37. Privileged information is issued by the company or the
employer, so insider dealing is a violation of the company’s property right and also a
breach of fiduciary duty between insiders and their employer. Furthermore, in the
financial market, interests of shareholders are put in a higher place than interests of
employers and employees38. Insiders who are involved in insider dealing gain benefits
at shareholders’ expenses and breach his fiduciary duty between employees and
shareholders39. However, those arguments are inconclusive. Entrepreneurs who
establish the business and shareholders who own the company have information
property rights40. If they trade based on privileged information, they do not violate the
company’s right. Additionally, there seems to be no breach of fiduciary duty if insiders
make transactions to maximise interests of shareholders41.
Abdolmohammadi and Sultan (n 22); Beams, Brown and Killough, ‘An Experiment Testing
the Determinants of Non-Compliance With Insider Trading Laws’ (2003) 45 Journal of
Business Ethics 309 – 323.
36
O’Hara (n 2); Ma and Sun (n 5).
37
O’Hara (n 2); Seredynska (n 2); Moore (n 15).
38
Stock investors are also shareholders who own the company, so company insiders including
high-level managers, officers and staffs have to act on the interests of shareholders. See CFA
Institute, Ethical and Professional Standards, and Quantitative Methods (Wiley 2016) at 97.
39
Moore (n 15).
40
Seredynska (n 2); Manne (n 15); Robert W. McGee, ‘Insider trading: An economic and
philosophical analysis’ (1988) 25 (1) The Mid-Atlantic Journal of Business 35 – 48.
41
Ma and Sun (n 5); Manne (n 15).
35
16
Legislative and Enforcement Responses in the UK and US
3.
Insider Dealing
Huge and easy profits
Insiders who are engaged in insider dealing are believed to effortlessly earn
huge profits. Insiders outperform the market and gain significant profits42. Insiders
even make large abnormal profits before official announcements about the
corporate43, the takeover44, dividend payment45, share repurchases46, or listing and
delisting47. Nevertheless, the argument based on huge gains ignores several facts.
Insiders do not make profits at the expense of anybody48. Rather than a ‘lottery win’
or a luck, profits gained from insider dealing are the result of hard work and
42
For example, Seyhun found that insiders gain about 3% of abnormal profits over 300 days
after trading date, whereas Lin and Howe concluded that intensive insider dealing brings
substantial abnormal returns to insiders. See Seyhun, ‘Insiders' profits, costs of trading, and
market efficiency’ (1986) 16 Journal of Financial Economics 189–212; Lin and Howe, ‘Insider
Trading in the OTC Market’ (1990) 45 Journal of Finance 1273 – 1284. See also Aktas et al.
(n 5); Jeffrey F. Jaffe, ‘Special information and insider trading’ (1974a) 47 (3) Journal of
Business 410 – 428; Joseph E. Finnerty, ‘Insiders and market efficiency’ (1976) 31 (4) Journal
of Finance 1141 – 1148; Josef Lakonishok and Inmoo Lee, ‘Are insider trades informative?’
(2001) 14 (1) Review of Financial Studies 79 – 111; Leslie A. Jeng, Andrew Metrick, Richard
Zeckhauser, ‘Estimating the Returns to Insider Trading: A Performance-Evaluation
Perspective’ (2003) 85 (2) Review of Economics and Statistics 453 – 471; Pope, Morris and
Peel, ‘Insider Trading: Some Evidence on Market Efficiency and Directors’ Share Dealings in
Great Britain’ (1990) 17 (3) Journal of Business Finance and Accounting 359 – 380; Alan
Gregory, John Matatko, Ian Tonks, ‘Detecting Information from Directors’ Trades: Signal
Definition and Variable Size Effects’ (2003) 24 Journal of Business Finance and Accounting
309 – 342; Jana Fidrmuc, Marc Goergen, Luc Renneboog, ‘Insider Trading, News Releases,
and Ownership Concentration’ (2007) 61 The Journal of Finance 341 – 372.
43
Karpoff and Lee, ‘Insider trading before new issue announcements’ (1991) 20 Financial
Management 18 – 26.
44
Seyhun, ‘Do bidder managers knowingly pay too much?’ (1990) 63 Journal of Business 439
– 464.
45
John and Lang, ‘Strategic insider trading around dividend announcements: Theory and
evidence’ (1991) 46 Journal of Finance 1361 – 1389; Cheng, Davidson and Leung, ‘Insider
trading returns and dividend signals’ (2011) 20 International Review of Economics and
Finance, 421 – 429.
46
Lee, Mikkelson and Partch, ‘Managers' trading around stock repurchases’ (1992) 47 Journal
of Finance 1947–1961; Konan Chan, David L. Ikenberry, Inmoo Lee and Yanzhi Wang,
‘Informed Traders: Linking Legal Insider Trading and Share Repurchases’ (2012) 68 (1)
Financial Analysts Journal 60 -73.
47
Lamba and Khan, ‘Exchange listings and delistings: The role of insider information and
insider trading’ (1999) 22 Journal of Financial Research 131–146.
48
Jacqueline A.C. Suter, The Regulation of Insider Dealing in Britain (Butterworths 1989).
17
Legislative and Enforcement Responses in the UK and US
Insider Dealing
combination of skills as well as knowledge 49. Whether huge profits are easily gained
has been questioned.
B.
Economic considerations
1.
Impacts on the market
a.
Distribution of information
Information plays a significant role in the financial market, as it determines the
accuracy of valuation process50. Given that not all relevant information of the security
is published, investors may overvalue or undervalue that asset, which both results in
a wrong investment decision or even a loss. However, untimely disclosure of
information may substantially decrease firm value and harm the company 51. In the
existing literature, there are two contradictory arguments on the relationship between
insider dealing and informational distribution.
49
Insiders make great effort to be in the position to which private information is available, and
they even spend much time doing analysis before transactions are made. See Seredynska (n
2) at 59.
50
According to Efficient Market Hypothesis (EMH) theory, financial market is classified into
three forms on the basis of the information reflection in stock price. In the weak efficient
market, even public information is not reflected in stock price, so rather than technical analysis
that is based on changes in price and volume, fundamental analysis is useful to the decisionmaking process. Stock price, in the semi-strong form, includes information reported and
announced by the firm; and fundamental analysis no longer works. In this form, private
information is important to help investors earn abnormal returns. Meanwhile, the strong
efficient market is characterised by the fact that both private and public information is reflected
in stock price, so passive investment is the only effective method. See CFA Institute, Equity
and Fixed Income (Wiley 2016) at 115.
51
Seredynska (n 2); Dennis W. Carlton, Daniel R. Fischel, ‘The Regulation of Insider Trading’
(1983) 35 Stanford Law Review 857 – 895.
18
Legislative and Enforcement Responses in the UK and US
Insider Dealing
Manne argued that insider dealing is an efficient channel to distribute
information in the market52, which is also supported by EMH theory53 and some
academics54. Intrinsic price, future returns and performance of the firm might be
reflected by insider dealing55. Specifically, insiders are more likely to buy prior to the
increase in price and sell before price declines56. Insider dealing limits price distortions
because transactions made or triggered by insiders adjust asset price to the level that
matches economic reality57. Company insiders can predict returns and market
movements on the basis of privileged information, thus, predictive information about
economic conditions is possibly conveyed in their transactions58. Importantly, insider
52
Manne (n 15). When insiders make deals on the basis of superior information, their
transactions establish market trend and change the supply and/or demand of the asset, which
in turn changes asset price. Price gradually moves to the intrinsic value. Thus, insider dealing
can convey the information and help investors make valuation that is more proper.
53
In accordance with EMH theory, private information plays a significant role in the semistrong efficient market.
54
Carlton and Fischel (n 51); Kelly, Nardinelli and Wallace, ‘Regulation of Insider Trading:
Rethinking SEC Policy Rules’ (1987) 7 (2) The Cato Journal 441–448; Morgan, ‘Insider
Trading and the Infringement of Property Rights’ (1987) 48 Ohio State Law Journal 79 – 116;
Wu, ‘An Economist Looks at Section 16 of the Securities Exchange Act of 1934’ (1968) 68
Columbia Law Review 260–269; Meulbroek, ‘An Empirical Analysis of Illegal Insider Trading’
(1992) 49 Journal of Finance 1661–1699; Cornell and Sirri, ‘The Reaction of Investors and
Stock Prices to Insider Trading’ (1992) 47 Journal of Finance 1031–1059; Sugato Chakravarty
and John J. McConnel, ‘An Analysis of Prices, Bid/Ask Spreads, and Bid and Ask Depths
Surrounding Ivan Boesky’s Illegal Trading in Carnation Stock’ (1997) 26 Financial
Management 18–34; Nihat Aktas, Eric de Bodt and Herve Van Oppens, ‘Evidence of the
Contribution of Legal Insider Trading to Market Efficiency’ (2007) UCL Core discussion paper
0714.
55
Aktas et al. (n 5); Seyhun, ‘Why does aggregate insider trading predict future stock returns?
(1992) 107 (4) Quarterly Journal of Economics 1303 – 1331; Leland, ‘Insider Trading: Should
it be Prohibited?’ (1992) 100 (4) Journal of Political Economy 859 – 887; Manouchehr
Tavakoli, David McMillan, Phillip McKnight, ‘Insider Trading And Stock Prices’ (2012) 22
International Review of Economics and Finance 254-266. See also Seredynska’s analysis of
stock price in the Texas Gulf Sulphur case in Seredynska (n 2).
56
Pope et al. (n 42); Jeffrey F. Jaffe, ‘The Effect of Regulation Changes on Insider Trading’
(1974b) 5 Bell Journal of Economics and Management Science 93 – 121; Baesel and Stein,
‘The Value of Information: Inferences from the Profitability of Insider Trading’ (1979) 14
Journal of Financial and Quantitative Analysis 553 – 571.
57
Hartmut Schmidt, ‘Insider Regulation and Economic Theory’ in Klaus J. Hopt and Eddy
Wymeersch, European Insider Dealing: Law and Practice (Butterworths 1991).
58
Lakonishok and Lee (n 42); Seyhun (n 42); Xiaoquan Jiang and Mir A. Zaman, ‘Aggregate
Insider Trading: Contrarian Beliefs or Superior Information?’ (2010) 34 Journal of Banking and
Finance 1225 – 1236.
19
Legislative and Enforcement Responses in the UK and US
Insider Dealing
dealing is considered as the cheapest method of informational transmission that
corporates may take advantage of59. Trading of the company’s insiders and/or
executives is observed by outsiders who might mimic insiders to make their investment
decisions60.
Nevertheless, some academics stated that insider dealing does not result in
informative efficiency. Insider dealing reduces market efficiency61 and despite
existence of insider dealing, mispricing still continues62. Insider dealing does not alter
asset prices63. Importantly, information transmitted via insider dealing might not help
outsiders earn abnormal profits64. Rather than efficient distribution of information,
insider dealing is associated with the postponement of internal sharing and/or official
disclosure of information, which affects the decision-making procedure within the
business and causes loss to outsiders65. However, Manne claimed that insider dealing
even helps managers to monitor the flow of information and ensure information is
transmitted to them timely66. Dooley found that delay in official announcement caused
John and Lang (n 45); John and Mishra, ‘Information Content of Insider Trading around
Corporate Announcements: The Case of Capital Expenditures’ (1990) 45 Journal of Finance
835 – 855.
60
Rozeff and Zaman (n 5); Tavakoli et al. (n 55); Bettis, Vickrey and Vickrey, ‘Mimickers of
corporate insiders who make large volume trades’ (1997) 53 Financial Analysts Journal 57 –
77; Brick, Statman and Weaver, ‘Event Studies and Model Misspecification: Another Look at
the Benefits of Outsiders From Public Information About Insider Trading’ (1989) 16 Journal of
Business, Finance, and Accounting 399 – 424.
61
Michael G. Keenan, ‘Insider trading, market efficiency, business ethics and external
regulation’ (2000) 11 Critical Perspectives on Accounting 71 – 96.
62
Morris Mendelson, ‘The Economics of Insider Trading Reconsidered’ (1969) 117 (3)
University of Pennsylvania Law Review 475.
63
Sugato Chakravarty and John J. McConnel, ‘Does Insider Trading Really Move Stock
Prices?’ (1999) 34 (2) The Journal of Financial and Quantitative Analysis 191 – 209.
64
Seyhun (n 42); Leland (n 55); Rozeff and Zaman, ‘Overreaction and insider trading:
Evidence from growth and value portfolios’ (1998) 53 Journal of Finance 701–716; Fishman
and Hagerty, ‘Insider Trading and the Efficiency of Stock Prices’ (1992) 23 Rand Journal of
Economics 106 – 122.
65
Stephen M. Bainbridge, ‘The Insider trading Prohibition: A Legal and Economic Enigma’
(1986) 38 University of Florida Law Review 50.
66
Henry G. Manne, ‘Insider Trading: Hayek, Virtual Markets, and the Dog that did not Bark’
(2005) 31 (1) Journal of Corporation Law 167 – 185.
59
20
Legislative and Enforcement Responses in the UK and US
Insider Dealing
by insider dealing is rarely occurs67. Meanwhile, Seredynska stated that there is no
relationship between insider dealing and the postponement of external information
disclosure68.
b.
Market liquidity and volatility
Insider dealing reduces market liquidity69, which discourages small investors
from making investment decisions. Enforcement of regulation reduces negative effects
of insider dealing on stock liquidity and price70. However, other studies concluded that
market liquidity is not declined by insider dealing71; or although insider-dealing
legislation came into effect, market liquidity still declined72.
Insider dealing is considered as a source of price volatility, which raises
transaction costs and cost of capital; erodes public confidence among small investors;
decreases market efficiency; weakens economic growth and reduces social welfare73.
Nevertheless, Manne argued that insider-dealing regulations even result in more
significant price changes74. Given that the causal link between insider dealing and
price volatility is accepted, the question is whether price volatility results in market
deficiency and discourages investors. If insider dealing delivers inside information and
Michael P. Dooley, ‘Enforcement of Insider Trading Restrictions’ (1980) 66 (1) Virginia Law
Review.
68
Seredynska (n 2).
69
Leland (n 55); Kyle, ‘Continuous Auctions and Insider Trading’ (1985) 53 Econometrica
1315 – 1336.
70
Hans Degryse, Frank de Jong, Jeremie Lefebvre, ‘Legal Insider Trading and Stock Market
Liquidity’ (2016) 164 De Economist 83 – 104.
71
Chakravarty and McConnell (n 54).
72
Rezaul Kabir, Theo Vermaelen, ‘Insider Trading Restrictions and the Stock Market:
Evidence from the Amsterdam Stock Exchange’ (1996) 40 (8) European Economic Review
1591 – 1603.
73
McGee and Block (n 26); Leland (n 55); Schmidt (n 57); Gregoire and Huang, ‘Informed
trading, noise trading and the cost of equity’ (2009) 17 International Review of Economics &
Finance 13 – 32.
74
Suter (n 48).
67
21
Legislative and Enforcement Responses in the UK and US
Insider Dealing
brings stock price to intrinsic value, it improves market efficiency, which enhances
public confidence75.
2.
Impacts on firms
The relationship between insider dealing and firm value is still controversial as
both positive76 and negative77 correlations are found78. Additionally, insider dealing is
regarded as a form of compensation for entrepreneurs and innovators, which creates
motivation for them to work better and contribute more to the business 79. This
argument is also criticised80. Firstly, given that insider dealing indirectly conveys
information to the market, the company does not consider insider dealing as a
compensation for employees to avoid untimely disclosure81. Secondly, except for
breakthrough innovations, other developments barely result in visible increase in
company value82. Thus, insider dealing as compensation for innovators may not be
justified. Moreover, compensation via insider dealing might be associated with
75
McGee and Block (n 26). Investors seem to be discouraged when their rights are violated
and not adequately protected by legislations.
76
Carlton and Fischel (n 51).
77
Manove, ‘The Harm from Insider Trading and Informed Speculation’ (1989) 104 Quarterly
Journal of Economics 823 - 846; Ausubel, ‘Insider Trading in a Rational Expectations
Economy’ (1990) 80 The American Economic Review 1022 – 1041.
78
In fact, differences in insider dealing’s effects on firm value are originated from the choice
of parameters in econometric models. See Leland (n 55).
79
It is similar to monetary bonuses and stock options awarded to employees who have great
contribution or bring valuable innovations to the company. See Manne (n 15); Carlton and
Fischel (n 51); Schmidt (n 57); Bainbridge (n 65); Henry G. Manne, ‘Insider Trading and
Property Rights in New Information’ (1985) 4 (3) Cato Journal 935 – 937; Dye, ‘Insider trading
and incentives’ (1984) 57 Journal of Business 295 – 313; Michael J. Chmiel, ‘The Insider
Trading and Securities Fraud Enforcement Act of 1998: Codifying a Private Right of Action’
(1990) University of Illinois Law Review 645 – 674.
80
Mendelson (n 62); Bainbridge (n 65); Iman Anabtawi, ‘Toward a Definition of Insider Trading’
(1989) 41 Stanford Law Review 377 – 399.
81
Disclosure in the wrong time will possibly decrease stock value, so the company might prefer
traditional forms such as bonuses or stock options. See Bainbridge (n 65).
82
Seredynska (n 2).
22
Legislative and Enforcement Responses in the UK and US
Insider Dealing
adverse effects such as free-rider problem83 or disruption in information-sharing
process84.
II.
The importance of insider-dealing regulations
Authorities seem to be confused about the illegality of insider dealing85. In fact,
regulators in many jurisdictions consider insider dealing as an unlawful behaviour.
Insider-dealing regulation is important because market itself does not efficiently
produce information86. The ultimate victim is the society; so for the purposes of
protecting social welfare, public confidence, market integrity and efficiency, it is
absolutely necessary to regulate insider dealing87. Besides, some empirical studies
found that insider-dealing regulations decrease cost of capital88.
Corporate regulation on insider dealing is also essential to protect small
shareholders89. Corporate governance and internal insider-dealing restrictions are
83
There will be free riders who do not participate in any research or contribute to any
innovation but still benefit from insider dealing. Insider dealing is no longer a meaningful
compensation for contributors of the company.
84
Not until profits from insider dealing are realised do employees share their knowledge and
information with their colleagues. See Bainbridge (n 65).
85
Especially, in case that insiders are engaged in insider dealing to save them from negative
news or downturn of a security, authorities are not sure whether this behaviour is illegal. See
Hansen (n 25).
86
Morris Mendelson, ‘Economics and the Assessment of Disclosure Requirements’ (1978) 1
Journal of Comparative Corporate Law and Securities Regulation 49 – 68.
87
Barnes (n 1); Dubow and Monteiro (n 16); Kaplan et al. (n 29); Schmidt (n 57); Ausubel (n
77); Hansen (n 25); Michael S. Caccese, ‘Insider Trading Laws and the Role of Securities
Analysts’ (1997) Financial Analysts Journal 9 – 12; Donald C. Langevoort, ‘ “Fine Distinctions”
in the Contemporary Law of Insider Trading’ (2013) Columbia Business Law Review 429 –
462; Kenneth R. Davis, ‘Insider Trading Flaw: Toward A Fraud-on-the-market Theory and
Beyond’ (2016) 66 American University Law Review 51 – 89.
88
Hsuan-Chi Chen and Qing Hao, ‘Insider trading law enforcement and gross spreads of ADR
IPOs’ (2011) 35 Journal of Banking and Finance 1907 – 1917; Bhattacharya and Daouk, ‘The
world price of insider trading’ (2002) 57 Journal of Finance 75 – 108; Bushman, Piotroski and
Smith, ‘Insider trading restrictions and analysts’ incentives to follow firms’ (2005) 60 Journal
of Finance 35 – 66; Nuno Fernandes and Miguel A. Ferreira, ‘Insider trading laws and stock
price informativeness’ (2009) 22 Review of Financial Studies 1845 – 1887.
89
If there is no restriction or prohibition on insider dealing, corporate managers may provide
large shareholders with privileged information that is considered as a kind of bribery. As a
result, managers are in collusion with dominant shareholders, which may negatively affect
23
Legislative and Enforcement Responses in the UK and US
Insider Dealing
useful to decline insider sales’ profitability90. However, Lee et al. found an opposite
result that corporate regulations are ineffective to prevent the exploitation of inside
information and insiders even strategically adapt with the adoption of restrictive
policies to continue taking advantages of private information91.
small investors’ interests. See Ernst Maug, ‘Insider Trading Legislation And Corporate
Governance’ (2002) 46 European Economic Review 1569 - 1597.
90
Lili Dai, Renhui Fu, Jun-Koo Kang, Inmoo Lee, ‘Corporate governance and the profitability
of insider trading’ (2016) 40 Journal of Corporate Finance 235 – 253; Bettis, Coles, Lemmon,
‘Corporate policies restricting trading by insiders’ (2000) 57 Journal of Financial Economics
191 – 220.
91
Inmoo Lee, Michael Lemmon, Yan Li, John M. Sequeira, ‘Do voluntary corporate restrictions
on insider trading eliminate informed insider trading?’ (2014) 29 Journal of Coprorate Finance
158 – 178.
24
Legislative and Enforcement Responses in the UK and US
Insider Dealing
CHAPTER 3: THE UNITED KINGDOM APPROACHES
In the UK, insider dealing is considered as a reprehensible behaviour 92. Since
the 1930s, several forms of insider-dealing legislation have appeared but not until the
1980s and 1990s did more comprehensive provisions exist 93.
I.
Legislative responses
A.
Development of insider dealing legislations in the United Kingdom
Before 1980, the UK insider dealing regulations were quite limited and there
was a need for more comprehensive provisions94. Insider dealing was criminalised
under Part V of the Companies Act 198095. It became a separate Act that was the
Company Securities (Insider Dealing) Act 198596. The CSA was the first and
significant step in the process of prohibiting insider dealing97. It was later superseded
by Part V of the Criminal Justice Act 199398. Even when the 1993 Act was adopted,
there were only criminal sanctions imposed on insider-dealing cases. Not until the
92
HC 36 1989/90 para 158 referred in Sarah Clarke, Insider Dealing: Law and Practice (Oxford
University Press 2013) at 113.
93
Andrew H Baker, ‘Chapter 5: Insider Dealing’ in Nicholas Ryder, Financial Crime in the 21st
Century: Law and Policy (Edward Elgar 2011) at 142.
94
The 1972 Justice Committee Report suggested that regulators should consider insider
dealing as a criminal offence and impose criminal sanctions on this behaviour. The Exchange
and the Panel issued the 1973 and 1977 Joint Statement that emphasised the importance of
criminalising insider dealing. See Clarke (n 92) at 117, 119; Barry Rider, Kern Alexander,
Stuart Bazley, Jeffrey Bryant, Market abuse and Insider Dealing (3rd edn, Bloomsbury
Professional 2016) at 48; Jack Davies, ‘From gentlemanly expectations to regulatory
principles: A history of insider dealing in the UK: Part 1’ (2015) 36 (5) Company Lawyer 132 –
143.
