Insider Trading (Part 1) – General Introduction

Introduction 

Are you privy to confidential information of a company? If that information is capable of affecting the securities market, should it be made public? Have you made “money moves” or traded securities of the said company based on your knowledge of that information, or have someone do it on your behalf? 

If all your answers to the above are yes, then you may have just committed ‘market misconduct’ pursuant to section 188 of the Capital Market Services Act 2007, known as, Insider Trading. 

This article will briefly deal with the elements of insider trading and will look at the considerations Malaysian courts take into account when dealing with the issue.

Elements of Insider Trading

In the simplest of terms, the following are its elements: 

1. There is an insider
2. Insider possesses information of a company that is not made public (“material non-public information”)
3. The said information if made public (“information generally available”) would cause a material effect on the price or value of the said company’s securities
4. Insider or someone on the insider’s behalf has traded or made dealings with the said company’s securities

Who is an insider? 

Pursuant to section 188(1) CMSA 2007, an insider is a person who: 

1. Possesses information that is not generally available which on becoming generally available a reasonable person would expect it to have a material effect on the price or the value of securities; and
2. Knows or ought reasonably to know that the information is not generally available. 

While the term “insider” is used to refer to persons who were officers, agents, or employees of the company or of a stock exchange, the provisions under the CMSA 2007 may even include a stranger to the company. 

Even a stranger is an insider?

Yes. The Malaysian courts tend to use the case of R v Evans & Doyle [1999] VSC 488  to demonstrate the circumstances in which a stranger can amount to an insider. 

In the case of Evans (supra), Evans was a financial director of the company MPI Pty Ltd (“MPI”). MPI discovered nickel sulphide deposits on its mining lease located near Kalgoorlie. Knowing this, Evans then bought shares in Mt Kersey Mining NL (“Mt Kersey”) which owned mining leases in the adjoining tenements. He did so on the basis that the mineral deposits could be contained in the mining leases owned by Mt Kersey. If this was the case, Evans predicted that Mt Kersey’s share price would rise once the news of MPI’s discovery was made available to the public. 

What amounts to “information” in the context of insider trading?

Pursuant to section 183 of CMSA 2007, information includes: 

1. Matters of supposition and other matters that are insufficiently definite to warrant being made known to the public; 
2. Matters relating to the intentions, or likely intentions of a person; 
3. Matters relating to negotiations or proposals with respect to –
   1. Commercial dealings; or 
   2. Dealing in securities 
4. Information relating to the financial performance of a corporation
5. Information that a person proposes to enter into, or has previously entered into one or more transactions or agreements in relation to securities or has prepared or proposes to issue a statement relating to such securities; and 
6. Matters relating to the future. 

For the purposes of this misconduct, the information defined in section 183 also includes deductions or conclusions made or drawn from such information which was the case with Evans (supra).  

The Principal Prohibitions under Insider Trading 

There are two prohibitions governed by sections 188(2) and 188(3) of the CMSA 2007 and in brief they are: 

1. Trading prohibition – offence is created when an “insider” trades in securities in respect of which he or she possesses information not generally available, but if made available would have a material effect on the price or value of the securities in question.
2. Tipping prohibition – offence is created when a person in possession of material non-public information communicates that information to another person in circumstances where he knows or ought reasonably to know that the other person would trade in the securities in question or cause someone else to do so. 

It is important to note that the crucial difference between the two prohibitions is that the tipping prohibition only applies to listed securities but trading prohibition is not so limited.  

Conclusion 

Insider trading is a criminal offence under the CMSA 2007. Upon his or her conviction under either sections 188(2) or (3), the insider shall be punished to imprisonment for a term not exceeding 10 years and to a fine not less than RM1,000,000.00 (section 188(4) CMSA 2007). 

However, pursuant to section 201 of the CMSA 2007, persons who have suffered loss or damages due to insider trading may recover his or her losses via commencing a civil action against the insider. We will subsequently explore the institution of civil proceedings against an insider in our next article.