95
The Companies Act 1980, ss 68 – 73. A person knowingly relating to a company or receiving
information from people having connection with the company commits a crime if he trades or
makes others trade on the basis of non-public material information.
96
The Company Securities (Insider Dealing) Act 1985. Hereinafter ‘CSA’. Insider dealing
conducted by not only primary but also secondary insiders was a criminal offence. Primary
insiders are people who have direct connection with the company, while secondary insiders
are those receiving information from primary ones.
97
Rider et al. (n 94) at 49.
98
The Criminal Justice Act 1993. Hereinafter ‘CJA’
25
Legislative and Enforcement Responses in the UK and US
Insider Dealing
Financial Services and Markets Act 200099 did both civil and criminal liabilities appear.
For the purposes of this thesis, Part V of the CJA and the FSMA are discussed.
B.
Part V of the Criminal Justice Act 1993
1.
Insider dealing offences and related definitions
a.
Three offences of insider dealing
Section 52(1) prohibits an individual from trading on securities if he has inside
and price-sensitive information100, which is the primary offence. Meanwhile, section
52(2) is about the secondary offences in which an individual possessing inside
information will commit a crime if he encourages others to trade on those securities or
improperly discloses price-sensitive information101. Prerequisite element of three
offences is that an insider possesses inside information102.
There are several issues in section 52. Firstly, although insider-dealing
provisions prohibit trade on a certain list that covers a wider range of assets than
previous legislations, it is absolutely non-exhaustive103. Secondly, the Act focuses on
deals taking place in regulated markets rather than face-to-face transactions104.
Thirdly, section 52 aims at prohibiting misconducts of individuals only and does not
cover corporates’ practices105. The narrow application of section 52 is compatible with
the recommendation made by the DTI that the focus on individuals is more appropriate
and reduces unnecessary complexity106. The criminal prosecution against a company
The Financial Services and Markets Act 2000. Hereinafter ‘FSMA’
The Criminal Justice Act 1993, s52(1).
101
The Criminal Justice Act 1993, s52(2).
102
Mark Stallworthy, ‘The United Kingdom’s New Regime for the Control of Insider Dealing’
(1993) 12 (4) International Company and Commercial Law Review 448 - 453 at 156.
103
Stallworthy (n 102).
104
Baker (n 93) at 156.
105
Weiwei (n 3); Clarke (n 92) at 148.
106
Clarke (n 92) at 149
99
100
26
Legislative and Enforcement Responses in the UK and US
Insider Dealing
is quite complicated, because the identification principle to establish criminal
responsibility for a corporate107 requires that unlawful conducts or intention is caused
by the control of the company. In case of Christian and Angie Littlewood108, insiderdealing and disclosing offences were not the ‘directing mind and will’ of the company.
Meanwhile, James Sanders – the founder of Blue Index Ltd, his wife and James
Swallow were accused of insider-dealing and encouraging offences109, which was also
the strategy of the company110. Thus, criminal prosecution was against individual
offenders; the company was banned from regulated practices and was out of business.
Fourthly, the provision does not list detailed factors that constitute secondary
offences111. To demonstrate the committal of disclosure offence, requirements on
which types of information are disclosed and to what extent the information is
disclosed are not clear, which creates several difficulties in the prosecution process112.
107
Lennards Carrying Co v Asiatic Petroleum [1915] AC 705; Bolton Engineering Co v Graham
[1957] 1 QB 159 (per Denning LJ); and R v Andrews Weatherfoil, 56 C App R 31 CA.
108
Financial Services Authority, ‘Final Notice to Christian Arthur Littlewood’ (Financial
Services
Authority
2012)
<https://www.fca.org.uk/publication/final-notices/christianlittlewood.pdf> accessed March 2018; Financial Services Authority, ‘Insider dealers ordered
to
pay
£1.5m
in
confiscation’
(Financial
Services
Authority,
2012)
<http://www.fsa.gov.uk/library/communication/pr/2012/082.shtml> accessed March 2018.
109
Paul Cheston and Jonathan Brown, ‘James Sanders: The trader who thought he was
untouchable’
(The
Independent,
2012)
<https://www.independent.co.uk/news/uk/crime/james-sanders-the-trader-who-thought-hewas-untouchable-7870125.html> accessed March 2018; Simon Neville, ‘Husband and wife
jailed
for
insider
dealing’
(The
Guardian,
2012)
<
https://www.theguardian.com/business/2012/jun/20/husband-and-wife-jailed-insider-dealing>
accessed March 2018.
110
Clarke (n 92) at 151.
111
Weiwei (n 3); Brenda Hannigan, Insider Dealing (2nd edn, Longman 1994) at 20.
112
For example, an employee accesses to inside information in the computer of his colleague
without permission. The question is whether his colleague is accused of improper disclosure.
Next, in case that an employee tells his relatives that it is good time to buy a particular stock,
whether he commits the encouraging or disclosing offence is questionable.
27
Legislative and Enforcement Responses in the UK and US
b.
Insider Dealing
Definition of ‘Inside information’
Section 56 provides an important definition of ‘inside information’. Inside
information relates to particular securities rather than general assets; is accurate or
specific; is non-public but if it is made public it will probably have great impacts on
asset price113.
‘Significant effect’ is an important criterion as it captures what really matters in
the market114, but problems arise115. How to define or determine the significance is not
clearly established116. Besides, the scope of inside information is narrow as only
information that largely affects securities is considered117. Information causing trivial
price movements might not be regarded as inside information118. Substantial price
changes prior to any special events can be an evidence of inside information’s effects,
but it might result from firm performance rather than information leak119. Thus, it is
inconsistent to conclude that inside information is disclosed whenever significant price
movements exist.
‘Specific or precise’ criterion also raises a debate. Definition of specificity and
precision should be given, but it is complicated to generate an exact definition that fits
113
The Criminal Justice Act 1993, s56(1).
There is a possibility that information used by insiders does not involve any actual effects.
In James Sanders case, forecasted takeover news did not become true. Information was still
inside information because if it had been public at that time, it would have had great influence
on stock price. See Rider et al. (n 94).
115
Baker (n 93) at 156, 157.
116
White (n 3); Keith Wotherspoon, ‘Insider Dealing – The New Law: Part V of The Criminal
Justice Act 1993’ (1994) 57 The Modern Law Review 419 – 433.
117
The UK approach targeted large events in which effects on the market can be easily
noticed. See Rider et al. (n 94) at 69.
118
Lomnicka, ‘The New Insider Dealing Provisions: Criminal Justice Act 1993, Part V’ (1994)
Journal of Business Law 173 – 188; Simon Morris, Financial Services: Regulating Investment
Business (2nd edn, FT Law & Tax London 1995) at 294. Nowadays, modern technology
supports investors to make high-volume trading transactions that turn small price changes into
huge profits. See Rider et al. (n 94) at 69.
119
Clarke (n 92) at 169; 170.
114
28
Legislative and Enforcement Responses in the UK and US
Insider Dealing
all circumstances120. This requirement aims at excluding unreliable news or
rumours121. ‘Precise’ could be narrowly interpreted by judges, which limits scope of
the provision122, so ‘specific’ was added to widen the section’s coverage123. Precise or
specific information is not necessarily detailed information such as contractual terms
or identities of all relating parties124. For instance, in cases of Malcolm Calvert125 and
Ali Mustafa and others126, specific news was the takeover events whereas precise
information was number of bidders, timing and price127. Meanwhile, in Neil Rollins
case128, specific information was the company’s worse performance and precise
information was the official disclosure’s timing129.
Ibid. at 179; David Kirk, ‘Enforcement of criminal sanctions for market abuse: Practicalities,
problem solving and pitfalls’ (2016) 17 ERA Forum 311 – 322.
121
Clarke (n 92) at 179, 180; Rider et al. (n 94) at 60.
122
Ibid.
123
Ibid.; Rider (n 20); Wotherspoon (n 116); Lomnicka (n 118). For example, the information
that Company A would be taken over by Company B at a given price was leaked. In reality,
actual price is much higher than the expected level. The information, under this circumstance,
is inaccurate but it is specific and still results in a giant rise in stock price of Company A. If
only ‘precise’ element was included in the provision, this piece of information would be
excluded. Thus, ‘specific’ element allows a broader approach to determine inside information.
124
Clarke (n 92) at 182.
125
Malcolm Calvert was a former market-maker at Cazenove, who earned £103,883 profit
from insider dealing and was accused of five counts. See Financial Services Authority, ‘Former
Cazenove partner found guilty of insider dealing’ (Financial Services Authority, 2010)
<http://www.fsa.gov.uk/pages/Library/Communication/PR/2010/041.shtml> accessed May
2018; Harry Wilson, ‘Ex-Cazenove partner Malcolm Calvert gets 21 months in jail for insider
trading’
(The
Telegraph,
2010)
<https://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7422473/ExCazenove-partner-Malcolm-Calvert-gets-21-months-in-jail-for-insider-trading.html> accessed
May 2018.
126
They were sentenced for having committed insider dealing offences under section 52 of
the CJA. See Financial Services Authority, ‘Six sentenced for insider dealing’ (Financial
Services Authority, 2012) <http://www.fsa.gov.uk/library/communication/pr/2012/080.shtml>
accessed May 2018.
127
Clarke (n 92) at 182, 183.
128
Neil Rollins was accused of four insider-dealing counts under section 52(1) of the CJA, one
insider-dealing count under section 52(2) of the CJA and four money-laundering counts. See
Financial Services Authority, ‘Insider Dealing: Financial Services Authority prosecutes Mr Neil
Rollins’
(Financial
Services
Authority,
2009)
<http://www.fsa.gov.uk/pages/Library/Communication/PR/2009/002.shtml> accessed May
2018.
129
Clarke (n 92) at 182.
120
29
Legislative and Enforcement Responses in the UK and US
Insider Dealing
Another requirement is that information must not have been ‘made public’130.
‘Made public’ is not necessarily linked to an official announcement made by the
corporate or security issuer131. The CJA seemingly permits insiders to make
transactions immediately when information is published rather than fully absorbed by
the whole market132. There is a possibility that the defendant justifies his dealing by
proving that information has been partially or fully public before transactions are
made133. In Matthew and Neel Uberoi134 case, Neel tried to prove that investment in
those companies was a good decision and possible takeovers could be forecasted by
the public.
Given these issues discussed above, it is impossible to establish a common
framework with exact thresholds to identify inside information that fits all cases.
Determination of inside information is the responsibility of prosecution 135. It depends
on case-by-case facts and decision of judges, which may possibly lead to legal
uncertainty and unexpected differences among similar cases.
130
Section 58 consists of a non-exhaustive list of circumstances where information is regarded
as being made public. See The Criminal Justice Act 1993, section 58.
131
Public information can be found in business or economic reports provided by the company
or experts, so careful research and hard work are the key to achieve higher profits. See Baker
(n 93) at 157.
132
White (n 3).
133
Clarke (n 92) at 201.
134
Matthew Uberoi was an intern at a broking company passed inside information about
takeovers and some deals to his father, Neel Uberoi; and they gained huge profits after Neel
bought relating stocks. See Financial Services Authority, ‘Former corporate broker intern and
father found guilty of insider dealing’ (Financial Services Authority, 2009)
<http://www.fsa.gov.uk/pages/Library/Communication/PR/2009/149.shtml> accessed May
2018.
135
Clarke (n 92) at 168, 171.
30
Legislative and Enforcement Responses in the UK and US
c.
Insider Dealing
Definition of ‘Insider’
An insider must have inside information at the time of dealing and is certainly
aware that this piece of information is inside information136; simultaneously,
information an insider has must be from inside sources and the insider knows he gets
the news from inside sources137.
Section 57 emphasises on the actual knowledge of the accused 138. However,
establishment of the defendant’s actual knowledge is difficult and not straightforward,
because it is on the case-by-case basis139. Additionally, there is likelihood that the
defendants hide their wrongdoings by proving that they do not know the news is inside
information and/or they do not obtain information from internal sources. Besides, the
prosecutor or the jury is required to draw inference from relating circumstances140.
Requirements to prove actual knowledge and criminal standard of proof make it
difficult to convict insider-dealing cases141. The burden of proof of actual knowledge
should be placed on the accused142. This suggestion resulted from unsuccessful
prosecution when previous legislation was enacted143, but recently, FSA has
successfully proved actual knowledge on the basis of circumstantial evidences such
as the Rupinder Sidhu case144.
136
The Criminal Justice Act 1993, s57(1)(a).
The Criminal Justice Act 1993, s57(1)(b).
138
The Criminal Justice Act 1993, s57.
139
Weiwei (n 3); Clarke (n 92) at 242; Rider et al. (n 94) at 74; Barry Alexander K. Rider and
Michael Ashe, Insider Crime: The New Law (Jordan and Sons Limited 1993) at 54. Under
many circumstances, the tippee is told to buy or sell a specific stock rather than be given
detailed information about the corporate’s events or performance.
140
Clarke (n 92) at 241.
141
Rider et al. (n 94) at 74.
142
Hannigan (n 111).
143
Clarke (n 92) at 241, 242. For example, in 1989, Holyoak, Hill and Morl were not accused
of being engaged in insider dealing, which might result from the fact that prosecutors could
not prove actual knowledge. See Clarke (n 92) at 242.
144
Sidhu got inside information from Anjam Ahmad – an employee of AKO Capital and they
earned £524,000 profit by involving in insider dealing of 18 shares. Ahmad admitted that he
and Sidhu participated in insider dealing, but Ahmad was not required to be a witness in the
137
31
Legislative and Enforcement Responses in the UK and US
Insider Dealing
In addition, section 57(2) covers both primary and secondary insiders145, which
broadens the definition of insider under the CSA146. Section 57(2)(a)(ii) apparently
eliminated difficulties in the prosecution under the CSA147. Section 52(2)(b) prevents
the circumstance where the defendant argues that he passively received
information148 as in R v Fisher case149. However, establishing the relationship between
the accused and the primary insider as well as the methods they communicate is not
an easy task. There is a likelihood that no record or evidence demonstrating the
existence of information delivery can be found150. The situation becomes more
complex when numerous people are engaged in the insider-dealing network. In case
that information passes through several intermediaries, it is difficult to prove that tippee
has knowledge that he obtains information from insiders and to establish that this piece
of information is inside one because qualities of information including accuracy and
specificity may not be maintained151. Besides, whether exact identity of primary
court of Sidhu. The Sidhu’s trial was purely based on circumstantial facts and Sidhu was still
convicted. See Financial Services Authority, ‘Management consultant appears in Court
charged
with
insider
dealing’
(Financial
Services
Authority,
2011)
<http://www.fsa.gov.uk/pages/Library/Communication/PR/2011/019.shtml> accessed May
2018; Yeganeh Torbati, ‘British consultant found guilty of insider trading’ (Reuters, 2011)
<https://uk.reuters.com/article/uk-insiderdealing/british-consultant-found-guilty-of-insidertrading-idUKTRE7BE1JX20111215 > accessed May 2018.
145
The Criminal Justice Act 1993, s57(2). There are three layers that are inner, middle and
outer circles corresponding to sub-section (a)(i), (a)(ii) and (b). These circles are believed to
possibly capture all potential categories of insider. See Clarke (n 92) at 248; Rider et al. (n 94)
at 52.
146
White (n 3); Clarke (n 92) at 247, 248; Rider et al. (n 94) at 74.
147
Clarke (n 92) at 252. For example, Kean and Floydd were brokers hired by Grand
Metropolitan but the prosecution against them under the CSA failed. This prosecution might
have been successful if it had been under the CJA.
148
Clarke (n 92) at 253, 254; Rider et al. (n 94) at 75, 76; Wotherspoon (n 116). Under section
52(2)(b), irrespective of whether the accused passively or actively receive information from
primary insiders, he will be considered as a secondary insider if prosecutors can prove he gets
information from internal sources given that requirements on actual knowledge are met.
149
Clarke (n 92) at 254.
150
For example, information is passed in a privately small and face-to-face talk.
151
Weiwei (n 3); Rider et al. (n 94) at 75; Wotherspoon (n 116).
32
Legislative and Enforcement Responses in the UK and US
Insider Dealing
insiders must be identified and whether inside information must only come from
primary insiders have been questioned152.
2.
The defences
There is a burden of proof, which means demonstrating only some evidences
is not adequate to make the defence successful153. Section 53 covers defences for
each of three offences and several special defences154.
Regarding section 53(1)155, it is difficult to prove that transactions made by
individuals possessing inside information are neither related to that special information
nor for the purposes of making profit as well as avoiding loss156. The defence that the
accused would have certainly made similar transactions even if inside information had
not been available to him157 seems to be frequently used158. An essential element is
to prove that timing of transactions does not depend on possession of inside
information159. In R v Stebbing case, the defendant successfully argued that he
152
Rider et al. (n 94) at 75.
Rider et al. (n 94) at 77, 78.
154
The Criminal Justice Act 1993, s53. Specifically, section 53(1) includes three
circumstances in which the defendant might not be guilty of primary insider-dealing offence,
while section 53(2) and section 53(3) state three defences for encouraging offence and two
defences for disclosing offence respectively.
155
The Criminal Justice Act 1993, s53(1). Three requirements are no expectation of
profitability, reasonable belief that there has been a wide disclosure of information, and
certainty of investment decisions regardless of possession of inside information.
156
Rider et al. (n 94) at 78; Clarke (n 92) at 308. For instance, in R v Gooding case, the
defendant argued that his purchase was a long-term investment and was not affected by
takeover information; but he still sold stocks immediately after information was officially
announced. See Clarke (n 92) at 309.
157
The Criminal Justice Act 1993, s53(1)(c).
158
Examples of this defence are pre-determined strategies for long-term investment or for
temporarily financial needs such as economic constraint, debt payment. See Rider et al. (n
94) at 79; Clarke (n 92) at 312; Rider and Ashe (n 139).
159
Under the CJA, there is no requirement that the accused totally puts inside information out
of his mind but he must prove that he intends to do what he did. Thus, the judges will take the
responsibility for assessing case-by-case evidences of the defence.
153
33
Legislative and Enforcement Responses in the UK and US
Insider Dealing
intended to buy stocks for months ago but he forgot to do so, and his purchase was a
long-term investment160.
Next, defences for encouraging offence are similar to those for primary insiderdealing offence whereas there are two defences for disclosing offence under section
53(3)161. This provision covers several circumstances where a person confides private
information to his wife or friends during the dinner162 and does not expect them to
make transactions relating to the information, or where a person believes that the
recipient of information trades on securities for long-term investment163. Furthermore,
section 53(4) Schedule 1 of the CJA states special defences relating to the market164.
Generally, defences stated in section 53 attempts to protect legitimate deals and
market practices from restrictions on insider dealing165.
3.
The penalties
Under the CJA, only criminal sanctions are imposed on offences of insider
dealing. Criminal penalties imposed on insider dealing can be a fine or imprisonment
or both166. Only criminal penalties are inadequate to deter wrongdoing and have no
160
Clarke (n 92) at 313.
The Criminal Justice Act 1993, s53(3). The defendant might argue that he did not expect
anyone to trade on the basis of his information disclosure or expect transactions based on
leaked information to be profitable.
162
For example, in case R v Staines and Morrissey, the defendant was an accountant who
disclosed inside information to his friends but believed that they did not make use of the
information. See R v Staines and Morrissey [1997] 2 Cr App R 426.
163
Clarke (n 92) at 317.
164
The Criminal Justice Act 1993, s53(4). The defendant is not guilty of insider dealing
offences if he is a market maker; or possesses market information; or his transactions based
on inside information are essential for the success of a series of stock acquisitions/disposals
or in pursuit of monetary policies, price stabilisation strategies.
165
Rider and Ashe (n 139).
166
The Criminal Justice Act 1993, s61(1). Maximum imprisonment term for summary
conviction is six months whereas that for conviction on indictment is seven years
161
34
Legislative and Enforcement Responses in the UK and US
Insider Dealing
effects on compensation for victims167. Civil remedies should be adopted as civil
liabilities are associated with lower burden of proof. Civil sanctions might support
criminal ones by providing more flexibility and bringing more cases to court, which
creates deterrent effects and effectively protects market integrity168. However, civil
regimes were rejected by the government at that time169. In fact, criminal law to deal
with insider dealing has been proved to be ineffective. From 1980 to 1994, there were
104 insider-dealing cases investigated by the Exchange but only 33 cases were
criminally prosecuted and about 17 cases were convicted 170. High burden of proof
under criminal regime might be the reason for few successful prosecutions171.
4.
Concluding remarks
In the UK, criminal law has been utilised to protect markets, which was based
on the fact that authorities are responsible for ensuring the whole market function
effectively172 and on the belief that the defendant should be entitled to legal protections
allowed by criminal law173. From the beginning of financial regulations, criminal
approach was much more desirable and preferable to control abusive conducts 174.
White (n 3); Baker (n 93) at 159; Harry McVea, ‘Fashioning a system of civil penalties for
insider dealing: sections 61 and 62 of the Financial Services Act 1986’ (1996) Journal of
Business Law 344 - 361.
168
White (n 3); Morris (n 118); Fishman, ‘A Comparison of Enforcement of Securities Law
Violations in the UK and US’ (1993) 14 Company Lawyer 163 at 170; Michael Chan,
‘Regulation in the City: Sharing Information’ (2000) 21 Company Lawyer 135.
169
Weiwei (n 3); McVea (n 167).
170
Mark Stamp and Carson Welsh, International Insider Dealing (Longman Law, Tax &
Finance 1996) at 113.
171
Baker (n 93) at 159; Hannigan (n 111); Rosalind Wright, ‘Market Abuse and Market
Manipulation: The Criminal, Civil and Regulatory Interface’ (2001) 3 Journal of International
Financial Markets 19 – 25 at 22.
172
Barry Alexander K. Rider, ‘The Control of Insider Trading – Smoke and Mirrors’ (2000) 19
(1) Dickinson Journal of International Law 1 – 45 at 7; 8. The authorities also financially benefit
from the holding of markets.
173
Ibid.
174
Gilligan, ‘The Origins of UK Financial Services Regulation’ (1997) 18 Company law 167.
167
35
Legislative and Enforcement Responses in the UK and US
Insider Dealing
However, the effectiveness and ability of criminal system to tackle serious frauds has
been questioned175. Under circumstances involving complex transactions, the
investigation and prosecution might be too costly and complicated, which discourages
prosecutors from bringing wrongdoers into the court176. Although criminal justice
system aims at protecting well-being of the society, wealthy individuals might make
use of its requirements such as standard of proof to benefit from tax avoidance177.
Although Part V of the CJA is considered as the most significant and
comprehensive amendment to fight against insider dealing, it maintained the UK
criminal approach and did not consider civil regimes, which created difficulties in the
prosecution due to high standard of proof and resulted in few successful
convictions178. To assess effectiveness of the CJA, there are some evaluative criteria
including the extent of coverage; legal certainty and clarity; existence of obstacles to
legal proceedings and the degree of protection for market participants and market as
a whole. Firstly, Part V of the CJA covers a relatively comprehensive and broad range
of offences. Three separate offences are introduced in more simple language 179.
Secondly, the CJA seems to be ineffective in terms of clarity and certainty. Definitions
of inside information and insiders are vague180, so determination of these two criteria
is still affected by decision of the courts. Besides, there are several limits relating to
unclear constituent factors of each offence and obscure defences181. There seems to
be no connection between offences and defences or even conflicts exist among
them182. Thirdly, criminal regime under the CJA creates numerous difficulties for the
175
Rider (n 172).
Ibid.
177
Ibid.
178
Weiwei (n 3).
179
White (n 3).
180
Weiwei (n 3); Rider and Ashe (n 139).
181
Weiwei (n 3).
182
Ibid.; Stamp and Welsh (n 170).
176
36
Legislative and Enforcement Responses in the UK and US
Insider Dealing
prosecution and conviction. High standard of proof is one of the obstacles. Some
loopholes in statutory definitions may help the accused escape from the prosecution.
Enforcement bodies including investigators, prosecutors or polices might not have fully
understanding of or access to the environment insider dealing takes place, whereas
the accused might be an expertise in that area183. Finally, given that victims of insider
dealing are the corporate, shareholders, investors possessing no inside information
and the market as a whole, the CJA does not provide any civil remedy for victims. This
legislation significantly focuses on penalising wrongdoers rather than enhancing
legitimate information acquisition.
C.
The Financial Services and Markets Act 2000
The CJA was largely criticised due to high standard of proof. Thus, the
government decided to fill the regulatory gap by adopting ‘The Market Abuse
Regime’184 that provides FSA with much flexibility and lowers burden of proof185. Not
until the FSMA did civil regime to tackle insider dealing come into effect, which
introduced substantial changes in the UK regulatory framework186. Criminal and civil
insider-dealing regimes separately co-exist in the UK, which may possibly create some
183
Rider (n 172).
Hereinafter ‘MAR’. MAR targets not only insider dealing but also other abusive practices in
the market. See Barnes (n 1); Baker (n 93) at 159; Michael Filby, ‘Part VIII Financial Services
and Markets Act: Filling Insider Dealing’s Regulatory Gaps’ (2004) 25 Company Lawyer 363
(2004); Alcock, ‘Market abuse’ (2002) 23 (5) Company Lawyer 142 – 150; Linklater, ‘The
Market Abuse Regime: Setting standards in the twenty-first century’ (2001) 22 (9) Company
Lawyer 267 – 272.
185
Michael Filby, ‘The Enforcement Of Insider Dealing Under The Financial Services And
Markets Act 2000’ (2003) 24(11) Company Lawyer; Swan, ‘Market abuse: A new duty of
fairness’ (2004) 25 (3) Company Lawyer 67 – 68; Brendan John Lambe, ‘The efficacy of
market abuse regulation in the UK’ (2016) 24 (3) Journal of Financial Regulation and
Compliance 248 – 267.
186
Barnes (n 1); Clarke (n 92) at 380; Filby (n 185).
184
37
Legislative and Enforcement Responses in the UK and US
Insider Dealing
confusion and difficulties for the authorities and legal professions187; but civil regime
might complement and support existing criminal approach188.
1.
The offences and related definitions
a.
Insider-dealing behaviour
Section 118(2) described the first type of market abuse 189 that is similar to
primary insider-dealing offence stated in section 52(1) of the CJA. Several cases that
fall within section 118(2) rather than section 118(4) are Michael Davies190, Robert
Middlemiss191, Peter Bracken192, David Isaacs193, Jonathan Malins194.
The definition of ‘Insider’ is given in section 118B195. A proof of actual
knowledge, which means the accused was aware of having inside information, is not
required under section 118B(a)-(d)196. Meanwhile, section 118B(e) emphasises on
187
Clarke (n 92) at 382.
Sykes, ‘Market abuse: A civil revolution’ (1999) 1 (2) Journal of International Financial
Markets 59 – 67.
189
The Financial Services and Markets Act 2000, s118(2).
190
Davies was fined £1000 for his small insider dealing of Berkeley Morgan Group Plc’s stock.
See Financial Services Authority, ‘Final Notice To Michael Thomas Davies’ (Financial Conduct
Authority 2004) <https://www.fca.org.uk/publication/final-notices/davies-mt_28jul04.pdf>
assessed May 2018.
191
Middlemiss was fined £15,000 due to engagement in insider dealing relating to shares of
Profile Media Group Plc. See Financial Services Authority, ‘Final Notice To Robert Middlemiss’
(Financial
Conduct
Authority
2004)
<https://www.fca.org.uk/publication/finalnotices/middlemiss_10feb04.pdf> assessed May 2018.
192
Peter Bracken participated in insider dealing of Whitehead Mann Group Plc share and was
fined £15,000. See Financial Services Authority, ‘Final Notice To Peter Bracken’ (Financial
Conduct
Authority
2004)
<https://www.fca.org.uk/publication/finalnotices/bracken_07jul04.pdf> assessed May 2018.
193
A £15,000 fine was imposed on David Isaacs as he was engaged in insider dealing of
Trafficmaster share. See Financial Services Authority, ‘Final Notice To Mr David Isaacs’
(Financial Services Authority 2005) <http://www.fsa.gov.uk/pubs/final/d-isaacs_28feb05.pdf >
assessed May 2018.
194
There were even higher penalties such as a £25,000 fine on Jonathan Malins for his illegal
dealing in Cambrian Mining Plc. See Financial Services Authority, ‘Final Notice To Jonathan
Malins’ (Financial Conduct Authority 2005) <https://www.fca.org.uk/publication/finalnotices/jonathan_malins.pdf> assessed May 2018.
195
The Financial Services and Markets Act 2000, s118B. An insider is the person who
possesses inside information under five circumstances. He might gain private information due
to his role as a member of authority regulating the corporate; a shareholder of the corporate;
an employee or third-party profession, worker. An insider might be the criminal who steals
inside information.
196
Clarke (n 92) at 410.
188
38
Legislative and Enforcement Responses in the UK and US
Insider Dealing
mens rea factor of actual knowledge and targets secondary insider receiving
information from primary insider197, which widens the coverage of the provision and
forestalls any argument about information accumulation ‘through the exercise’ of
employment198. For example, in case of FSA v John Shevlin199, Shevlin’s employment
was not associated with confidential information, so it was more reasonable to apply
section 118B(e).
‘Inside information’ is described in section 118C200. Constituent factors are
similar to those required by section 56 of the CJA. In terms of the precise nature,
precision relates to the ability to indicate that an event occurs or is expected to exist
and the adequate specificity to have effect on asset price201. However, section
118C(5)(b) is unclear and difficult to understand, as conflicts exist in the wording and
there is no explicit benchmark to determine the level of accuracy202. Besides, section
118C(8) briefly defines ‘generally available’ without further explanation203, but much
guidance is provided in the handbook MAR 1.2 Market Abuse204. With regards to the
possibly significant effect of information, Part VIII of the FSMA is quite similar to Part
197
The Financial Services and Markets Act 2000, s118B(e). See also Clarke (n 92) at 410.
Clarke (n 92) at 411.
199
Shevlin – an IT officer of The Body Shop Plc – made use of managers’ passwords to access
to confidential emails without permission. He was engaged in short-selling and earned
£38,472 profit. See Financial Services Authority, ‘Final Notice To Mr John Shevlin’ (Financial
Conduct Authority 2008) <https://www.fca.org.uk/publication/final-notices/john_shevlin.pdf>
accessed May 2018.
200
The Financial Services and Markets Act 2000, s118C. Specifically, section 118C(2)
includes four main elements that form inside information. They are the precision, the nonpublic or unavailable feature, the relationship with given asset and the potentially substantial
impact on price.
201
The Financial Services and Markets Act 2000, s118C(5).
202
FSA v David Massey [2011] UKUT 49 (TCC) at para 38, 39. See also Baker (n 93) at 168.
203
The Financial Services and Markets Act 2000, s118C(8). Inside information must be ‘not
generally available’ which cannot be accumulated by carrying out an analysis, report or
research
204
MAR 1.2.13E of Financial Conduct Authority, ‘MAR 1.2 Market Abuse: general’ (Financial
Conduct
Authority,
n/d)
<https://www.handbook.fca.org.uk/handbook/MAR/1/2.html?date=2012-06-01>
accessed
May 2018.
198
39
Legislative and Enforcement Responses in the UK and US
Insider Dealing
V of the CJA. Substantial effect on price is linked with the fact that investor is likely to
make his investment based on the information205. Seemingly, irrespective of whether
actual effect exists or not, criteria that information is used by reasonable investors is
adequate to establish ‘significant effect’ element. The Tribunal in FSA v David Massey
case applied the ‘reasonable investor’ test to determine whether information has
significant effect on price or not206. This approach is commonly applied by the
FSA/FCA because they consistently record in final notices that information which a
reasonable investor’s investment decisions are based on will probably substantially
affect stock price207.
b.
Improper disclosure behaviour
Section 118(3) of the FSMA describes the second behaviour208 that is the same
with improper disclosure offence under section 52(2)(b) of the CJA. There is no clear
guidance under the FSMA, but MAR handbook covers several elements such as
whether the information disclosure complies with market disciplines or regulatory
codes, whether the recipient is required to keep secret, whether the disclosure is
essential for the purposes of takeover209.
205
The Financial Services and Markets Act 2000, s118C(6).
FSA v David Massey (n 202) at para 41.
207
Clarke (n 92) at 442; Baker (n 93) at 164, 165.
208
The Financial Services and Markets Act 2000, s118(3). Whether information is properly
disclosed or not plays the substantial role in this provision. The relationship between
information disclosure and legitimate performance of the individual’s responsibilities or
employment is also important.
209
MAR 1.4.5E of Financial Conduct Authority, ‘MAR 1.4 Unlawful disclosure’ (Financial
Conduct
Authority,
n/d)
<https://www.handbook.fca.org.uk/handbook/MAR/1/4.html>
accessed May 2018.
206
40
Legislative and Enforcement Responses in the UK and US
2.
Insider Dealing
The defences and the penalties
Statutory defences are stated in section 118A(5) of the FSMA210. The provision
of defences under the FSMA is not as clear as those under the CJA, which might result
from the fact that Part VIII of the FSMA covers numerous market-abuse misconducts
whereas Part V of the CJA focuses on insider-dealing practices only.
Section 123 of the FSMA provides that FSA/FCA is allowed to impose
appropriate penalties on or make a public censure about the individuals taking part in
or requiring or encouraging others to engage in market abuse211. The authority is able
to make a formal request for remedies against the defendant such as compensation,
restitution or asset liquidation212. Although this provision does not provide detailed
definition or guidance on ‘requiring or encouraging’ element, it covers the
encouragement offence which is quite similar to section 52(2)(a) of the CJA. For
example, Alexei Krilov-Harrison was accused of improper disclosure under section
118(3) and encouraging offence under section 123(1)(b), so he was fined £24,000213.
Similarly, Perry Bliss214, Jeremy Burley215 and William Coppin216 were fined £30,000;
£70,000 and £144,200 respectively for the same misconducts.
210
The Financial Services and Markets Act 2000, s118A(5). Behaviour is not considered as
an unlawful practice if it is compliant with the MAD’s rules or exemptions, market disciplines,
or is for the purposes of monetary and/or fiscal policies.
211
The Financial Services and Markets Act 2000, s123.
212
Rider et al. (n 94) at 106.
213
Financial Services Authority, ‘Final Notice To Alexei Krilov-Harrison’ (Financial Conduct
Authority
2009)
<https://www.fca.org.uk/publication/final-notices/krilovharrison.pdf
>
assessed May 2018.
214
Financial Services Authority, ‘Final Notice To Perry John Bliss’ (Financial Conduct Authority
2010) <https://www.fca.org.uk/publication/final-notices/perry_bliss.pdf> assessed May 2018.
215
Financial Services Authority, ‘Final Notice To Jeremy Burley’ (Financial Services Authority
2010) < http://www.fsa.gov.uk/pubs/final/jeremy_burley.pdf> assessed May 2018.
216
Financial Services Authority, ‘Final Notice To William James Coppin’ (Financial Conduct
Authority 2010) <https://www.fca.org.uk/publication/final-notices/william_coppin.pdf >
assessed May 2018.
41
Legislative and Enforcement Responses in the UK and US
3.
Insider Dealing
Concluding remarks
Although FCA states that market abuse is a civil rather than criminal offence217,
the CJA is still the main insider-dealing legislation and the FSMA complements the
CJA by providing civil remedies. Firstly, Part VIII of the FSMA includes three insiderdealing offences stated in Part V of the CJA. Although the FSMA does not provide
further guidance, the FSMA’s coverage is wider than that of the CJA because it targets
both individuals and juristic persons218. Secondly, requirements on insider-dealing
offences and surrounding issues under the FSMA are quite similar to those under the
CJA, but there are some unclear issues in relevant definitions. Thirdly, the FSMA
introduces civil regimes to fight against market abuse, which fills the regulatory gap.
Civil approach solves the problem of high burden of proof, which helps increase
successful rate of prosecution and conviction219. Besides, under the MAR, prosecutors
are not required to demonstrate the accused’s intent, which is different from the
CJA220; but with no requirements on the intent, reckless misconducts might be
caught221. Finally, under the FSMA, civil remedies are offered to victims, which might
further protect market participants and increase deterrent effects222. However, Dubow
and Monteiro measured market cleanliness, then concluded that after the enactment
of the FSMA, insider dealing still occurred and in the studied period, the Act did not
have adequate effects223. Meanwhile, Lambe used different statistical methods and
Financial Conduct Authority, ‘Market abuse’ (Financial Conduct Authority, n/d) <
https://www.fca.org.uk/markets/market-abuse> assessed May 2018.
218
Baker (n 93) at 161; Filby (n 184).
219
Weiwei (n 3); Srivastava, Mason, Simpson, and Litt, ‘Financial crime’ (2011) 86 Compliance
Officer Bulletin 1–23; Teasdale, ‘FSA to FCA: recent trends in UK financial conduct regulation’
(2011) 26(12) Journal of International Banking Law and Regulation 583–586.
220
Baker (n 93) at 162; Alcock, ‘Market abuse – the new witchcraft’ (2001) 151 New Law
Journal 1398. That results from the authority’s objectives to ensure market integrity and
efficiency in addition to detecting and prosecuting wrongdoers.
221
Swan (n 185).
222
Weiwei (n 3).
223
Dubow and Monteiro (n 16).
217
42
Legislative and Enforcement Responses in the UK and US
Insider Dealing
data sample but agreed that the FSMA was insufficient to deter wrongdoings as insider
dealing still existed before the official disclosure of information224.
II.
Enforcement responses
A.
Enforcement authorities
Between 1980 and 2001, there was only criminal regime with legal proceedings
conducted by the DTI (Figure 1)225. The DTI only worked effectively in the beginning
and it soon had difficulties when defendants did not plead guilty. Since 2002, dual
regime has replaced criminal regime. The FSA/FCA is the enforcement body to tackle
white-collar crimes, and has enforcement powers to conduct investigation, prosecution
and impose punishments on regulated individuals as well as organisations 226. Unlike
the DTI or SFO which only has power to pursue criminal offences, FSA/FCA can
initiate both criminal and civil proceedings against insider dealing227. An expansion in
FSA/FCA’s enforcement powers is a significant change in the regulation and also an
advantage over other authorities 228.
224
Lambe (n 185).
Jack Davies, ‘From gentlemanly expectations to regulatory principles: A history of insider
dealing in the UK: Part 2’ (2015) 36 (6) Company Lawyer 163 – 174. Internal investigations
were conducted by the DTI from 1980 to 1985. From 1986 to 1994, there were internal and
external investigations, and LSE was able to initiate criminal prosecutions.
226
The Financial Services and Markets Act 2000, s. 6. See Nicholas Ryder, The financial crisis
and white collar crime: The perfect storm? (Edward Elgar 2014).
227
Weiwei (n 3); Filby (n 185); Lambe (n 185).
228
Clarke (n 92) at 578; Lambe (n 185).
225
43
Legislative and Enforcement Responses in the UK and US
Insider Dealing
Figure 1: Number of prosecutions and convictions from 1980 to 2001229
50
40
30
20
10
0
1980 - 1985
1986 - 1994
Prosecution
1995 - 2001
Conviction
The post-crisis ‘credible deterrence’ strategy that focuses on individual and
institutional wrongdoers was adopted by FSA/FCA. This approach ensures deterrent
effects and enhances public confidence by attempting to successfully initiate
prosecutions and convictions; widely propagating enforcement priorities and
objectives to authorised persons, market participants and consumers 230. To respond
to criticism of its major use of fines, FSA emphasised another purpose of ‘credible
deterrence’ strategy is to tackle market abuse and it succeeded in criminally convicting
several insider-dealing cases231. FSA imposed significant sanctions on both
individuals and organisations. Amount of fines increased by almost 59 times from
£5.3million in 2007 to £311.5million in 2012 (Figure 2). However, fines actually
accounted for small parts of profits gained from misconducts by wrongdoers 232. FSA
was criticised because rather than seriousness and impacts of malpractices, political
229
Data source: Davies (n 225).
‘Credible deterrence’ approach explicitly sends a warning message that heavy punishment
such as long-term imprisonment or large monetary penalties will be imposed on violations and
misconducts. See Peat and Mason, ‘Credible deterrence in action: the FSA brings a series of
cases against traders’ (2009) 30 (9) Company Lawyer 278–279; Srivastava et al. (n 219);
Teasdale (n 219).
231
Srivastava et al. (n 219); Christine Astaniou, Shoshana Wainer & Nikunj Kiri, ‘UK market
abuse update: FSA continues to demonstrate resolve to tackle market abuse’ (2010) Law and
Financial Markets Review 582 – 592.
232
Ryder (n 226).
230
44
Legislative and Enforcement Responses in the UK and US
Insider Dealing
and media-friendly elements played an important role in FSA’s determination of
fines233. In 2013, FSA was replaced by FCA whose purposes are consumer protection
and maintenance of market integrity rather than financial crime targets set by FSA 234.
Insider dealing is regarded as the central target of ‘credible deterrence’ policies235.
FCA more proactively implements ‘credible deterrence’ strategies and more seriously
attempts to initiate legal proceedings with heavy penalties than FSA did 236. Values of
fines in 2013, 2014 and 2015 were substantially higher than those in previous years
(Figure 2).
Figure 2: Total amounts of fines imposed by FSA and FCA (since 2013)237
1,600.00
1,400.00
£ millions
1,200.00
1,000.00
800.00
600.00
400.00
200.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
233
Ibid.
FCA makes use of FSA’s enforcement strategies and tools to fight against financial frauds,
dishonesty, misconducts and market abuses. See The Financial Services Act 2012, Part 3,
s50; Ryder (n 226) at 214-215; James Perry, Rob Moulton, Glynn Barwick, Richard Small,
Jake Green and Nicola Kay, ‘The new UK regulatory landscape’ (2011) 84 Compliance Officer
Bulletin 1 - 33; Tracey McDermott, ‘Keynote address: Financial crime in the FCA world’
(Financial Conduct Authority, 2013) < https://www.fca.org.uk/news/speeches/keynoteaddress-financial-crime-fca-world> assessed March 2018; Financial Conduct Authority,
‘Financial crime’ (Financial Conduct Authority, 2015) < https://www.fca.org.uk/firms/financialcrime> assessed March 2018.
235
Clarke (n 92) at 577.
236
Srivastava et al. (n 219).
237
The National Archives, ‘Fines table’ (The National Archives, n/d) <
http://webarchive.nationalarchives.gov.uk/20130201213211/http://www.fsa.gov.uk/about/pre
ss/facts/fines/2012> assessed March 2018; Financial Conduct Authority, ‘Fines table’
(Financial Conduct Authority, n/d) <https://www.fca.org.uk/news/news-stories/2016-fines>
assessed March 2018.
234
45
Legislative and Enforcement Responses in the UK and US
B.
Criminal proceedings versus civil proceedings
1.
Criminal proceedings
Insider Dealing
FSA/FCA is able to criminally prosecute insider-dealing cases238, but the
progress of criminal prosecutions is slow and the authority prefers civil sanctions239.
Recently, FSA/FCA has paid much attention to criminal prosecutions and made
tougher actions toward insider dealing240. Before 2008, FSA failed to initiate criminal
proceedings against insider dealing. From 2000 to 2008, a few prosecutions were
conducted by DTI and SFO. In 2004, SFO pursued an insider-dealing case that
involved a ‘ring’ including four insiders241. Since 2008, more prosecutions have been
brought by the FSA/FCA (Figure 3). Until 2016, FSA/FCA secured 32 insider-dealing
convictions242 and the number of cases being found guilty or convicted continues to
rise. That was regarded as the effectiveness of newly-adopted strategy and the effort
of FSA/FCA to initiate criminal proceedings.
238
The Financial Services and Markets Act 2000, s 402(1)(a).
Haines, ‘FSA determined to improve the cleanliness of markets: custodial sentences
continue to be a real threat’ (2008) 29 (12) Company Lawyer 370; Burger and Davies, ‘The
most valuable commodity I know of is information’ (2005) 13 (4) Journal of Financial
Regulation and Compliance 324 – 332 at 326.
240
Haines (n 239); Alexander, ‘Corporate crimes: are the gloves coming off?’ (2009) 30 (11)
Company Lawyer 321 – 322. Margaret Cole – the Director of Enforcement – stated that one
of FSA’s objectives under ‘credible deterrence’ strategy was to criminally prosecute insiderdealing wrongdoers. See Financial Services Authority, ‘Enforcing Financial Services
Regulation: The UK FSA Perspective’ (Financial Services Authority, 2008)
<http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2008/0404_mc.shtml>
accessed May 2018; Financial Services Authority, ‘Delivering Credible Deterrence’ (Financial
Services
Authority,
2009)
<http://www.fsa.gov.uk/library/communication/speeches/2009/0427_mc.shtml>
accessed
May 2018.
241
Barnes (n 1); Baker (n 93) at 278; Simon Bowers, ‘Essex four charged with insider dealing’
(The Guardian, 2002) <https://www.theguardian.com/business/2002/dec/14/4> accessed
May 2018.
242
Financial Conduct Authority, ‘Mark Lyttleton sentenced to 12 months imprisonment for
insider dealing’ (Financial Conduct Authority, 2016) <https://www.fca.org.uk/news/pressreleases/mark-lyttleton-sentenced-12-months-imprisonment-insider-dealing > accessed May
2018.
239
46
Legislative and Enforcement Responses in the UK and US
Insider Dealing
Figure 3: Number of cases found guilty by DTI, SFO before 2008 and by
FSA/FCA after 2008243
12
10
8
6
4
2
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Besides, sentencing terms vary on the case-by-case basis (Table 1). Elements
including defendants’ employment, reasons for their possession of inside information,
whether the wrongdoing is deliberately or recklessly conducted, degree of
sophistication and complexity, actual benefits for defendants and impacts on victims
or market are considered244. The longest term of imprisonment is four years and six
months, which was imposed on Martyn Dodgson245. Courts are reluctant to impose
the highest sentences, so effectiveness of the increase in maximum punishment level
is questioned. Additionally, criminal sanctions are mainly imposed on individuals and
it is difficult to find a corporate that is criminally held liable for insider dealing. It is
compatible with the fact that UK legislative response focuses on establishing individual
243
Clarke (n 92) at 522, 523.
Cheung (n 2); Filby (n 185); R. v Mcquoid [2009] EWCA Crim 1301, [2009] 4 All E.R. 388.
245
Financial Conduct Authority, ‘Two convicted of insider dealing in Operation Tabernula trial’
(Financial Conduct Authority, 2016) <https://www.fca.org.uk/news/press-releases/twoconvicted-insider-dealing-operation-tabernula-trial> accessed May 2018; Financial Conduct
Authority, ‘Insider dealers sentenced in Operation Tabernula trial’ (Financial Conduct
Authority, 2016) <https://www.fca.org.uk/news/press-releases/insider-dealers-sentencedoperation-tabernula-trial> accessed May 2018.
244
47
Legislative and Enforcement Responses in the UK and US
Insider Dealing
liability rather than corporate liability. FSA/FCA was also criticised due to their failure
to prosecute large insider-dealing network and/or large-scale practice246.
To determine whether criminal proceedings are appropriate, two-stage test
consists of evidential and public interest assessment247. FCA considers the Code for
Crown Prosecutors and the Enforcement Guide of FCA Handbook of Rules and
Guidance to decide the suitable prosecution248. A non-exhaustive list of factors
includes the significance of market distortion, criminal records, the extent of cooperation with other people, and personal circumstances249. In Richard Ralph and Filip
Boyen case250, there were adequately straightforward evidences to criminally
prosecute wrongdoers251; however, civil sanctions were imposed as two defendants
co-operated with FSA during investigating period252. They escaped from being
criminally held for insider dealing.
Co-operation agreements between authorities and suspects who are willing to
assist investigation and prosecution are normal in the common law. Given that insiderdealing cases are complicated, costly and time-consuming, FSA took advantage of
co-operation agreements with suspects to support investigation and probably
246
Barnes (n 1).
Clarke (n 92) at 573, 579; Lambe (n 185).
248
Clarke (n 92) at 573.
249
Financial Conduct Authority, ‘The Enforcement Guide’ (Financial Conduct Authority, n/d)
<https://www.handbook.fca.org.uk/handbook/document/EG_Full_20140401.pdf> accessed
May 2018.
250
Ralph was fined a total amount of £117,691.41 while the fine imposed on Boyen was
£81,982.95. Those fines included a disgorgement and an additional element. See Financial
Services Authority, ‘Final Notice To Richard Ralph’ (Financial Services Authority 2008)
<http://www.fsa.gov.uk/pubs/final/richard_ralph.pdf> accessed May 2018; Financial Services
Authority, ‘Final Notice To Filip Boyen’ (Financial Conduct Authority 2008)
<https://www.fca.org.uk/publication/final-notices/filip_boyen.pdf> accessed May 2018.
251
Ralph was the director of Monterrico and also an experienced investor. He was in breach
of trust and his corporate’s insider-dealing, transparency and disclosure rules. His misconduct
was deliberate because corporate advisers had given him advice relating to his obligations
and he purposefully involved Boyen to conceal his trading. Damage to public confidence was
also taken into consideration. See Clarke (n 92) at 580.
252
Ibid. at 582.
247
48
Legislative and Enforcement Responses in the UK and US
Insider Dealing
establish liability for other wrongdoers253. For example, in Malcolm Calvert case254,
FSA found it difficult to gather sufficient evidences and entered into a co-operation
agreement with Hatcher255. Thus, co-operation agreements might help the FSA/FCA
in the investigation, prosecution, conviction and assist the authority to discover insiderdealing rings256. Nevertheless, it has been questioned that whether those agreements
are intentionally used by defendants to avoid imprisonment. There is no clear
framework to assess the extent of reduction or discount treated as the benefit of cooperation agreements.
2.
Civil proceedings
The FSMA allows the civil approach parallel to the criminal regime, which is
controversial and creates some confusion257. It raises the problem whether civil
sanctions are precisely prescribed as civil or criminal enforcement and subsequently,
whether so-called civil penalties violate human rights258.
Under the FSMA, there is a wide range of civil actions that FSA/FCA can
impose on insider-dealing defendants259. The authority is able to cancel or remove a
corporate’s permission to operate, suspend a firm from authorised activities, restrict
some specific practices conducted by firm; withdraw an approval or permission of an
authorised person, prohibit or suspend a person from regulated activities; issue public
253
Clarke (n 92) at 584; Astaniou et al. (n 231).
Hatcher was Calvert’s friend and was also engaged in his misconduct. See Financial
Services Authority (n 125).
255
Hatcher admitted his engagement and provided valuable information about Calvert’s
wrongdoing, which supported the criminal prosecution against Calvert. See Clarke (n 92) at
588; Astaniou et al. (n 231).
256
Astaniou et al. (n 231).
257
Baker (n 93) at 172, 173; Filby (n 185); Conceicao, ‘The FSA’s approach to taking action
against market abuse’ (2007) 29 (2) Company Lawyer 43-45.
258
Baker (n 93) at 173; Filby (n 185). Human rights are under the UK Human Rights Act 1998
and the European Convention on Human Rights.
259
Clarke (n 92); Rider et al. (n 94) at 290; Filby (n 185).
254
49
Legislative and Enforcement Responses in the UK and US
Insider Dealing
censure, require asset freezing and impose financial penalties on both individuals and
entities260. In terms of informal actions, FSA/FCA may issue private warnings to
authorised or non-authorised corporates and individuals if there are potential marketabuse conducts261. Private warning, which is non-statutory and normally conducted by
the FSA/FCA in case of minor violations, is to make wrongdoers aware that if their
malpractice continues, they will face with formal actions262. Regarding formal actions,
the most common type is financial punishment whose amounts vary from cases to
cases and are mainly imposed on individuals rather than corporates (Table 2). To
determine whether a fine or a public censure is suitable, the authority considers a nonexhaustive series of factors including the nature, severity, profitability, effect of
misconduct; whether the misconduct is reckless or purposeful; the complexity, liquidity
and size of market; and potential deterrent effects263. Besides, there is a five-stage
procedure to decide level of fine264. Other types of formal actions are prohibition
orders, withdrawal of approval, cancellation of permission, suspension and restriction
orders.
Regarding legislative responses, civil approach is an essential regime to
remove difficulties associated with criminal proceedings, to improve the number of
successful convictions and to introduce civil remedies for victims. Monetary sanctions
imposed on retail malpractices are to avoid unfairness while imposition of those fines
260
The Financial Services and Market Act 2000, ss 55; 56; 63; 66; 123; 205; 206A.
Clarke (n 92) at 607.
262
Ibid.
263
Section 6.2 of Financial Conduct Authority, ‘The Decision Procedure and Penalties manual’
(Financial Conduct Authority, n/d) <https://www.handbook.fca.org.uk/handbook/DEPP.pdf >
accessed May 2018.
264
The first two steps titled ‘Disgorgement’ and ‘Seriousness’ are to assess the amount of
profit gained or loss avoided and the severity of wrongdoings. In the next step, the level of fine
may rise or fall after several aggravating or mitigating factors such as the extent of cooperation with the authority, the criminal records of suspects are taken into account. Then, the
penalty might be adjusted for deterrence and/or discounted. Disgorgement element is
excluded from settlement discount. See Financial Conduct Authority (n 263) at section 6.5.
261
50
Legislative and Enforcement Responses in the UK and US
Insider Dealing
on financial crimes or wholesale wrongdoings aims at preventing the lack of
corporates’ internal management and protecting the integrity as well as efficiency of
financial markets265. Thus, financial punishment is expected to affect the corporate’s
stock value, the profitability and reputation of both individual and institutional
wrongdoers. In fact, civil sanctions are criticised and the effectiveness has been
questioned. Firstly, monetary penalties associated with litigation costs are believed to
decrease wrongdoers’ profitability and this effect actually happens266; but the fall in
profit might be a negative consequence of unsuccessful business practices instead of
punishment. Fines are relatively smaller than profits, so wrongdoers consider fines as
business costs and continue their wrongdoings to earn huge profits that are much
bigger than losses from sanctions267. Additionally, financial penalties might have
deterrent effects in case that individuals pay fines by themselves; in contrast, if fines
are paid by shareholders’ funds, wrongdoers still have incentives to benefit from
misconducts268. Secondly, financial punishment on corporates might force
265
Val Srinivas, Daniel Byler, Richa Wadhwani, Alok Ranjan and Vamsi Krishna, 'Enforcement
Actions In The Banking Industry: Trends And Lessons Learned' (Deloitte University Press
2015); Elena Carletti, 'Fines For Misconduct In The Banking Sector – What Is The Situation In
The EU?' (Economic Governance Support Unit, European Parliament 2017).
266
Carletti (n 265); Calvin Benedict, 'Will Conduct Costs Change The Behavior Of Banks?'
(2014) 3(1) Seven Pillars Institute Moral Cents; Jeff Cox, 'Now That Banks Have Paid $321
Billion
In
Fines,
Here's
The
Toughest
Test
Ahead'
(CNBC,
2017)
<https://www.cnbc.com/2017/03/03/banks-have-paid-321-billion-in-fines-since-thecrisis.html> accessed 6 November 2017.
267
Benedict (n 266); Cox (n 266); Hannes Köster and Matthias Pelster, 'Financial Penalties
And Bank Performance' (2017) 79 Journal of Banking & Finance 57-71; Wharton, 'Are
Financial Penalties Enough To Deter Banks' Bad Behavior?' (Knowledge@Wharton, 2015)
<http://knowledge.wharton.upenn.edu/article/are-financial-penalties-enough-to-deter-banksbad-behavior/> accessed 6 November 2017; The Economist, 'Fine And Punishment' (The
Economist, 2012) <http://www.economist.com/node/21559315> accessed 6 November 2017;
Gavin Finch, 'World’S Biggest Banks Fined $321 Billion Since Financial Crisis'
(Bloomberg.com, 2017) <https://www.bloomberg.com/news/articles/2017-03-02/world-sbiggest-banks-fined-321-billion-since-financial-crisis> accessed 6 November 2017; The
House
of
Commons,
'Changing
Banking
For
Good'
(2006)
<http://www.parliament.uk/documents/banking-commission/Banking-final-report-vol-ii.pdf>
assessed November 2017.
268
Pecuniary sanctions imposed on firms rarely effectively affect employees or managers that
are directly engaged in the wrongdoing. See Maher, ‘Crisis not averted: lack of criminal
51
Legislative and Enforcement Responses in the UK and US
Insider Dealing
shareholders to supervise and manage their firms; because fines lead to lower cashflow, higher discount rate and lower share value269. In fact, despite financial sanctions
imposed on corporates, there was still an increase in share price270. Thirdly, regulators
expect that civil punishment leads to reputational loss which was estimated to be 7.5
times greater than financial loss271. But reputational loss might erode public
confidence and result in market instability272.
Therefore, imposition of pecuniary sanctions on financial crimes in general and
on insider dealing in particular neither effectively deter wrongdoings nor protect market
participants and market as a whole273. The deep-rooted problem is the corporate’s
internal culture274, which calls for much concern about corporate governance 275.
Besides, either criminal or civil proceedings ineffectively tackle financial crimes if they
are conducted alone. An appropriate combination of two approaches might be
recommended.
prosecutions leaves limited consequences for those responsible for the financial crisis’ (2013)
39 New England Journal on Criminal and Civil Confinement 459–476; Jed Rakoff, ‘The
Financial Crisis: Why Have No High-Level Executives Been Prosecuted?’ (2014) The New
York Review of Books.
269
Köster and Pelster (n 267); Christopher Kennedy, ‘Criminal Sentences for Corporations:
Alternative Fining Mechanisms’ (1985) 73 (2) California Law Review 443 – 482.
270
Benedict (n 266).
271
European Systemic Risk Board, ‘Report On Misconduct Risk In The Banking Sector’ (2015)
<https://www.esrb.europa.eu/pub/pdf/other/150625_report_misconduct_risk.en.pdf>
accessed 6 October 2017.
272
European Systemic Risk Board (n 271); Jill Treanor, 'Banks’ £30Bn In Compensation
Claims
And
Fines
'Pose
Risk
To
Stability'
(The
Guardian,
2015)
<https://www.theguardian.com/business/2015/jul/01/banks-30bn-in-fines-and-compensationclaims-pose-risk-to-stability> accessed 6 October 2017; Bank of England, ‘Financial Stability
Report’ (2015) <https://www.bankofengland.co.uk/financial-stability-report/2015/december2015> assessed 6 October 2017.
273
Benedict (n 266); Henry Hillman, ‘The Carrot Or The Stick: Finding A Balance In The
Regulatory Conundrum’ (2013) Financial Regulation International.
274
Wharton (n 267); Roman Tomasic, ‘The financial crisis and the haphazard pursuit of
financial crime’ (2011) 18(1) Journal of Financial Crime 7-31; Hannah Laming and Nicholas
Querée, ‘FSA v UBS: Will Big Fines Change Banks’ Attitudes To Risk Management?’ (2013)
Butterworths Journal of International Banking and Financial Law.
275
Tomasic (n 274); Perry et al. (n 234).
52
Legislative and Enforcement Responses in the UK and US
C.
Insider Dealing
Concluding remarks
While criminal approach still plays an important role in the legislative
responses, civil proceedings are more common in the enforcement responses. Thanks
to ‘credible deterrence’ policy, the authority pays attention to criminal proceedings. To
evaluate enforcement responses, there is a framework including five major criteria that
are whether criminal or civil sanctions are imposed; the number of prosecutions and
convictions; whether sanctions are imposed on individuals or organisations; actual
compliance of defendants; and actual effects.
Firstly, enforcement of criminal and civil sanctions is considered. In the UK,
FSA/FCA is the enforcement authority that has power to decide appropriate sanctions
and level of punishment. The UK sentencing model considers a set of criteria including
amount of profit gained or loss avoided, nature of employment, circumstances
resulting in insiders’ possession of privileged information, degree of sophistication,
whether other people involve in insider-dealing practice, whether misconduct is
reckless or deliberate, effects on victims and on public confidence276. It is a better and
more comprehensive model than US one277. However, FSA/FCA has been criticised
as civil sanctions are the major enforcement tool and there is a lack of criminal
proceedings. Recently, thanks to ‘credible deterrence’ policy, the authority has put a
high value on criminal proceedings. Secondly, since ‘credible deterrence’ strategy is
implemented, both the number of criminal convictions and the amount of civil fines
have increased. That may demonstrate the authority’s great effort to tackle insider
dealing. Between 2008 and 2016, 32 cases were criminally convicted by FSA/FCA278,
which is a significant increase compared to the small number of pre-2008 successful
276
Cheung (n 2).
Ibid.
278
Financial Conduct Authority (n 242).
277
53
Legislative and Enforcement Responses in the UK and US
Insider Dealing
cases brought by SFO and DTI. Thirdly, both criminal and civil approaches mainly
target individuals rather than organisations. In comparison with sanctions imposed on
individuals, cases where corporates are criminally held liable account for a small
proportion. There is a substantial need for both criminal and civil proceedings against
corporations, large-scale insider dealing conducted by a ring of insiders. Furthermore,
in terms of defendants’ actual compliance with judgement, some individuals plead
guilty in the early stage of investigation and make use of co-operation agreements with
the authority to fully provide information, to support investigation as well as prosecution
and to receive reduction in punishment in return. Although co-operation agreements
are helpful to assist the authority, there is a potential problem that those agreements
are abused by defendants. Finally, whether enforcement actions bring actual
protection to market participants is considered. The fact is that it is difficult to determine
exact victims of insider dealing and it is still controversial whether investors,
shareholders or the corporate are victims. Monetary fines commonly go to the
regulators rather than the ultimate victims. Thus, enforcement actions are seemingly
to punish wrongdoers rather than provide remedies for victims.
54
Legislative and Enforcement Responses in the UK and US
Insider Dealing
CHAPTER 4: THE UNITED STATES APPROACHES
Insider trading had not been regarded as an unlawful practice279. Since insidertrading regulation was first introduced in the US, the public viewpoint has changed
significantly. Insider trading is a form of cheating in the US and there is no tolerance
for insider trading280. Both US regulators and the public consider insider trading as a
serious crime, which is similar to the common belief in British society. While it was until
1980s that insider-dealing regulations were officially adopted in the UK, the US is the
first country that has regulated insider trading since 1930s.
I.
Legislative responses
A.
Development of insider-trading legislations in the United States
The Wall Street Crash led to Great Depression, which resulted in the
introduction of the Securities Exchange Act of 1934281 to ensure fairness in the stock
exchange, to protect market participants, public confidence and integrity of stock
markets282. This Act is the most frequently used legislation to deal with insider
trading283. Afterwards, the Insider Trading Sanctions Act of 1984284, the Insider
279
Case Goodwin v. Aggassiz 186 N.E. 659, Mass. 1933 referred in Stephen M. Bainbridge,
‘The Law and Economics of Insider Trading: A Comprehensive Primer’ (2001) SSRN
Electronic Journal.
280
Arthur Levitt, ‘A Question of Integrity: Promoting Investor Confidence by Fighting Insider
Trading’
(Securities
and
Exchange
Commission,
1998)
<https://www.sec.gov/news/speech/speecharchive/1998/spch202.txt > accessed May 2018.
281
Pub. L. 73 – 291, 48 Stat. 881. Hereinafter ‘SEA’.
282
Seredynska (n 2) at 37; Bainbridge (n 279).
283
Seredynska (n 2) at 37, 38; Michael V. Seitzinger, ‘Federal Securities Law: Insider Trading’
(Congressional Research Service 2016). The SEA allows SEC to adopt their own rules for the
purposes of protecting investors and public interest. Since 1942, rule 10b-5 has allowed SEC
to tackle securities fraud and insider trading in particular. Rule 10b-5 laid the foundation for
insider trading regulation.
284
Pub. L. 98 – 376, 98 Stat. 1264. Hereinafter ‘ITSA’. At that time, insider trading was
regarded as a severe threat that eroded public confidence, fairness and honesty of stock
markets. The Act was the regulatory response to deter insider-trading offences by increasing
sanctions. See Seitzinger (n 283).
55
Legislative and Enforcement Responses in the UK and US
Insider Dealing
Trading and Securities Fraud Enforcement Act of 1988285 and the Stop Trading on
Congressional Knowledge (STOCK) Act of 2012286 were adopted. These Acts provide
extra provisions and amendments to the SEA to create a comprehensive insidertrading regime.
For the purposes of this dissertation, the focus is on the SEA also known as the
main insider-trading legislation, the ITSA and the ITSFEA. Compared to UK insiderdealing legislations, in the US, there are no separate provisions that explicitly prohibit
insider trading287. The CJA and the FSMA in the UK are two comprehensive laws;
each of them covers insider-dealing offences, related definitions, defences and
penalties. Meanwhile, the SEA, the ITSA and the ITSFEA together contribute to an
insider-trading legislation. Relevant definitions are found in the courts’ judgements or
decisions instead of statutory provisions288.
Pub. L. 100 – 704, 102 Stat. 4677. Hereinafter ‘ITSFEA’. This Act increased the scope of
civil sanctions, so that an individual who does not adequately prevent insider trading is also
fined. See Seitzinger (n 283).
286
This Act prohibited governmental staffs and federal officials from taking advantage of
private information to trade on securities. See Seitzinger (n 283).
287
Anabtawi (n 80); Caccese (n 87); Micah A. Acoba, 'Insider Trading Jurisprudence after
United States v. O'Hagan: A Restatement (Second) of Torts 551(2) Perspective' (1999) 84
Cornell Law Review 1356 – 1362; Marco Ventoruzzo, ‘Comparing Insider Trading in the United
States and in the European Union: History and Recent Development’ (2014) European
Corporate Governance Institute Working Paper Series in Law No. 257/2014; Oliver Perry
Colvin, ‘A Dynamic Definition of an Prohibition against Insider Trading’ (1991) 31 Santa Clara
Law Review 603 – 640; Daniel L. Goelzer and Max Berueffy, ‘Insider Trading: The Search for
a Definition’ (1988) 39 (2) Alabama Law Review 491 – 530; Cindy A. Schipani and H. Nejat
Seyhun, ‘Defining “Material, Nonpublic”: What Should Constitute Illegal Insider Information?’
(2016) XXI Fordham Journal of Corporate and Financial Law 327 – 378; Sarah Baumgartel,
‘Privileging Professional Insider Trading’ (2016) 51 Georgia Law Review 71 – 119.
288
Goelzer and Berueffy (n 287); Schipani and Seyhun (n 287); Reinier Kraakman, ‘The Legal
Theory of Insider Trading Regulation in the United States’ in Klaus J. Hopt and Eddy
Wymeersch, European Insider Dealing: Law and Practice (Butterworths 1991) at 44.
285
56
Legislative and Enforcement Responses in the UK and US
B.
The Securities Exchange Act of 1934
1.
Section 10(b) and Rule 10b-5
Insider Dealing
Under US insider-trading regulations, there is a lack of separate provisions to
detect, prosecute and convict insider trading. To tackle insider trading, SEC makes
use of section 10(b)/rule 10b-5 which broadly target fraudulent or deceptive usage of
devices relating to security transactions289. Section 10(b)/rule 10b-5 does not explicitly
target insider trading290. Insider trading is considered as a fraud rather than a misuse
of information or market abuse as under UK legislations291. To establish a civil or
criminal liability or to claim for financial damages under section 10(b)/rule 10b-5,
several factors must be proved292.
Pub. L. 73 – 291, 48 Stat. 881 codified at 15 U.S.C. §78j(b). See Ventoruzzo (n 287);
Baumgartel (n 287); Kraakman (n 288) at 40; Tammy L. O’Leary and Timothy L. O’Leary, ‘The
Insider Trading Sanctions Act of 1984: Did Congress and the SEC Go Home Too Early?’
(1986) 19 University of California, Davis Law Review 497 – 537; Erica Clements, ‘The Seventh
Amendment Right to Jury Trial in Civil Penalties Actions: A Post-Tull Examination of the Insider
Trading Sanctions Act of 1984’ (1988) 43 University of Miami Law Review 361 – 418 at 391;
Michael Karsch, ‘The Insider Trading Sanctions Act: Incorporating a Market Information
Definition’ (1984) 6 Journal of Comparative Business and Capital Market Law 283 – 305 at
292; Barbara Bader Aldave, ‘The Insider Trading and Securities Fraud Enforcement Act of
1988: An Analysis and Appraisal’ (1988) 52 Albany Law Review 893 – 921; Carlyle H.
Dauenhauer, ‘Justice in Equity: Newman and Egalitarian Reconciliation for Insider-Trading
Theory’ (2015) 12 (1) Rutgers Business Law Review 41 – 96; Austin J. Green, ‘(Beyond)
Family Ties: Remote Tippees in a Post-Salman Era’ (2017) 85 Fordham Law Review 2769 –
2802; William F. Highbreger, ‘Common Law Corporate Recovery for Trading on Non-Public
Information’ (1974) 74 Columbia Law Review 269 – 298.
290
Kraakman (n 288) at 40; Karsch (n 289) at 292; Stephen M. Bainbridge, 'An Overview Of
US Insider Trading Law: Lessons For The EU?' (2005) SSRN Electronic Journal.
291
Ventoruzzo (n 287); Jeff Berman, Carlos Conceicao, Steven Gatti and Nick O’Neill, ‘The
US and EU – An ocean apart on insider dealing regulation?’ (Clifford Chance, 2015) <
https://www.cliffordchance.com/briefings/2015/06/the_us_and_eu_anoceanapartoninsiderde
alin.html> accessed May 2018.
292
Factors to establish a liability are existence of jurisdictional power relating to violation; proof
of manipulation including misrepresentation, omission or deception; materiality; evidence of
intent associated with malpractice and the relationship between deceptive conducts and
security purchase/sale. For plaintiffs who try to claim for financial damages, they must
demonstrate their position as security buyer or seller; his reliance and care; the causal link
between his loss and misconduct; damages with numerical evidence. See William K.S. Wang
and Marc I. Steinberg, Insider Trading (3rd edn, Oxford University Press 2010) at 102, 103.
289
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Legislative and Enforcement Responses in the UK and US
a.
Insider Dealing
Inside information
Inside information is defined as material non-public information293, so two key
elements are materiality and confidentiality.
Materiality is the significant probability that a reasonable investor will take into
account private information to make investment decisions294. Firstly, courts will assess
the degree of importance that people possessing information attached to it295. In Basic
Inc. v Levinson296, transactions made by insiders might be a signal of material
information, while in SEC v Texas Gulf Sulphur Co297, a major element was ‘the
importance attached to the drilling results by those who knew about it’. Secondly,
market reaction at the time information is public is examined298. In US v Carpenter299,
the court explicitly emphasised on large market effect to prove materiality. Price
movement is an indication of materiality, but it is controversial. In SEC v Tome300, SEC
v Talbot301, SEC v Michel302, SEC v Warde303, United States v. Mylett304, courts
alleged insider trading based on immediate increase in stock price when information
was officially announced. Similarly, evidence of materiality was a decline in price in
US v Heron305. However, price change is not regarded as a determinative or exclusive
factor in US v Bilzerian306, Geiger v Solomon-Page Group, Ltd307. Next, in case of
293
US v Svoboda, 347 F.3d 471, 475 n.3 (C.A.2 (N.Y), 2003).
Basic Inc. v Levinson, 485 U.S. 224, 231 – 232 (1988).
295
Wang and Steinberg (n 292) at 111.
296
Basic Inc. v Levinson (n 294).
297
SEC v Texas Gulf Sulphur Co, 401 F.2d 833 (2d Cir. 1968).
298
Wang and Steinberg (n 292) at 113.
299
US v Carpenter, 791 F.2d 1024 (2d Cir. 1986).
300
SEC v Tome, 638 F. Supp. 596, 623 (S.D.N.Y. 1986).
301
SEC v Talbot, 530 F.3d 1085, 1097 – 1098 (9th Cir. 2008).
302
SEC v Michel, 521 F. Supp. 2d 795, 825-826 (N.D. Ill. 2007).
303
SEC v Warde, 151 F.3d 42, 47 (2d Cir. 1998).
304
US v Mylett, 97 F.3d 663 (2d Cir. 1996).
305
US v Heron, 525 F. Supp. 2d 729, 744 (E.D. Pa. 2007).
306
US v Bilzerian, 926 F.2d 1285, 1298 (2d Cir. 1991).
307
Geiger v Solomon-Page Group, Ltd, 933 F. Supp. 1180, 1188 (S.D.N.Y. 1996).
294
58
Legislative and Enforcement Responses in the UK and US
Insider Dealing
tipping, the courts consider source of information and specificity as indicators of
materiality308 such as in SEC v Monarch Fund309 and SEC v Talbot310. In comparison
with UK requirements on material information, US criteria are quite similar but
commonly decided by case law rather than statutory provision. UK and US approaches
all face with legal uncertainty because there is no clear benchmark to determine level
of significance or specificity; and market reactions are mainly observed via price
movements, which is relatively controversial. However, there are several differences.
US approach does not attach to ‘significant effects’, which may broadly cover small as
well as large impacts and avoid defining threshold of significance. Besides, US
approach does not consider accuracy of information, and specificity element is taken
into account in case of secondary insider-trading offence only. Meanwhile, UK
legislation focuses on these two factors in both primary and secondary offences.
In terms of publicity, there are two major views311. The first view is that
information is released in the media and it helps investors make appropriate
investment decisions. Dissemination is not immediately associated with absorption312.
SEC has not provided any guidance to identify when and whether information is public,
which was disagreed in SEC v Dirks313. In SEC v Texas Gulf Sulphur Co.314 and SEC
v Lund315, although information was released, the disclosure was ineffective and
308
Wang and Steinberg (n 292) at 117.
SEC v Monarch Fund, 608 F.2d 938 (2d Cir. 1979). Key question was specificity of
information.
310
SEC v Talbot (n 301). The court considered whether information was from insider or not
and whether there was any implied certainty or specific quantification associated with
information.
311
Wang and Steinberg (n 292) at 143.
312
In SEC v Coates, 394 U.S. 976 (1969), the defendant was accused of insider trading
because information was just released but not totally disseminated and absorbed by the
public.
313
SEC v Dirks, 463 U.S. 646 (1983).
314
SEC v Texas Gulf Sulphur Co. (n 297) at 833, 853.
315
SEC v Lund, 570 F. Supp. 1397 (C.D. Cal. 1983).
309
59
Legislative and Enforcement Responses in the UK and US
Insider Dealing
insufficient to ensure information was available to investors. The second view based
on EMH theory is that if a large number of active investors know the information, it will
be reflected in security price and is regarded as being made public316. Relying on EMH
theory, courts rejected to hold defendants liable for inside information in SEC v
Monarch Fund317, SEC v Bausch & Lomb318, Catherines v Copytele, Inc.319, but in
SEC v Peters320 or In re Investors Management Co.321, the defendants’ argument that
rumours around the company were public was rejected. Generally, US requirements
on ‘made public’ factor are similar to the UK because rather than limit the coverage to
only corporate announcements, they extend the scope to information that is widely
known by the public. Nevertheless, US legislation requires information to be disclosed
and absorbed rather than disseminated, which is stricter and more rigid than the UK.
b.
The offenders
While in the UK, there is a statutory definition of ‘insider’, US statutes do not
give any explanation on ‘insider’322. Insider-trading prohibitions covers not only
corporate insiders but also outsiders such as third-party employees, congressmen,
government officials323. In the US, determination of offenders is strongly associated
with assessment of their duty, because courts rely on common-law principles to tackle
316
Wang and Steinberg (n 292) at 150.
SEC v Monarch Fund (n 309).
318
SEC v Bausch & Lomb, 565 F.2d 8 (2d Cir. 1977).
319
Catherines v Copytele, Inc., 602 F. Supp. 1019 (E.D.N.Y. 1985).
320
SEC v Peters, 735 F. Supp. 1505 (D. Kan. 1990).
321
In re Investors Management Co., 44 SEC 633 (1971).
322
Bainbridge (n 279); Eric Engle, ‘Global norm convergence: Capital markets in US and EU
law’ (2010) 21 European Business Law Review 465 – 490; Michael D. Mann and Lise A.
Lustgarten, 'Internationalization of Insider Trading Enforcement: A Guide to Regulation and
Cooperation' (1993) Practising Law Institute PLI Order No. 134-7024 January 14, 14-15.
323
Stephen M. Bainbridge, ‘Insider Trading Inside the Beltway’ (2011) 36 (2) The Journal of
Corporation Law 281 – 307.
317
60
Legislative and Enforcement Responses in the UK and US
Insider Dealing
frauds324. There is a requirement to demonstrate fiduciary relationship and duties to
hold the alleged liable for his wrongdoings325. However, no accurate requirements on
proof of which duties have been breached are found. After Chiarella and Dirks cases,
disclosure duty is the main category, but issues arise when insiders encourage others
to trade rather than trade by themselves326. Confidentiality duty was examined in
several cases327; however, it is inconsistent because same information can be
simultaneously used by many insiders328. A more reasonable requirement on fiduciary
duty is to stop self-dealing based on inside information329.
Offenders are classified as ‘insiders’, ‘tippees’ and ‘misapproriators’330. Firstly,
unlike UK approach in which ‘insider’ covers both primary and secondary insiders,
insiders under US legislation are literally people owning or working in the corporate331.
They must disclose private information or refrain from taking advantage of privileged
information to trade, which is the classical disclose-or-abstain rule332. This rule has
been questioned. In Chiarella and Dirks, only when the defendant has a fiduciary duty
that the company expects or requires him/her to keep secret, is the disclose or abstain
rule applied333. Similarly, in SEC v Switzer334, a person overhearing inside information
Bainbridge (n 279); O’Leary and O’Leary (n 289); Engle (n 322).
Bainbridge (n 279). There might not be a fraud merely arising from possession of private
information if the accused have no duty to disclose such as not being the company’s agent,
not having fiduciary relationship with the company or not being placed with sellers’ trust and
confidence. See SEC v Dirks (n 313) at 646, 653-655; US v Chiarella, 445 US 222, 235 (1980).
326
Bainbridge (n 279).
327
US v Libera, 510 US 976 (1993); US v Carpenter (n 299) at 1024, 1034.
328
Bainbridge (n 279).
329
Ibid.; SEC v Dirks (n 313).
330
O’Leary and O’Leary (n 289); Engle (n 322).
331
In re Cady, Roberts & Co., 40 SEC 907, 911 (1961).
332
SEC v Texas Gulf Sulphur Co. (n 297) at 833, 848; Shapiro v Merrill Lynch, Pierce, Fenner
& Smith, Inc., 495 F.2d 228, 236 (2d Cir. 1974).
333
SEC v Dirks (n 313) at 654, 655; US v Chiarella (n 325) at 232. A printer in Chiarella case
was not liable for insider trading because he did not owe fiduciary duty to the shareholders of
target company.
334
SEC v Switzer, 590 F. Supp. 756 (W.D. Okla. 1984).
324
325
61
Legislative and Enforcement Responses in the UK and US
Insider Dealing
from an insider’s conversation was not guilty of insider trading as he was not expected
to keep secret. However, reliance on the fiduciary relationship instead of nature of
malpractice was criticised, as the accused was able to gain profits from confidential
information, which was unfair and discouraged investors in the market 335. Secondly,
tippees are people obtaining information from insiders336. The tippee’s fiduciary duty
only arises when he reasonably knows that there is a breach of duty done by the tipper,
and the tipper’s duty is only breached when he gains benefit from the tip 337. This
discipline was also criticised as it created chances for tippees to benefit from unfair
informational advantages338. No existence of duty is a common defence used by
tippees. Provided there is no benefit for tipper or tipper is not an insider, both tipper
and tippee escape from liability; even when tipper breaches his duty, tippee is not
guilty if he is not aware of that breach339. Especially, when the ultimate tippee gets
information via several intermediaries, it is unlikely that he knows about the breach of
tipper’s duty. Determining who has fiduciary duty is difficult for courts340. Thirdly,
misappropriators are people whose dealing is based on confidential information
gained from third parties, so they breach a duty owed to owners of private information
rather than plaintiffs341. Under misappropriation theory, there is neither requirements
on fiduciary connection between the accused and plaintiff nor requirements to
demonstrate tipper’s breach of duty, which removes regulatory gaps and helps SEC
prosecute wrongdoers that are not guilty under the disclose-or-abstain rule or the
O’Leary and O’Leary (n 289).
Engle (n 322).
337
SEC v Dirks (n 313) at 660 – 670. In Dirks, an analyst, who was informed by insider that
there was a misstatement on the company’s assets, was not held liable because insider did
not benefit from information disclosure.
338
Davis (n 87); O’Leary and O’Leary (n 289); Engle (n 322).
339
Ibid.
340
Engle (n 322).
341
US v Newman, 664 F.2d 12, 17-18 (2d Cir. 1981); SEC v Musella, 578 F. Supp. 425, 438
(S.D.N.Y. 1984).
335
336
62
Legislative and Enforcement Responses in the UK and US
Insider Dealing
tipping theory342. In US v Newman343, SEC v Musella344 and SEC v Materia345,
defendants misappropriated takeover information and were accused of violating rule
10b-5. Nevertheless, problems still exist. Section 10(b) prohibits frauds relating to
manipulative or deceptive devices, but misuse or misappropriation of information
might not be a fraud346. Thus, misappropriation theory is inadequate to establish
liability under rule 10b-5. Although this theory solves issues of two previous rules
which focus on fiduciary duties rather than nature of misconducts, misappropriation
theory still involves ambiguous concepts of duty owed to information possessor347.
Furthermore, scienter348 is an important factor which includes actual awareness
of material non-public information and knowledge that information is material as well
as confidential349. The most straightforward circumstance is that the defendant is
directly prohibited from self-trading and tipping by the corporate or information
owners350. In case of misappropriators and tippees, they must be aware that misuse
of information is a breach of fiduciary duty351. In comparison with UK legislations,
element of the defendant’s actual knowledge under US regulations is similar.
Generally, both UK and US approaches cover a wide range of offenders and do not
limit the coverage to only people working in or owning the company. Three offender
categories in US case law match with three offences stated in UK statutes.
O’Leary and O’Leary (n 289).
US v Newman (n 341).
344
SEC v Musella (n 341).
345
SEC v Materia, 745 F.2d 197 (2d Cir. 1984).
346
O’Leary and O’Leary (n 289).
347
Ibid.
348
‘Scienter’ was defined as ‘a mental state embracing intent to deceive, manipulate or
defraud. See Ernst & Ernst v Hochfelder, 425 US 185, 194 n.12 (1976).
349
SEC v Dirks (n 313) at 646, 674; SEC v MacDonald, 699 F.2d 47, 50 (1st Cir. 1983); Elkind
v Liggett & Myers, Inc., 635 F.2d 156, 167 (2d Cir. 1980).
350
SEC v Peters (n 320); at 1505, 1520, 1521; SEC v Clark, 915 F.2d 439, 453 n.26 (9th Cir.
1990).
351
Langevoort (n 87); Wang and Steinberg (n 292) at 165.
342
343
63
Legislative and Enforcement Responses in the UK and US
2.
Insider Dealing
Section 16(b)
Section 16(b) directly regulates insider trading352. Section 16(b) is a selfexecuting provision which provides more approaches to deal with insider trading,
prevents insiders from manipulating security prices, saves regulatory costs and is
expected to have greatly deterrent effects353. Empirically, section 16(b) deters price
manipulation354, managers’ trading prior to takeover announcement355 and reduces
profits gained from insider trading356. However, several studies found that this section
actually does not prevent either short-swing or long-term insider trading357. It even
prevents shareholders from participating in corporate management, leads to higher
risks for active shareholders358 but provides insiders with much welfare by transferring
wealth from outsiders to insiders359.
This section was criticised due to its limited restrictions on insider trading 360.
Rather than disclosure requirements, it focuses on the reporting of insiders’
Pub. L. 73 – 291, §16(b), 48 Stat. 881 codified at 15 U.S.C. §78p. There are three methods
in which section 16(b) prohibits abusive conducts. Some specific insiders are required to
report their shareholdings and transactions on the corporate’s securities; they are prohibited
from short-selling activities relating to the corporate’s securities and must be liable for any
profit gained from short-swing transactions happening within less than six months.
353
Carlton and Fischel (n 51); ‘An Economic Analysis of Section 16(b) of the Securities
Exchange Act of 1934’ (1976) 18 William and Mary Law Review 389 – 428.
354
Michael Fishman and Kathleen Hagerty, ‘The mandatory disclosure of trades and market
liquidity’ (1995) 8 (3) Review of Financial Studies 637 – 676; Kose John and Ranga
Narayanan, ‘Market manipulation and the role of insider trading regulations’ (1997) 70 (2)
Journal of Business 217 – 247.
355
Anup Agrawal and Jeffrey Jaffe, ‘Does Section 16b Deter Insider Trading By Target
Managers?’ (1995) 39 Journal of Financial Economics 295 - 319.
356
Stephen L. Lenkey, ‘Insider Trading and the Short-swing Profit Rule’ (2017) 169 Journal of
Economic Theory 517-545.
357
Carlton and Fischel (n 51); William and Mary Law Review (n 353).
358
Charles Kahn and Andrew Winton, ‘Ownership structure, speculation, and shareholder
intervention’ (1998) 53(1) Journal of Finance 99–129.
359
Lenkey (n 356).
360
Ventoruzzo (n 287); Highberger (n 289); Bainbridge (n 290); Wang and Steinberg (n 292)
at 923; Agrawal and Jaffe (n 355) at 297; Nasser Arshadi and Thomas H. Eyssell, The Law
and Finance of Corporate Insider Trading: Theory and Evidence (Springer 1993) at 44, 51.
352
64
Legislative and Enforcement Responses in the UK and US
Insider Dealing
transactions. The scope of this section is also limited, because it only imposes
restrictions on certain individuals and issuers that meet registration or shareholding
requirements and only applies on transactions made within a short period361. Liability
under section 16 depends on insiders’ profit realisation instead of actual losses of
trading partners. Additionally, section 16 does not require proof of fraud; and rather
than authorise SEC to force disgorgement, it lets shareholders or managers take legal
actions, which rarely occurs as they have no incentive to do so.
3.
Section 32
Section 32 provides penalties imposed on violations of the SEA 362. Compared
to UK maximum imprisonment term, the US maximum period is shorter. Similar to the
CJA, section 32 of the SEA focuses on criminal sanctions that have been criticised
because of inefficiency363. Pecuniary penalties which are based on the amount of profit
gained or loss avoided364 have no deterrent effect, because wrongdoers consider fines
as a loss of their money and profit earned might outweigh fines and/or litigation
costs365. Deterrent impact of $10,000 maximum fine actually decreases due to
existence of inflation. Additionally, prosecution of criminal cases is difficult because of
high burden of proof and the fact that evidence is circumstantial366. Overall, criticisms
on criminal penalties under both UK and US systems are similar.
This section only targets corporate’s executives instead of any individuals having access
to private information and it does not include transactions that only sales or purchases occur.
362
Pub. L. 73 – 291, §32, 48 Stat. 881 codified at 15 U.S.C. §78ff. The maximum criminal
sanctions on individuals are $10,000 fine or 2-year imprisonment or both. In addition, if the
offender is an exchange, monetary penalty is up to $500,000. No imprisonment is imposed on
violations if the offender proves that he was not aware of regulations or rules.
363
O’Leary and O’Leary (n 289).
364
Elkind v Liggett & Myers, Inc. (n 349) at 156, 172; Wilson v Comtech Telecommunications
Corp., 648 F.2d 88, 94-95 (2d Cir. 1981).
365
O’Leary and O’Leary (n 289).
366
Ibid., Arshadi and Eyssell (n 360) at 49, 50.
361
65
Legislative and Enforcement Responses in the UK and US
4.
Insider Dealing
Concluding remarks
While statutes with regulatory requirements play a significant role in the UK
approach, the US system depends on insider-trading related judicial precedent. There
are no clear definitions of insider-trading offences, inside information and no clear
categories of offenders under US regulations. Critics have suggested that a statute
clarifying civil or criminal liabilities of insider trading should be enacted in the US 367.
Nevertheless, SEC stated that existing law effectively prohibited insider-trading
violations and rejected the need of statutory definitions because definitions might
involve uncertainties368. Case-by-case approach provides much flexibility and still
supports SEC to target insider trading369.
Firstly, US regulations to tackle insider trading are based on fraudulent
principles, so fiduciary duties are greatly examined. US case laws prohibit three
offences that are similar to those forbidden under UK statutes. Both individuals and
organisations are targeted under the SEA, which is broader than the CJA’s scope. The
US ‘dissemination and absorption’ rule seems to be more rigid than UK statutory
‘inside information’ definition. However, US requirements on fiduciary duties adversely
create chances for wrongdoers to escape prosecution. In terms of the coverage, UK
approach is clearer and more focused than US one. Secondly, due to importance of
case laws and lack of regulatory requirements in US system, uncertainty occurs and
Colvin (n 287); Milton V. Freeman, ‘The Insider Trading Sanctions Bill – A Neglected
Opportunity’ (1984) 4 (2) Pace Law Review 221 – 229; Donald C. Langevoort, ‘Setting the
Agenda for Legislative Reform: Some Fallacies, Anomalies, and Other Curiosities in the
Prevailing Law of Insider Trading’ (1988) 39 Alabama Law Review 399; Richard M. Phillips
and Robert J. Zutz, ‘The Insider Trading Doctrine: A Need for Legislative Repair’ (1984) 13 (1)
Hofstra Law Review 65 – 100; Lacey S. Calhoun, ‘Moving toward a Clearer Definition of Insider
Trading: Why Adoption of the Possession Standard Protects Investors’ (1999) 32 University
of Michigan Journal of Law Reform 1119 – 1145.
368
Kraakman (n 288) at 44; Aldave (n 289).
369
Goelzer and Berueffy (n 287).
367
66
Legislative and Enforcement Responses in the UK and US
Insider Dealing
court decisions might be affected by judges’ subjective viewpoints. The concepts of
‘inside information’ and ‘fiduciary duty’ are unclear and vague. There is no clear
guidance to determine which practices are fraudulent and who are accused of
misconducts under section 10(b)/rule 10b-5370. Even in the UK approach where there
are separate provisions to tackle insider dealing, ambiguousness and uncertainty still
exist. Thus, concerning clarity and certainty, both systems are ineffective. Similarly,
with regards to the ease for detection, investigation and prosecution, the CJA and the
SEA are ineffective as they focus on criminal approach, which requires high standard
of proof and places burden on prosecutors to find evidences. Especially, US approach
requests demonstration of fiduciary duties, which is more difficult. Finally, the SEA is
similar to the CJA in terms of criticisms of criminal sanctions. There is a need for civil
remedies and much focus on improving information disclosure. Despite requirement
on transaction reports of certain insiders, US approach does not mention proper
disclosure.
C.
The Insider Trading Sanctions Act of 1984 and the Insider Trading
and Securities Fraud Enforcement Act of 1988
1.
The Insider Trading Sanctions Act of 1984
Prior to the ITSA, criminal prosecution played the main role in prohibiting insider
trading and the authority did not place a high value on civil approach 371. Civil fines
were not included in SEC’s pre-ITSA sanctions, as SEC focused on injunction and
370
Scheppele (n 16); Schipani and Seyhun (n 287).
Arshadi and Eyssell (n 360) at 49; Carole B. Silver, ‘Penalizing Insider Trading: A Critical
Assessment of the Insider Trading Sanctions Act of 1984’ (1985) 1985 Duke Law Journal 960
– 1025 at 960, 961.
371
67
Legislative and Enforcement Responses in the UK and US
Insider Dealing
disgorgement372. These methods were ineffective373. Thus, the 1984 Act aims at
raising level of sanctions imposed on insider trading, enhancing civil enforcement and
improving administrative power of SEC374. Section 2(a) allows financial penalties
whose amount is ‘three times profit gained or loss avoided by insider trading’375.
Criminal fines can be up to $100,000 under section 3376, which is ten times maximum
level stated in the SEA. The increase in amount of financial sanction is expected to
have deterrent impacts, remove the SEA’s ineffectiveness and improve SEC’s
enforcement power377. Furthermore, the ITSA authorises SEC to initiate administrative
proceedings against reporting misconducts378, which extends SEC’s administrative
power379. This Act is believed to help SEC effectively enforce disclosure requirements
by targeting officers and directors, declining burden of proof, and providing much
Clements (n 289) at 378; Jonathan A. Blumberg, ‘Implications of the 1984 Insider Trading
Sanction Act: Collateral Estoppel and Double Jeopardy’ (1985) 64 North Carolina Law Review
117 – 157 at 121.
373
Silver (n 371) at 962; Blumberg (n 372); David M. Brodsky, ‘Insider Trading and the Insider
Trading Sanctions Act of 1984: New Wine into New Bottles’ (1984) 41 Washington and Lee
Law Review 921 – 941.
374
O’Leary and O’Leary (n 289); Clements (n 289); Wang and Steinberg (n 292) at 669;
Arshadi and Eyssell (n 360) at 49; Silver (n 371) at 960, 962; Blumberg (n 372); Brodsky (n
373); Brian G. Howland, ‘The Insider Trading Sanctions Act of 1984: Does the ITSA Authorize
the SEC to Issue Administrative Bars’ (1985) 42 Washington and Lee Law Review 993 – 1013
at 994, 1012; Michael J. Metzger, ‘Treble Damages, Deterrence, and their Relation to
Substantive Law: Ramifications of the Insider Trading Sanctions Act of 1984’ (1986) 20
Valparaiso University Law Review 575 – 617 at 580, 581, 583; Stuart J. Kaswell, ‘An Insider’s
View of the Insider Trading and Securities Fraud Enforcement Act of 1988’ (1989) 45 The
Business Lawyer 145 – 180 at 153.
375
Pub. L. 98 – 376, §2(a), 98 Stat. 1264 codified at 15 U.S.C. §78aa. Section 2 directly targets
misconduct of security purchase or sale based on material non-public information, explains
‘profit gained or loss avoided’ term and states that treble fines only apply to violations relating
to transactions via dealer, broker or exchange. See Pub. L. 98 – 376, §2, 98 Stat. 1264 codified
at 15 U.S.C. §78t.
376
Pub. L. 98 – 376, §3, 98 Stat. 1265 codified at 15 U.S.C. §78ff.
377
Schipani and Seyhun (n 287); O’Leary and O’Leary (n 289); Silver (n 371) at 963; Metzger
(n 374) at 595, 596; Donna M. Nagy, ‘Beyond Dirks: Gratuitous Tipping and Insider Trading’
(2016) 42 The Journal of Corporation Law 1 – 57.
378
Pub. L. 98 – 376, §4, 98 Stat. 1265 codified at 15 U.S.C. §78o. In case that there is noncompliance with SEC’s reporting regulations, SEC can publish a notice and then order
wrongdoers to make correction.
379
O’Leary and O’Leary (n 289); Nagy (n 377).
372
68
Legislative and Enforcement Responses in the UK and US
Insider Dealing
flexibility to make appropriate decisions such as administrative order or injunctive
relief380. In fact, under the ITSA, 40 cases were prosecuted and over $130million of
fines and disgorgement were imposed by SEC in 1987381.
There are still deficiencies that limit SEC’s power. There is lack of a statutory
definition of ‘inside trader’, a clear procedure to determine liability of secondary
wrongdoers as well as guidelines to assess and impose treble penalties382. That raises
problems of confusion, fairness and justifiable protection for defendants 383. A
defendant might face with double punishment including both criminal and civil
sanctions for the same offence, which violates the Constitution’s double jeopardy
clause384. Moreover, the ITSA only targets secondary-market transactions and ignores
face-to-face or primary-market trades385.
The ITSA is quite similar to the FSMA which authorises FSA/FCA to impose
civil sanctions or make public censures386. Nevertheless, the ITSA limits the maximum
level of fines while the FSMA does not. The limit might be advantageous, as it prevents
regulators imposing significantly large fines to create positive media effects and
artificially deterrent impacts. However, the limit may be ineffective in case of violations
involved in huge transactions whose values go beyond the fixed limit.
O’Leary and O’Leary (n 289); Green (n 289); Silver (n 371) at 964, 965.
Goelzer and Berueffy (n 287).
382
Goelzer and Berueffy (n 287); O’Leary and O’Leary (n 289); Clements (n 289) at 377;
Green (n 289); Wang and Steinberg (n 292) at 670; Arshadi and Eyssell (n 360) at 50; Silver
(n 371) at 963, 974, 979; Blumberg (n 372) at 118, 125; Brodsky (n 373) at 939; Silver (n 371)
at 963, 974, 979; Kaswell (n 374) at 153; Donald C. Langevoort, ‘The Insider Trading
Sanctions Act of 1984 and Its Effect on Existing Law’ (1984) 37 (6) Vanderbilt Law Review
1273 – 1298.
383
Clements (n 289) at 380; Silver (n 371) at 1025; Metzger (n 374) at 609.
384
Blumberg (n 372).
385
Arshadi and Eyssell (n 360) at 50.
386
Baumgartel (n 287).
380
381
69
Legislative and Enforcement Responses in the UK and US
2.
Insider Dealing
The Insider Trading and Securities Fraud Enforcement Act of 1988
The ITSFEA came into effect after US v Carpenter387 where misappropriation
theory was applied and difficulties for criminal prosecution were removed 388. The 1988
Act provided amendments to strengthen regulatory enforcement, restore public
confidence, maintain market integrity and fairness; though it was still criticised due to
the lack of statutory definitions and the ease to raise defence against new
provisions389.
Firstly, section 3(a)(2) authorises SEC to impose civil penalties on insidertrading offenders and on persons who manage wrongdoers390. In fact, this section
does not strictly target controlling persons, as the sole evidence of employment is
inadequate to establish liability for controlling persons391. Controlling persons are held
liable if SEC proves that they are aware of existence of violations but fail to
appropriately take preventative measures392. Establishing liability for controlling
persons’ failure to prevent misconducts demonstrates the wider coverage and stricter
regulation of US approach than UK one. Additionally, section 3(b) provides
amendments that brokers, dealers, investment advisers are supervised and requires
written procedures for prevention of information abuse393. The extension of a civilpenalty scheme creates an economic pressure for controlling persons to carefully
387
US v Carpenter (n 299).
Aldave (n 289); Kaswell (n 374).
389
Ibid.; Nagy (n 377).
390
Pub. L. 100 – 704, §3(a)(2), 102 Stat. 4677 codified at 15 U.S.C. §78u. Maximum penalty
imposed on primary offenders is three times the profit gained or loss avoided, but the amount
of fines on controlling persons might be up to ‘the greater of $1,000,000 or three times the
amount of the profit gained or loss avoided’ made by controlled persons.
391
Aldave (n 289); Kaswell (n 374); Bruce A. Teeters, ‘Insider Trading and Securities Fraud
Enforcement Act of 1988: Just How Much Are Employers Going to Pay’ (1990) 59 Cincinnati
Law Review 587 – 614.
392
Pub. L. 100 – 704, §3(a)(2), 102 Stat. 4677 codified at 15 U.S.C. §78u. Controlling persons
can be employers or anyone that can affect corporate policies or others’ activities.
393
Pub. L. 100 – 704, §3(b), 102 Stat. 4679 codified at 15 U.S.C. §78u. Persons failing to
comply with the regulations may face with SEC’s action or civil sanctions.
388
70
Legislative and Enforcement Responses in the UK and US
Insider Dealing
supervise their staffs; encourages corporates to establish internal systems such as
‘Chinese Walls’ for early prevention of wrongdoings and/or training sessions to
educate employees394. However, section 3 was theoretically criticised due to some
anomalies. According to misappropriation theory, corporates or employers are owners
of material non-public information and victims of informational abuse; so the question
is whether they should be held liable for failure to take preventive measures 395.
Importantly, maximum level of civil penalties on controlling persons is also
questionable. The amount of $1,000,000 or three times profit gained or loss avoided
has not been justified396. Whether amount of civil sanctions is fair is still questioned.
Secondly, section 4 amends criminal sanctions397, which broadens the scope
of organisational wrongdoers398 and increases maximum criminal punishment399.
Compared to UK criminal penalties, level of US sanctions is higher. Increase in amount
of monetary penalties may possibly remove inflation effect and create financial force
that deters wrongdoing. However, effects of this section are symbolic rather than
practical, as courts are unwilling to impose the maximum penalties400.
Thirdly, under section 5, there is a new section where a private right of action
also known as an express remedy is granted to investors contemporaneously
394
Caccese (n 87); Aldave (n 289); Arshadi and Eyssell (n 360) at 51; Teeters (n 391) at 589,
604, 605; Howard M. Friedman, ‘The Insider Trading and Securities Fraud Enforcement Act
of 1988’ (1990) 68 North Carolina Law Review 465 – 494 at 478.
395
Aldave (n 289).
396
Ibid.
397
Pub. L. 100 – 704, §4, 102 Stat. 4680 codified at 15 U.S.C. §78ff
398
Teeters (n 391) at 607, 608. ‘An exchange’ term is replaced by ‘a person other than a
natural person’.
399
Maximum level of criminal penalties imposed on individuals increases from $100,000 to
$1,000,000 and from five years to ten years. Similarly, amount of criminal fines on
organisations is up to $2,500,000 rather than $500,000.
400
Aldave (n 289).
71
Legislative and Enforcement Responses in the UK and US
Insider Dealing
transacting with insider-trading offenders401. This section is believed to indirectly
strengthen the misappropriation theory402. However, it neither provides remedy for
actual losses of insider-trading victims nor contributes to insider-trading law
enforcement403. It is difficult to exactly identify victims harmed by insider trading and it
is inconsistent if victims claim against their trading partners 404. In fact, this new section
does not grant a cause of action to actual but unidentified victims.
3.
Concluding remarks
The ITSA and the ITSFEA provide significant amendments to the SEA and
mainly concentrate on enforcement reforms. The ITSA focuses on enhancement of
civil penalties and SEC’s administrative power, whereas the ITSFEA targets
controlling persons, increases civil as well as criminal sanctions and introduces a
private right of action for contemporaneous traders. Firstly, two Acts extend the SEA’s
coverage by adding provisions to hold controlling persons liable. Criminal sanctions
for organisations are now applied to any ‘person other than a natural person’ instead
of only ‘an exchange’. Meanwhile, corporates’ criminal responsibility and controlling
Pub. L. 100 – 704, §5, 102 Stat. 4680 codified at 15 U.S.C. §78t-1. Contemporaneous
traders are entitled to sue investors who buy or sell securities on the basis of privilleged
information.
402
Chmiel (n 79); Kraakman (n 288) at 45; Teeters (n 391) at 599; Friedman (n 394) at 481;
Mark A. Clayton, ‘The Misappropriation Theory in Light of Carpenter and the Insider Trading
and Securities Fraud Enforcement Act of 1988’ (1989) 17 Pepperdine Law Review 185 – 215
at 210.
403
Chmiel (n 79) at 662; Aldave (n 289); Kaswell (n 374).
404
Aldave (n 289); William K.S. Wang, ‘Trading on Material Nonpublic Information on
Impersonal Stock Markets: Who is Harmed, and Who can Sue Whom Under SEC Rule 10b5? (1981) 54 Southern California Law Review 1217 – 1321. Two insider-trading perspectives
are the trade and the infromation nondisclosure. Investors harmed by the trade are people
whose security purchases or sales are less favourable than those in case that insider trading
does not exist. Meanwhile, victims of the nondisclosure are investors whose investment
decisions are less favourable than those possessing important and private information.
However, people trading based on inside information might not violate disclosure
requirements.
401
72
Legislative and Enforcement Responses in the UK and US
Insider Dealing
persons’ liability in the UK are likely to be excluded. Secondly, these Acts are mainly
amendments so problems of ambiguousness are rarely found. However,
inconsistency still exists since holding controlling persons liable seems to conflict with
misappropriation theory. In terms of legal procedures, civil approach under two Acts
removes difficulties of high standard of proof, which is similar to effectiveness of UK
civil regimes under the FSMA. There are still deficiencies such as lack of definitions
and guidance to determine secondary liability or actual victims and to enforce treble
sanctions. Finally, these Acts are expected to increase public confidence and enhance
protection for market participants by increasing level of fines imposed on wrongdoers
and granting remedy for inside-trading victims. That is similar to expected
effectiveness of the FSMA in the UK. However, effectiveness of higher level of
penalties and remedial measures is questioned. Seyhun concluded that enactment of
the ITSA and the ITSFEA did not decrease insider trading misconducts; volume and
profitability of insider trading even rose after those two Acts were implemented405.
Meanwhile, Eyssell and Reburn stated that the ITSA had deterrent effects on highprofile insiders’ selling behaviours406, and Garfinkel found that the ITSFEA might affect
insiders’ trading strategies as there was a delay in trading407. Persons confirmed that
both Acts substantially deterred insider-trading practices408.
Seyhun, ‘The effectiveness of the insider-trading sanctions’ (1992) 35 Journal of Law and
Economics 149–182.
406
Thomas H. Eyssell and James P. Reburn, ‘The Effects of the Insider Trading Sanctions Act
of 1984: The Case of Seasoned Equity Offerings’ (1993) XVI (2) The Journal of Financial
Research 161 – 170.
407
Garfinkel, ‘New evidence on the effects of federal regulations on insider trading: The Insider
Trading and Securities Fraud Enforcement Act (ITSFEA)’ (1997) 3 Journal of Corporate
Finance 89 – 111.
408
Obeua S. Persons, ‘SEC’s Insider Trading Enforcements and Target Firms’ Stock Values’
(1997) 39 Journal of Business Research 187 – 194.
405
73
Legislative and Enforcement Responses in the UK and US
D.
Insider Dealing
The US insider-trading theories
There are three theories in the American insider-trading doctrine.
Firstly, the equal access theory places a duty owed to the market that all
investors need to disclose information or avoid trading based on private information409.
The ‘disclose-or-abstain’ rule began and was followed by courts410 such as in Texas
Gulf Sulphur411. This theory is simple and helps identify insider-trading victims that are
uninformed investors412. However, its weakness was illustrated in Chiarella413 where
printer owed no duty of information disclosure to his trading partners 414. Additionally,
the equal access theory was misinterpreted based on contractarian ethics, because it
is difficult to determine why and how trading on the basis of privileged information is a
fraud415.
The second theory is the fiduciary duty one where disclosure duty resulting from
‘relationship of trust and confidence’416 is placed on insiders417. By taking advantage
409
Seredynska (n 2) at 41, 44; Ventoruzzo (n 287); Kraakman (n 288) at 40; Bainbridge (n
290) at 3; Arshadi and Eyssell (n 360) at 45; David Sims, ‘United States v. Carpenter: An
Inadequate Solution to the Problem of Insider Trading’ (1988) 34 The Wayne Law Review
1461 – 1484. According to this theory, it is unfair to exploit material non-public information that
is unavailable to other investors. Two elements of Rule 10b-5 are relationship granting
privileged access to confidential information and unfairness to other market participants due
to advantages of such information. See In re Cady, Roberts & Co. (n 331).
410
Bainbridge (n 279) at 12; Ventoruzzo (n 287); Colvin (n 287); Green (n 289).
411
SEC v Texas Gulf Sulphur Co. (n 297) at 833.
412
Kraakman (n 288) at 41.
413
US v Chiarella (n 325).
414
Seredynska (n 2) at 42; Colvin (n 287); Kraakman (n 288) at 41; Green (n 289); Anthony
Michael Sabino; Michael A. Sabino, ‘From Chiarella to Cuban: The Contributing Evolution of
the Law of Insider Trading’ (2011) 16 Fordham Journal of Corporate and Financial Law 673 –
741.
415
Scheppele (n 16). Informational advantages are neither unfair nor associated with
deception if information is gathered from self-research and thorough analysis independently
conducted by market participants. See Davis (n 87); J. Kelly Strader, ‘(Re)Conceptualizing
Insider Trading: United States v. Newman and the Intent to Defraud’ (2015) 80 Brooklyn Law
Review 1419 – 1485 at 1419, 1424.
416
US v Chiarella (n 325) at 230.
417
Anabtawi (n 80); Ventoruzzo (n 287); Baumgartel (n 287); Colvin (n 287); Kraakman (n
288) at 42; Bainbridge (n 290); Arshadi and Eyssell (n 360) at 46; Calhoun (n 367); Sims (n
409); Sabino and Sabino (n 414); Alexander F. Loke, ‘From the Fiduciary Theory to
Information Abuse: The Changing Fabric of Insider Trading Law in the UK, Australia and
74
Legislative and Enforcement Responses in the UK and US
Insider Dealing
of confidential information, insiders breach their duty of loyalty and fairness owed to
corporate shareholders418. This theory complies with common-law principles relating
to fraud, maintains pre-1980 case law and provides courts with much flexibility to
prohibit insider trading on case-by-case basis419. Nevertheless, fiduciary duty theory
has not solved Chiarella problems that there must be a true fiduciary relationship and
a true violation of fiduciary duties to establish liability under section 10(b)420.
Furthermore, fiduciary duty theory seems to limit scope of insider-trading laws as
prohibitions seemingly apply to only offenders working in the company421. Structural
changes that involve much complexity and anonymity, eliminate fiduciary relationship
between owners of private information and investors affected by informational abuse
are not reflected in the legal doctrine422.
Next, the third theory known as misappropriation theory targets market insiders
rather than only corporate insiders, as it states that transactions made on the basis of
material non-public information obtained by breach of confidentiality duty or theft are
unlawful423. This theory emphasises on breach of duty owed to information source,
broadens the coverage of insider-trading regulations424 and can be regarded as a
Singapore’ (2006) 54 The American Journal of Comparative Law 123 – 172; Martin Kimel,
‘The Inadequacy of Rule 10b-5 to Address Outsider Trading by Reporters’ (1986) 38 Stanford
Law Review 1549 – 1576; Douglas W. Hawes, ‘A Development In Insider Trading Law In The
United States: A Case Note On Chiarella v. United States’ (1981) 3 Journal of Comparative
Corporate Law and Securities Regulation 193-197.
418
Davis (n 87); Loke (n 417); Jill E. Fisch, ‘Start Making Sense: An Analysis and Proposal for
Insider Trading Regulation’ (1991) 26 Georgia Law Review 179 – 251 at 193.
419
Kraakman (n 288) at 43.
420
Sabino and Sabino (n 414).
421
Seredynska (n 2) at 42; Davis (n 87); Colvin (n 287); Kimel (n 417).
422
Scheppele (n 16).
423
SEC v. Rocklage, 470 F.3d 1, 5 (1st Cir. 2006). See Scheppele (n 16); Caccese (n 87);
Langevoort (n 87); Davis (n 87); Goelzer and Berueffy (n 287); Baumgartel (n 287); Colvin (n
287); Kraakman (n 288) at 44; Bainbridge (n 290); Engle (n 322); Arshadi and Eyssell (n 360)
at 48; Calhoun (n 367); Clayton (n 402); Sims (n 409); Sabino and Sabino (n 414); Loke (n
417); Hawes (n 417); Carlos Conceicao, Polly Snyder and Chris Stott, ‘US insider trading v
EU insider dealing: A difference more than in name’ (2015) XXXA Butterworths Journal of
International Banking and Finance Law 1 – 3.
424
Scheppele (n 16); Bainbridge (n 279); Baumgartel (n 287); Nagy (n 377); Kimel (n 417);
75
Legislative and Enforcement Responses in the UK and US
Insider Dealing
regime to protect property rights425. In Chiarella case, irrespective of existence of any
relationship to other investors, printer was accused of insider trading as he defrauded
his company. In US v O’Hagan426, O’Hagan did not have disclosure duty but still
breached ‘a duty of loyalty and confidentiality’ and defrauded principal of exclusive
information. However, limitations still exist. Misappropriation theory ignores that
information property right might distort establishment of liability427. According to this
theory, employer is entitled to own private information but in fact, public shareholders
can be assigned that ownership. Moreover, under this theory, tippees are rarely held
liable because they do not have a duty owed to information source428.
In short, US and UK insider-trading laws both seriously consider insider dealing
as a serious crime. Two systems cover similar offences and a broad range of
offenders. Unclear guidance and various difficulties in legal proceedings exist in both
systems. Thus, it is impossible to jump to a final conclusion on which system is better.
Importantly, there are some notable disparities between two legal approaches. Firstly,
US approach places a high value on protection for individuals and organisations that
possess material non-public information, so it focuses on fiduciary relationship and
duties owed to information owners429. Meanwhile, in the EU, especially in the UK, the
John P. Anderson, ‘Poetic expansions of insider trading liability’ (2017) Legal Studies
Research Paper No. 2017-09, Mississippi College School of Law 1 – 19; Michael D. Guttentag,
st
‘Selective Disclosure and Insider Trading: Tipper Wrongdoing in the 21 Century’ (2016) 69
Florida Law Review.
425
Langevoort (n 87); Stephen M. Bainbridge, ‘Insider Trading Regulation: The Path
Dependent Choice Between Property Rights and Securities Fraud’ (1999) 52 SMU Law
Review 1589 – 1651.
426
US v O’Hagan, 521 US 642 (1997).
427
Scheppele (n 16); Cox and Fogarty (n 17); Kraakman (n 288) at 46; Engle (n 322); Clayton
(n 402).
428
Davis (n 87).
429
Seredynska (n 2) at 49; Cox and Fogarty (n 17); Ventoruzzo (n 287); Conceicao et al. (n
423).
76
Legislative and Enforcement Responses in the UK and US
Insider Dealing
priority is to create a fair, moral and honest market where no participants can take
advantages of privileged information430. Secondly, case laws play a significant role in
the US approach while in the UK, role of statutory regulations is much higher than that
of lawsuits. The UK seems to possess more rigid statutory framework with more clearly
defined prohibitions than the US431. Thirdly, US regulations limit to securities and their
derivatives whereas the UK law targets a wider range including all financial
instruments and their derivatives432. Finally, US approach allows SEC to impose
administrative sanctions or civil penalties and the final option is to initiate criminal
proceedings433. Meanwhile, UK approach prefers criminal proceedings. One reason
for this discrepancy is that US society has considered civil law as a great importance
and a preferred alternative to criminal law, whereas UK society has held the strong
belief in the advantage of criminal approaches434. Another possible explanation is of
peculiar differences in legal systems including constitutional position, extent of
importance of authorities such as SEC or FSA/FCA435.
II.
Enforcement responses
A.
Enforcement authorities
In the US, enforcement bodies to tackle insider trading are SEC, DoJ and selfregulatory organisations436. For the purpose of this thesis, SEC and DoJ are analysed.
430
Ibid.
Cheung (n 2); Engle (n 322); Conceicao et al. (n 423).
432
Conceicao et al. (n 423).
433
Seredynska (n 2) at 50; Langevoort (n 382).
434
Rider (n 172) at 8, 9.
435
Ibid.
436
The self-regulatory organisations include the Financial Industry Regulatory Authority and
stock exchanges which must require their members to comply with securities law and are able
to impose monetary sanctions on wrongdoers. See David P. Doherty, Arthur S. Okun, Steven
F. Korostoff and James A. Nofi, ‘The Enforcement Role of The New York Stock Exchange’
(1991) 85 (3) Northwestern University Law Review 637; Lee A. Pickard & Anthony W. Djinis,
‘NASD Disciplinary Proceedings: Practice and Procedure’ (1982) 37 (3) The Business Lawyer
431
77
Legislative and Enforcement Responses in the UK and US
1.
Insider Dealing
The Securities and Exchange Commission
Similar to the FSA/FCA, the SEC is entitled to conduct investigations and
prosecutions against financial crimes. However, while the FSA/FCA can use both
criminal and civil tools, SEC only has the power to initiate civil proceedings 437. If
criminal prosecutions are required, SEC will refer to and co-operate with DoJ; but
SEC’s referral to DoJ rarely occurs438. SEC takes advantage of Big Data to detect
insider trading, support enforcement actions and strengthen market surveillance,
which is similar to FCA’s use of technology to tackle market abuse439. Thus, SEC is
believed to have better performance than DoJ and it puts a high value on monetary
sanctions440.
1213 – 1246; John E. Pinto, ‘The NASD’s Enforcement Agenda’ (1991) 85 Northwestern
University Law Review 739.
437
Wang and Steinberg (n 292) at 639, 640; Lev Bromberg, George Gilligan, Ian Ramsay,
‘Insider Trading and Market Manipulation: The SEC’s Enforcement Outcomes’ (2017) 45
Securities Regulation Law Journal 109 – 125. Civil proceedings include injunction, imposition
of fines, disgorgement, suspension, cease order and licence revocation.
438
Ryder (n 226); Huynh, ‘Preemption v. punishment: a comparative study of white collar crime
prosecution in the United States and the United Kingdom’ (2010) 9 Journal of International
Business and Law 105–135.
439
Nate Raymond, ‘Newest weapon in US hunt for insider traders paying off’ (Reuters, 2016)
<https://www.reuters.com/article/us-usa-insidertrading-insight/newest-weapon-in-u-s-huntfor-insider-traders-paying-off-idUSKBN12W2X4> accessed May 2018; Todd Ehret, ‘SEC’s
advanced data analytics helps detect even the smallest illicit market activity’ (Reuters, 2017)
<https://www.reuters.com/article/bc-finreg-data-analytics-idUSKBN19L28C> accessed May
2018.
440
Nicholas Ryder, ‘“Greed, for lack of a better word, is good. Greed is right. Greed works”:
A contemporary and comparative review of the relationship between the global financial crisis,
financial crime and white collar criminals in the U.S. and the U.K.’ (2016) 1(1) British Journal
of White Collar Crime 3-47.
78
Legislative and Enforcement Responses in the UK and US
Insider Dealing
Figure 4: Disgorgement, financial sanctions and enforcement actions441
SEC’s actions effectively reduced stock price of target firms because legal
expenses resulting from SEC actions are expected to be high; future earnings, cashflows and reputation might be negatively affected442. In the post-crisis period, amount
of fines and number of enforcement responses conducted by SEC substantially
increased (Figure 4). This post-crisis increase can also be seen in the UK responses.
In 2011 and 2012, SEC took 750 enforcement actions per year, which is the highest
level from 1990 to 2012. Especially, insider trading is one of SEC’s enforcement
priorities to ensure integrity and fairness of capital markets443. SEC has targeted a
huge number of individual and institutional suspects engaged in insider trading 444.
Sonia A. Steinway, ‘SEC Monetary Penalties Speak Very Loudly, but What Do They Say A Critical Analysis of the SEC's New Enforcement Approach’ (2014) 124 The Yale Law
Journal 209.
442
Persons (n 408).
443
Persons (n 408); Securities and Exchange Commission, ‘SEC Enforcement Actions –
Insider
Trading
Cases’
(Securities
and
Exchange
Commission,
n/d)
<https://www.sec.gov/spotlight/insidertrading/cases.shtml> accessed May 2018.
444
Securities and Exchange Commission (n 442). Defendants include professionals, fund
managers, corporate attorney, employees, managers or investment funds and banks. For
example, CR Intrinsic Hedge Fund and two others were held liable for $276m insider-trading
scheme in 2012 and they agreed to pay a fine of $600m in 2013. See Securities and Exchange
Commission, ‘SEC Charges Hedge Fund Firm CR Intrinsic and Two Others in $276 Million
Insider Trading Scheme Involving Alzheimer’s Drug’ (Securities and Exchange Commission,
2012) <https://www.sec.gov/news/press-release/2012-2012-237htm> accessed May 2018;
Securities and Exchange Commission, ‘CR Intrinsic Agrees to Pay More than $600 Million in
441
79
Legislative and Enforcement Responses in the UK and US
Insider Dealing
Although SEC explicitly stated that insider trading is its enforcement priority, the
number of enforcement actions and wrongdoers that were found guilty decreased from
2010 to 2017 (Figure 5). There is a possibility that SEC’s enforcement has deterred
insider trading, which leads to a decline in two indicators. However, the decline might
also be an evidence of SEC’s ineffectiveness in case that SEC fails to take actions
against insider-trading wrongdoers and defendants successfully escape from being
found guilty.
70
160
60
140
50
120
100
40
80
30
60
20
40
10
20
0
Number of people charged
Figure 5: Enforcement actions against insider trading445
Administrative proceedings
Civil actions
Number of defendants and
respondents
0
2010 2011 2012 2013 2014 2015 2016 2017
Largest-Ever Settlement for Insider Trading Case’, (Securities and Exchange Commission,
2013) <http://www.sec.gov/news/press/2013/2013-41.htm> accessed March 2018.
445
Data source: Securities and Exchange Commission, ‘Select SEC and Market Data – Fiscal
2010’
(Securities
and
Exchange
Commission
2011)
<https://www.sec.gov/files/secstats2010.pdf> accessed May 2018; Securities and Exchange
Commission, ‘Select SEC and Market Data – Fiscal 2011’ (Securities and Exchange
Commission 2012) <https://www.sec.gov/files/secstats2011.pdf> accessed May 2018;
Securities and Exchange Commission, ‘Select SEC and Market Data – Fiscal 2012’
(Securities and Exchange Commission 2013) <https://www.sec.gov/files/secstats2012.pdf>
accessed May 2018; Securities and Exchange Commission, ‘Select SEC and Market Data –
Fiscal
2013’
(Securities
and
Exchange
Commission
2014)
<https://www.sec.gov/files/secstats2013.pdf> accessed May 2018; Securities and Exchange
Commission, ‘Select SEC and Market Data – Fiscal 2014’ (Securities and Exchange
Commission 2015) <https://www.sec.gov/files/secstats2014.pdf> accessed May 2018;
Securities and Exchange Commission, ‘Select SEC and Market Data – Fiscal 2015’
(Securities and Exchange Commission 2016) <https://www.sec.gov/files/secstats2015.pdf>
accessed May 2018; Securities and Exchange Commission, ‘Select SEC and Market Data –
Fiscal 2016’ (Securities and Exchange Commission 2017) <https://www.sec.gov/files/201703/secstats2016.pdf> accessed May 2018; Securities and Exchange Commission, ‘Select
SEC and Market Data – Fiscal 2017 (Enforcement Information only)’ (Securities and
Exchange Commission 2018) <https://www.sec.gov/files/enforcement-annual-report-2017addendum.pdf> accessed May 2018.
80
Legislative and Enforcement Responses in the UK and US
Insider Dealing
SEC was criticised due to following issues. Firstly, SEC improperly focused on
large, wealthy and well-known defendants, so it might not target wrongdoers whose
misconducts are the worst ones and are significantly harmful446. SEC tends to target
huge ‘deep-pockets’ organisations that large fines cannot result in bankruptcy or
insolvency447. SEC is influenced by the publicity-seeking theory, so it has pursued
media-friendly cases and enforcement quality has declined448. Regarding this
publicity-seeking feature, SEC is similar to FSA/FCA. Besides, SEC seemingly
provides protection for predators with political and economic powers, rather than
maintenance of market integrity and public confidence449. Secondly, SEC’s
enforcement responses are not closely supervised, and SEC enjoys its powers instead
of being put under public pressure450. SEC can choose either administrative or civil
sanctions, but administrative tools are more preferred451. Moreover, organisations take
advantages of settlements to avoid being engaged in administrative or judicial
procedures, so ‘sue-and-settle’ lawsuits that allow institutional suspects to settle rather
than plead guilty of their misconducts were strongly criticised452.
446
Steinway (n 444).
James D. Cox, Randall Thomas, Dana Kiku, ‘Public and Private Enforcement of the
Securities Laws: Have Things Changed Since Enron?’ (2005) 80 (3) Notre Dame Law Review
893.
448
Stephen Choi, Anat Wiechman, Pritchard, ‘Scandal Enforcement at the SEC: The Arc of
the Option Backdating Investigation’ (2013) 15(2) American Law and Economics Review 542577.
449
Ryder (n 226) at 138; Edward Wyatt, ‘S.E.C. Is Avoiding Tough Sanctions for Large Banks’
(The New York Times, 2012) < https://www.nytimes.com/2012/02/03/business/sec-isavoiding-tough-sanctions-for-large-banks.html> assessed in March 2018; Nichols,
‘Addressing inept SEC enforcement efforts: lessons from Madoff, the hedge fund industry,
and title IV of the Dodd–Frank Act for the US and global financial systems’ (2011) 31
Northwestern Journal of International Law and Business 637–698. SEC was reluctant to bring
enforcement responses against powerful wrongdoers and usually granted exemptions for
systematically important corporations.
450
Steinway (n 444).
451
Ibid.
452
Ibid.; Edward Greene and Caroline Odorski, ‘SEC Enforcement in the Financial Sector:
Addressing Post-Crisis Criticism’ (2015) 16(1) Business Law International 5-19.
447
81
Legislative and Enforcement Responses in the UK and US
2.
Insider Dealing
The Department of Justice
The DoJ contributes to enforcement responses to financial crimes453. While
SEC can only bring civil actions against wrongdoers, DoJ conducts investigations,
prosecutions, convictions and actively pursues criminal lawsuits of serious white-collar
crimes454 such as mortgage frauds or LIBOR manipulation. However, DoJ failed to
initiate criminal proceedings against high-profile individuals and corporates455. DoJ’s
enforcement actions had small effects on large organisations456. With regards to
insider trading, DoJ’s criminal enforcement is less preferred than SEC’s civil tools457,
because civil approach plays an important role in the US society while criminal
approach is the final choice458.
In fact, DoJ has contributed to several cases such as US v Newman459, US v
Cheng Yi Liang460, US v Donald Johnson461, US v Joseph P. Nacchio462, Qualcomm
case463. Newman case is an important one, because Newman judgment resulted in
the fact that criminal convictions in numerous post-Newman cases were vacated and
453
Ryder (n 440).
Ryder (n 226) at 146. DoJ ‘has a long history of prosecuting financial fraud’ and is believed
to continue its objectives of deterring potential malpractices and convicting wrongdoers. See
McDonnell, ‘Don’t panic! Defending cowardly interventions during and after the financial crisis’
(2011) 116 Penn State Law Review 1–75; Charles Murdock, ‘The Dodd-Frank Wall Street
Reform and Consumer Protection Act: What Caused the Financial Crisis and Will Dodd-Frank
Prevent Future Crises’ (2011) 64 SMU Law Review 1243.
455
Ryder (n 440).
456
Aldrick, ‘JPMorgan agrees $13bn settlement with US Justice Department’ (The Telegraph,
2013)
<http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10391383/JPMorganagrees-13bn- settlement-with-US-Justice-Department.html> accessed March 2018.
457
Langevoort (n 382).
458
Seredynska (n 2) at 50.
459
US v Newman (n 341).
460
US v Cheng Yi Liang, No. 8:11-cr-00530-DKC-1.
461
US v Donald Johnson, No. 1:11-cr-00254-AJT-1.
462
US v Joseph P. Nacchio, No. 1:05-cr-00545-MSK-1.
463
The US Department of Justice, ‘Insider Trading Fraud’ (The US Department of Justice, n/d)
<https://www.justice.gov/criminal-fraud/insider-trading-fraud> accessed May 2018.
454
82
Legislative and Enforcement Responses in the UK and US
Insider Dealing
SEC faced with challenges to initiate civil proceedings464. Annulments raised the
concern that Newman decision might limit legal proceedings against insider trading465.
However, the courts denied at least 15 dismissals of indictments, plea withdrawals or
annulments, so Newman decision does not completely affect DoJ’s convictions 466.
Similarly, in the post-Newman period, SEC has continued to conduct civil proceedings
against insider trading. There were actions against 78 offenders in 2016 and against
87 offenders in 2015467.
B.
Criminal proceedings versus civil proceedings
1.
Criminal proceedings
In the US, the Sentencing Guidelines Manual468 considers profit gained or loss
avoided by defendants rather than actual loss of victims, as it is difficult to identify
victims and their losses469. While US sentencing model is a gain-based approach to
Christopher LaVigne and Brian Calandra, ‘Insider Trading Laws and Enforcement’ (2016)
Practical Compliance & Risk Management For The Securities Industry 17 – 24. For example,
DoJ dismissed indictments against a group of traders engaged in IBM Corporation’s takeover
of SPSS Inc, and DoJ continued to annul seven convictions including the case of Steinberg
who was accused of insider trading relating to Dell and NVIDIA stocks. See also US v Durant,
et al., No. 12-cr-00887 (ALC) at 10 – 11 (S.D.N.Y, 2014); US v Conradt et al., No. 12-cr-00887
(ALC) (S.D.N.Y, 2015).
465
Matthew Goldstein and Ben Protess, ‘Court Rejects Bharara’s Plea to Reconsider Insider
Trading
Ruling’
(The
New
York
Times,
2015)
<https://www.nytimes.com/2015/04/04/business/dealbook/appeals-court-rejects-request-torehear-landmark-insider-trading-case.html > accessed May 2018.
466
LaVigne and Calandra (n 464).
467
Ibid.; Securities and Exchange Commission (n 445).
468
Insider trading is considered as a sophisticated fraud; and this practice conducted by
individuals is assigned a base offence level of eight which leads to up to six-month
imprisonment and a fine ranging from $1,000 to $10,000. The base offence level may vary on
the basis of criminal history; whether defendants are employees, directors of the corporate,
investment advisors, brokers; number of victims and the amount of money relating to
misconducts. See Wang and Steinberg (n 292) at 632; The United States Sentencing
Commission, ‘United States Sentencing Guidelines Manual § 1A1.1 Commentary, Chapter
One,
Part
A(2)’
(The
United
States
Sentencing
Commission,
2009)
<https://www.ussc.gov/guidelines/archive/2009-federal-sentencing-guidelines-manual>
accessed May 2018.
469
The United States Sentencing Commission (n 468).
464
83
Legislative and Enforcement Responses in the UK and US
Insider Dealing
determine level of penalties, the UK considers a wider set of factors; so an AngloAmerican comparison shows that the UK model is better than the US470.
Furthermore, criminal sanctions have four goals: general deterrence, specific
deterrence, retribution and education471. Criminal punishment is believed to be a
viable method to tackle corporate misconducts, because criminal sanctions will result
in social advantage and use of criminal sanctions necessarily supports other
punishments472. However, UK and US laws rarely hold corporates criminally liable for
insider trading. Both SEC and DoJ failed to prosecute entities. Corporates are entitled
to settlements including plea agreements, DPAs, NPAs473; but the use of these
settlements is controversial. Criminal sanctions on corporates led to a serious downfall
of Arthur Andersen, which was believed to be avoided by NPA 474. DPAs and NPAs
might force corporates to stop wrongdoings, make corrections and save corporates
from unexpected insolvency; so these settlements recover public confidence and
prevent death penalty for corporates475. But DPAs and NPAs might make prosecutors
470
Cheung (n 2).
Stephen A. Yoder, ‘Criminal Sanctions for Corporate Illegality’ (1978) 69 (1) Journal of
Criminal Law and Criminology 40 – 58. General deterrence is to create legal threats that deter
not-yet-committed wrongdoings and specific deterrence is to prevent criminals from engaging
in further crimes; whereas retribution is a type of punishment that the society imposes on
wrongdoers to vindicate its anger and education goal can only be achieved when legal
proceedings are publicised in the mass media.
472
Yoder (n 471).
473
Cindy R. Alexander and Mark A. Cohen, ‘The evolution of corporate criminal settlements:
An empirical perspective on non-prosecution, deferred prosecution, and plea agreements’
(2015) 52 American Criminal Law Review 537 – 593.
474
Elizabeth K. Ainslie, ‘Indicting Corporations Revisited: Lessons of the Arthur Andersen
Prosecution’ (2006) 43 American Criminal Law Review at 107, 109; Ellis W. Martin, ‘Deferred
Prosecution Agreements: “Too Big Too Jail” and the Potential of Judicial Oversight Combined
with Congressional Legislation’ (2014) 18 North Carolina Banking Institute 161 – 182.
475
Martin (n 474); Peter J. Henning, ‘The Organizational Guidelines: R.I.P.?’ (2007) 116 The
Yale Law Journal Pocket Part 312; Elizabeth R. Sheyn, ‘Anything but a 'Racket': Why
Professor Epstein's Attack on the Nature and Function of Deferred and Non-Prosecution
Agreements Misses the Mark’ (2007) SSRN Electronic Journal; The US Department of
Justice, ‘Assistant Attorney General Lanny A. Breuer Speaks at the New York City Bar
Association’
(The
US
Department
of
Justice,
2012)
<
https://www.justice.gov/opa/speech/assistant-attorney-general-lanny-breuer-speaks-newyork-city-bar-association> accessed May 2018.
471
84
Legislative and Enforcement Responses in the UK and US
Insider Dealing
become judges, which blurs the separation of powers476; and these settlements
request entities to permanently co-operate with regulators477. Besides, effectiveness
of DPAs and NPAs are questioned478. These agreements might undermine authorities’
efforts of law enforcement479 and might not have same deterrent effects as traditional
agreements or criminal prosecutions480. DPAs are regarded as being similar to fines,
so they have few deterrent effects481.
2.
Civil proceedings
While UK ‘credible deterrence’ approach boosts criminal proceedings against
insider dealing, US system prefers civil enforcement responses. SEC has powers to
impose injunctions, disgorgements, monetary penalties, officer or director bars and
administrative remedies on insider-trading wrongdoers482. The civil enforcement
power granted to SEC is similar to the FSA/FCA’s power.
An injunction is to deter future misconducts instead of punishing wrongdoers,
but it can result in serious consequences such as suspension, revocation of
registration, disqualification or prohibition483. To determine whether injunction should
be issued, ‘a reasonable likelihood of future violations’484 will be examined485.
Richard A. Epstein, ‘The Deferred Prosecution Racket’ (The Wall Street Journal, 2006) <
https://www.wsj.com/articles/SB116468395737834160> accessed May 2018.
477
Brandon L. Garrett, ‘Structural Reform Prosecution’ (2007) 93 Virginia Law Review 853.
478
Alexander and Cohen (n 473); Martin (n 474).
479
David M. Uhlmann, ‘Deferred Prosecution and Non-Prosecution Agreements and the
Erosion of Corporate Criminal Liability’ (2013) 72 Maryland Law Review 1295 – 1344.
480
Alexander and Cohen (n 473); Kyle Noonan, ‘The Case for a Federal Corporate Charter
Revocation Penalty’ (2012) 80 The George Washington Law Review 602 – 631; Mary Kreiner
Ramirez, ‘The Science Fiction of Corporate Criminal Liability: Containing the Machine Through
the Corporate Death Penalty’ (2005) 47 Arizona Law Review 933 – 1002.
481
Martin (n 474).
482
Wang and Steinberg (n 292) at 647.
483
Ibid.
484
SEC v Advance Growth Capital Corp., 470 F.2d 40, 53 (7th Cir. 1972).
485
SEC v Aaron, 446 U.S. 680, 700–701 (1980); SEC v Cavanagh, 155 F.3d 129, 135 (2d Cir.
1998). Other factors include extent of involvement, nature of infraction, defendants’ awareness
476
85
Legislative and Enforcement Responses in the UK and US
Insider Dealing
However, due to severe consequences of injunctive relief, SEC is required to
demonstrate actual probability of recurrence rather than mere facts of past
wrongdoings486. There are several cases487 where SEC’s request for injunction was
denied because of insufficient proof.
With regards to monetary sanctions, although the ITSA and ITSFEA have
improved SEC’s power, they do not provide guidance to determine level of fines488.
Courts considered several factors such as severity, extent of scienter involvement,
isolation of violation489; wrongdoers’ financial worth and signal of concealment;
potential sanctions resulting from misconducts and whether defendants’ employment
is in the financial industry490. While UK guidance to determine whether a fine is
appropriate or which level of fine should be imposed is given in the FCA’s Handbook,
US approach relies on judgments so criteria vary on the case-by-case basis. However,
UK and US financial sanctions suffer from similar criticisms. Although the ITSA
requires that fines are up to triple profit gained or loss avoided, this requirement was
rarely applied because cases were early settled491, which is similar to the fact that UK
courts are reluctant to impose maximum sentences. US fines are also criticised
because losses resulting from fines are smaller than profit gained from wrongdoings;
fines paid by shareholders have few deterrent effects on individuals and corporates;
of wrongfulness, the likelihood of future misconducts, the defendants’ sincerity and assurance.
See SEC v Universal Major Indus. Corp., 546 F.2d 1044, 1048 (2d Cir. 1976); SEC v
Cavanagh, 155 F.3d 129, 135 (2d Cir. 1998); SEC v Spence & Green Chem. Co., 612 F.2d
896, 903 (8th Cir. 1980); SEC v Bonastia, 614 F.2d 908 (3d Cir. 1980); SEC v Commonwealth
Chemical Securities, Inc., 574 F.2d 90, 100 (2d Cir. 1978); SEC v Paro, 468 F. Supp. 635,
649 (N.D.N.Y. 1979).
486
SEC v Commonwealth Chemical Securities, Inc. (n 485).
487
Ibid.; SEC v Bausch & Lomb Inc (n 318); SEC v Happ, 392 F.3d 12 (1st Cir 2004); SEC v
Ginsburg, 242 F. Supp. 2d 1310 (S.D. Fla. 2002).
488
Wang and Steinberg (n 292) at 670.
489
SEC v Brethen, [1992–1993] Transfer Binder Fed. Sec. L. Rep. (CCH) ¶ 97,210 (S.D. Ohio
1992).
490
SEC v Sargent, 329 F.3d 34, 41–42 (1st Cir. 2003).
491
Bromberg et al. (n 437).
86
Legislative and Enforcement Responses in the UK and US
Insider Dealing
and fines lead to loss of public confidence rather than decrease in firm value 492.
Therefore, US monetary penalties neither effectively deter misconducts nor protect
interests of consumers and markets. These conclusions are similar in the UK.
C.
Concluding remarks
Civil proceedings play an important role in the UK and US; but unlike the UK,
criminal approach complements civil regime in the US. SEC is the major enforcement
authority that tackles insider trading. A five-factor analysis to assess effectiveness of
enforcement responses is applied to the US.
Firstly, US enforcement responses include both criminal and civil approaches,
though civil tools are mainly utilised. While FSA/FCA has power to initiate criminal and
civil proceedings, SEC can only adopt civil approaches to tackle insider trading and
DoJ focuses on criminal prosecutions. Thus, rather than requiring co-operation
between two separate bodies, granting much power for FSA/FCA seemingly helps the
authority work more flexibly493. Regarding sentencing models, the US model is not as
good as the UK model494. However, there were similar criticisms of monetary penalties
both in the UK and US. Secondly, SEC still considers insider trading as one of its
priorities and continuously takes actions against many insider-trading wrongdoers.
The fact that the number of insider-trading enforcement actions and wrongdoers
charged decreases does not sufficiently demonstrate SEC’s ineffectiveness. Besides,
there is lack of official statistics of the FSA/FCA’s insider-trading enforcement actions
as well as the US criminal proceedings, so it is impossible to compare between UK
and US approaches with regards to the number-of-convictions criteria. Thirdly, US
492
Steinway (n 444); Greene and Odorski (n 452).
Lambe (n 185).
494
Cheung (n 2).
493
87
Legislative and Enforcement Responses in the UK and US
Insider Dealing
authorities mainly target individuals rather than entities, which is similar to UK
regulators. Both UK and US authorities initiate legal proceedings against a wide range
of wrongdoers. Fourthly, regarding actual compliance of defendants, civil and
administrative sanctions are the major punishment, so neither late compliance nor
non-compliance is found. Although few entities are criminally held liable for insider
trading, the general issue in criminal proceedings against corporates is the use of
DPAs and NPAs whose efficacy is controversial. Finally, actual effects of insidertrading law enforcement are considered. The tightening of US regulation was found to
be effective as it greatly reduced insider trading495. Although initial enforcement of
insider-trading regulation results in higher potential profits, the toughness of the
regulation is negatively correlated with profits496. Insider-trading law in the US is the
toughest and insiders’ profits are the lowest, while the UK amount of insiders’ profits
is lower than other countries but still higher than the US497.
Anthony Boardman, Z. Stuart Liu, Marshall Sarnat and Ilan Vertinsky, ‘The effectiveness
of tightening illegal insider trading regulation: the case of corporate takeovers’ (1998) 8
Applied Financial Economics 519 – 531.
496
Arturo Bris, ‘Do Insider Trading Laws Work?’ (2005) 11 (3) European Financial
Management 267 – 312.
497
Ibid.
495
88
Legislative and Enforcement Responses in the UK and US
Insider Dealing
CHAPTER 5: CONCLUSION
Insider dealing is a market abuse offence where wrongdoers take advantage of
privileged information to purchase or sell securities for profit-making or loss avoidance
purposes. This thesis using a comparative methodology with legal-cultures approach
discusses ethical and economic characteristics of insider dealing, then analyses the
effectiveness of UK and US legislative and enforcement responses. It aims at
understanding two different approaches to tackle insider dealing and determining the
better system.
1.
Debates on insider dealing and insider-dealing laws
Insider dealing is analysed from the ethical and economic viewpoints. In terms
of ethics, insider dealing is regarded as an unfair practice, a fraud and a misconduct
associated with effortlessly significant profits. Regarding economic perspectives,
impacts on market including informative efficiency, price volatility, market liquidity and
effects on firms such as a form of compensation, firm value are considered. However,
arguments on insider-dealing characteristics are still controversial. Thus, there are
both approval and disapproval of insider-dealing regulations. Many researchers
believe that insider-dealing laws are essential to protect market participants and the
market; to maintain public confidence, market integrity and efficiency.
2.
The United Kingdom approaches to tackle insider dealing
In the UK, Part V of the CJA and Part VIII of the FSMA have been major insiderdealing provisions. While the CJA only established criminal liabilities, the FSMA added
civil sanctions on insider dealing. Part V of the CJA is regarded as a comprehensive
legislation that covers a broad range of insider dealing offences in relatively simple
language. However, there are several criticisms. Vague definitions and unclear factors
89
Legislative and Enforcement Responses in the UK and US
Insider Dealing
of offences or defences are stated under Part V of the CJA, which results in loopholes.
Criminal regime associated with high standard of proof creates obstacles in the
process of prosecution and conviction. There is a lack of civil remedies for insiderdealing victims and approaches to improve legitimate information acquisition.
Meanwhile, Part VIII of the FSMA is a complement of Part V of the CJA to tackle insider
dealing. It covers similar offences stated under the CJA and also has unclear
definitions. Importantly, the FSMA fills the regulatory gap by introducing civil regime
that lowers the burden of proof and improves successful rate of prosecution as well as
conviction. Although civil remedies under the FSMA are expected to have more
deterrent effects, empirical studies found that the FSMA was insufficient to deter
insider dealing in the chosen periods.
With regard to enforcement responses, the FSA/FCA is the enforcement
authority that can initiate both criminal and civil proceedings. Although the FSA
imposed numerous sanctions on individual and institutional wrongdoers, it was
criticised because the FSA paid great attention to political as well as media-friendly
factors and the value of fines was relatively smaller than profits gained from
wrongdoings. Meanwhile, the FCA is believed to be more proactive and serious than
the FSA. Generally, the FSA/FCA is criticised due to its major use of civil sanctions
and the lack of criminal proceedings. Thanks to ‘credible deterrence’ policy, criminal
proceedings play a more important role in the enforcement responses. Besides, the
authority’s great attempt to deal with insider dealing is demonstrated by the increase
in the number of successful criminal convictions and amount of fines. However, both
criminal and civil sanctions are mainly imposed on individuals rather than corporates.
Those sanctions seem to punish wrongdoers rather than provide remedies for victims.
90
Legislative and Enforcement Responses in the UK and US
3.
Insider Dealing
The United States approaches to tackle insider dealing
Unlike the UK approaches, there are no separate legislations that explicitly
regulate insider trading in the US. Firstly, the SEA is analysed. Insider trading is
regulated on the basis of fraudulent principles. Fiduciary duties play an essential role
in insider-trading laws, but requirements on fiduciary duties adversely help
wrongdoers escape legal proceedings. Although both US case laws and UK statutes
prohibit similar offences, UK laws are clearer and more focused than US ones. In
terms of certainty and ease for initiation of legal proceedings, the CJA and the SEA
are ineffective, because ambiguousness exists and these two Acts focus on criminal
sanctions. However, while definitions are explicitly stated in the UK laws, neither
guidance to determine insider-trading practices nor definitions related to insider
trading are found in the US statutes. Secondly, the ITSA and the ITSFEA are
discussed. These Acts broaden the coverage of US insider-trading laws and remove
difficulties of high standard of proof, but there is still a lack of statutory definitions and
guidance. Their effectiveness has been questioned by empirical studies. In general,
UK and US laws consider insider trading as a serious crime and still have difficulties
in the legal proceedings. While US laws aim at protecting owners of material nonpublic information, UK laws pay attention to the market’s integrity and fairness. Case
laws are more important than statutes in the US approach, which is different from the
UK one. Additionally, US insider-trading laws place a high value on administrative and
civil sanctions whereas UK legislative approach prefers criminal punishment.
In the US, SEC can only use civil tools and DoJ is responsible for criminal
proceedings, while the FSA/FCA has the power to take both civil and criminal
enforcement actions. Although SEC explicitly puts insider trading in the priority and is
believed to perform better than DoJ, SEC was criticised due to its target on ‘deep-
91
Legislative and Enforcement Responses in the UK and US
Insider Dealing
pockets’ defendants and its tendency to protect politically economically powerful
predators. Regarding civil and criminal enforcement, while UK authority places a high
value on criminal proceedings, civil enforcement actions still play an essential role in
the US. US sentencing models are based on gains of misconducts rather than a set
of criteria established in the UK models. However, both UK and US systems mainly
target individuals rather than corporates. In terms of actual effects, US insider-trading
law is tougher than UK law and it was empirically found that insiders’ profitability in the
US was lower than in the UK.
It is difficult to conclude which system is better, because each system
outperforms in several criteria. Although vague terms, uncertainty and difficulties in
the process of legal proceedings still exist in the UK and US legislative responses, UK
approaches seem to be more effective as there are separate insider-dealing
provisions and explicitly-stated definitions related to insider dealing offences. Despite
common criticisms on use and effectiveness of civil fines, US enforcement responses
might be better than UK responses in respect of actual effects. Therefore, further
studies should focus on the reforms to remove ambiguousness and increase
effectiveness of civil sanctions in both systems, to establish statutory definitions in US
approach and to improve efficiency of UK enforcement responses.
92
Legislative and Enforcement Responses in the UK and US
Insider Dealing
APPENDIX
Table 1: A summary of several criminal cases brought by the FSA and FCA498
Year
Case
2009
R v Christopher
McQuoid and James
William Melbourne
2009
R v Matthew and Neel
Uberoi
2010
R v Malcolm Calvert
2010
R v Anjam Ahmad
2010
R v Christian Littlewood
and Angie Littlewood
2011
R v Neil Rollins
498
Sentence
Facts
McQuoid – a general counsel at
8-month imprisonment
TTP Communications and his
for McQuoid
father-in-law, Melbourne were
8-month imprisonment
found guilty of insider dealing.
suspended for 12
Melbourne’s
profit
was
months for Melbourne
£48,919.20
Neel Uberoi is the father of
2-year imprisonment for Matthew Uberoi who was an
Neel Uberoi
intern of a corporate broking firm.
12-month imprisonment Neel Uberoi made around
for Matthew Uberoi
£110,000 profit on the basis of
his son’s information.
Calvert was a former marketmaker at Cazenove and gained
21-month imprisonment
£103,883 profit from insider
dealing
Ahmad was a trader and risk
10-month imprisonment
manager at AKO. He admitted
suspended for 2 years;
his insider-dealing practice and
£50,000 fine and 300
entered into an agreement with
hours of unpaid
the FSA to assist the prosecuting
community work
process
3-year-4-month
Christian Littlewood was a senior
imprisonment for
investment banker, who passed
Christian Littlewood
privileged information to his wife
Suspended 12-month and a friend named Helmy
imprisonment for Angie Sa’aid. They made a profit of
Littlewood
about £590,000
Rollins
possessed
inside
Simultaneously 15- and
information of PM Group Plc,
21-month
traded on privileged information
imprisonments for
and encouraged others to trade.
insider dealing
He also concealed his criminal
6-month imprisonment
asset by using two separate
for money laundering
accounts
Clarke (n 92) at 357 – 369.
93
Legislative and Enforcement Responses in the UK and US
2011
R v Helmy Omar Sa’aid
2-year imprisonment
2011
R v Rupinder Sidhu
2-year imprisonment
R v James and Miranda
2012
Sanders and James
Swallow
4-year imprisonment
and 5-year Directors
Disqualification Order
for James Sanders
10-month imprisonment
for Miranda Sanders
and James Swallow
R v Ali Mustafa, Pardip
Saini, Paresh Shah,
Neten Shah, Bijah
Shah and Truptesh
Patel
3-year-6-month
imprisonment for
Mustafa, Saini and
Paresh Shah
18-month imprisonment
for Neten Shah
2-year imprisonment for
Bijal Shah and Patel
2012
2012
R v Thomas Ammann
2-year-8-month
imprisonment
2013
R v Paul Milsom
2-year imprisonment
2013
R v Richard Joseph
4-year imprisonment
94
Insider Dealing
Sa’aid is a friend of Angie
Littlewood and was involved in
their insider-dealing.
Sidhu and Ahmad were engaged
in insider dealing related to 18
different shares. Profit earned by
Sidhu was £524,000.
James Sanders and James
Swallow were directors of a
broking firm. They traded five US
stocks
based
on
inside
information. James and Miranda
Sanders earned £1,533,749
profit whereas James Swallow
made a profit of £382,253.
These six people got privileged
information from two investment
banks’ printing rooms. Their
insider dealing was conducted
for a long period and total profit
was £732,044.59.
Ammann was an investment
banker
at
Mizuho.
He
encouraged his friends to trade
on his behalf but they were not
engaged in his trading. Ammann
still earned around €1million.
Milsom was a senior trader at
Legal and General. He admitted
disclosing information to another
person. They earned £400,000
profit, and Milsom gained
£164,000. Milsom received a
reduction due to his early
pleading
guilty
and
plea
agreement.
Joseph was a futures trader who
possessed inside information
from two investment banks. His
profit gained from insider dealing
was £591,117.
Legislative and Enforcement Responses in the UK and US
2014
R v Julian Rifat499
19-month imprisonment
2015
R v Ryan Willmott500
10-month imprisonment
12-month
imprisonment; £15,000
fine and a £203,234
Confiscation Order
4-year-6-month
imprisonment for
Dodgson
3-year-6-month
imprisonment for Hind
2015
R v Paul Coyle501
2016
R v Martyn Dodgson
and Andrew Hind502
2016
R v Damian Clarke503
2-year imprisonment
R v Mark Lyttleton504
12-month
imprisonment; a
£83,225.62 fine and a
£149,861.27
Confiscation Order
2016
Insider Dealing
Rifat was a senior trader at
Moore Capital Management Llc.
He pleaded guilty of disclosing
inside information and being
engaged in insider dealing
whose profit was over £250,000.
Willmott was a former manager
at Logica Plc. He admitted his
insider-dealing practice which
resulted in a profit of over
£30,000.
Coyle worked at Wm Morrison
Supermarkets Plc. He was
engaged in insider dealing and
earned over £79,000 profit.
They pleaded guilty of insider
dealing from 2006 to 2010.
Sentence imposed on Dodgson
was the longest term brought by
FCA.
Clarke was a fund manager and
also an equities trader. He
admitted using inside information
to conduct insider dealing. His
profit was over £155,161.98.
Lyttleton was a former manager
at
BlackRock
Investment
Management Ltd. He pleaded
guilty of two counts of insider
dealing.
Financial Conduct Authority, ‘Former Moore Capital trader pleads guilty to insider dealing’
(Financial Conduct Authority, 2014) <https://www.fca.org.uk/news/press-releases/formermoore-capital-trader-pleads-guilty-insider-dealing> accessed May 2018.
500
Financial Conduct Authority, ‘Former Logica PLC Manager pleads guilty to insider dealing’
(Financial Conduct Authority, 2015) <https://www.fca.org.uk/news/press-releases/formerlogica-plc-manager-pleads-guilty-insider-dealing > accessed May 2018.
501
Financial Conduct Authority, ‘Former Group Treasurer and Head of Tax at Morrisons plc
sentenced to 12 months imprisonment for insider dealing’ (Financial Conduct Authority, 2016)
<https://www.fca.org.uk/news/press-releases/former-group-treasurer-and-head-taxmorrisons-plc-sentenced-12-months> accessed May 2018.
502
Financial Conduct Authority (n 245).
503
Financial Conduct Authority, ‘Former equities trader at Schroders Investment Management
sentenced
for
insider
dealing’
(Financial
Conduct
Authority,
2016)
<https://www.fca.org.uk/news/press-releases/former-equities-trader-schroders-investmentmanagement-sentenced-insider-dealing > accessed May 2018.
504
Financial Conduct Authority (n 242).
499
95
Legislative and Enforcement Responses in the UK and US
Insider Dealing
Table 2: A summary of several civil cases brought by the FSA and FCA505
Year
2004
2005
Case
Individual or
Organisation
Penalty
Conduct
Robert
Middlemiss
Individual
£15,000
Insider dealing
Peter Bracken
Individual
£15,000
Insider dealing
Michael Davies
Individual
£1,000
Insider dealing
Jason Smith
Individual
£15,000
Improper
disclosure
Robin Hutchings
Individual
£18,000
Insider dealing
David Isaacs
Individual
£15,000
Insider dealing,
improper
disclosure
Arif Mohammed
Individual
£10,000
Insider dealing
Jonathan Malins
Individual
£25,000
Insider dealing
Philippe Jabre
Individual
£750,000
GLG Partners LP
Organisation
£750,000
James Boyd
Parker
Individual
£250,000
Insider dealing
Bertie Hatcher
Individual
£56,098
Insider dealing
2006
2008
Insider dealing,
breach of
FSA’s
Principles for
Approved
Persons
Insider dealing,
breach of
FSA’s
Principles for
Business
Profit gained or
Loss avoided
£6,825 loss
avoided
£2,824 profit
gained
£420 profit
gained
£4,924 profit
gained
£3,750 profit
gained
£6,400 profit
gained
$500,000 profit
gained
£121,742 profit
gained
£56,098 profit
gained
Clarke (n 92) at 495 – 500; Financial Conduct Authority, ‘FCA fines Interactive Brokers
(UK) Limited £1,049,412 for poor market abuse controls and failure to report suspicious client
transactions’ (Financial Conduct Authority, 2018) <https://www.fca.org.uk/news/pressreleases/fca-fines-interactive-brokers-uk-limited > accessed May 2018.
505
96
Legislative and Enforcement Responses in the UK and US
John Shevlin
Individual
£85,000
Insider dealing
Steven Harrison
Individual
£52,500
Insider dealing
2010
£38,472 profit
gained
€44,000 profit
gained
Richard Ralph
Individual
£117,691
Insider dealing ,
improper
disclosure
Filip Boyen
Individual
£81,983
Insider dealing
Stewart McKegg
Individual
£14,411
Insider dealing
£4,462 profit
gained
£12,691 profit
gained
£29,482 profit
gained
£14,411 profit
gained
Brian Valentine
Taylor
Individual
£4,642
Insider dealing,
improper
disclosure
Erik Boyen
Individual
£176,254
Insider dealing
£127,254 profit
gained
Individual
£59,500
Insider dealing
£86,030 profit
gained
Darwin Lewis
Clifton OBE
Byron Holdings
Ltd
2009
Insider Dealing
Organisation
Darren Morton
Individual
Christopher Parry
Individual
£86,030
Public
censure
Public
censure
Insider dealing
Insider dealing
Alexei KrilovHarrison
Individual
£24,000
Improper
disclosure and
encouraging
Mehmer Sepil
Individual
£967,005
Insider dealing
Murat Ozgul
Individual
£105,240
Insider dealing
Levent Akca
Individual
£94,062
Insider dealing
Robin Chhabra
Individual
£180,541
Sameer Patel
Individual
£95,000
Jeremy Burley
Individual
£144,200
Jeffery Burley
Andre Jean
Scerri
Perry John Bliss
Individual
£35,000
Improper
disclosure
Insider dealing
Insider dealing
and
encouraging
Insider dealing
Individual
£66,062
Insider dealing
Individual
£30,000
97
$66,000 loss
avoided
$66,000 loss
avoided
£267,005 profit
gained
£35,240 profit
gained
£10,062 profit
gained
£85,541 profit
gained and loss
avoided
£21,700 loss
avoided
£46,062 profit
gained
Legislative and Enforcement Responses in the UK and US
2011
2012
2016
Insider Dealing
William James
Coppin
Individual
£70,000
Improper
disclosure and
encouraging
David Massey
Individual
£150,000
Insider dealing
£111,474 profit
gained
David Einhorn
Greenlight
Capital Inc
Individual
£3,638,000
Insider dealing
£638,000 loss
avoided
Organisation
£3,650,795
Andrew Osborne
Individual
£350,000
Nicholas James
Kyprios
Individual
£210,000
Individual
£59,557
Public
censure
Gavin Breeze
98
Improper
disclosure
Improper
disclosure
Insider dealing,
improper
disclosure
£242,000 loss
avoided
Legislative and Enforcement Responses in the UK and US
BIBLIOGRAPHY
Primary sources
UK legislations
The Companies Act 1980.
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R. v Mcquoid [2009] EWCA Crim 1301, [2009] 4 All E.R. 388.
US legislations
The Securities Exchange Act of 1934.
The Insider Trading Sanctions Act of 1984.
The Insider Trading and Securities Fraud Enforcement Act of 1988.
The Stop Trading on Congressional Knowledge (STOCK) Act of 2012.
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101
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