Greed is Good
“Someone reminded me I once said, 'Greed is good'. Now it seems it's legal.” Gordon Gekko (Michael Douglas) in 'Wall Street: Money Never Sleeps'.
There has long been a perception that the Gordon Gekko types have been getting away with it for years. The Financial Services Authority (FSA), who regulate the City, have been promising for some years to get tougher on insider dealing. Sure enough, the FSA has undertaken more prosecutions in recent years than ever before; we predict that the offence of insider dealing will be a much more common-place listing in the Crown Court in the months and years to come.
SOCPS and Plea Bargaining
The increase in prosecutions has been made possible, partly by the use of the Serious Organised Crime and Police Act 2005; i.e. the powers therein to enter into immunity deals with suspects as well as being able to offer greatly reduced sentences in return for co-operation. There is also the Attorney General's Guidelines on Plea Negotiation which hold obvious attractions for both sides. The authors of this article are instructed in a case involving plea negotiations ahead of charge under these guidelines.
The modern law on insider trading is found in Part V of the Criminal Justice Act 1993. Section 52 of the Act provides that it is an offence for “an insider” to deal in “price-affected securities”. An 'insider' is an individual who has 'information' as someone on the inside. The information must relate to particular securities (e.g. stocks and shares) or issuer of securities, it must also be “specific or precise” information which has not been made public. Such an individual gains inside 'information as an 'insider' by virtue of his position in the company, for instance, a director, an employee etc or by reason of some other employment status or profession, e.g. an independent accountant advising the company.
The Americans can of course, and do, rely on 'phone intercept material - something not allowed in the Courts here. FSA regulations however have for some time required regulated businesses to record landline calls to and from its trading desks and also to record business calls made by staff on mobile phones (FSA Policy Statement 10/17, Taping of Mobile Phones, Nov. 2010).
The FSA will probably not exist in its current form in the next couple of years. Despite this however, the prosecutions of insider trading will continue. There will undoubtedly be an increase in co-operation between UK organisations such as City Police and the FSA but more importantly perhaps between the UK and foreign enforcement authorities. The increase generally in the use of plea negotiation as well as immunity from prosecution etc under SOCPA all guarantee that insider trading will become a much more common-place prosecution. Greed might be good, but it can be very costly too.
The defences are set out in Section 53 and include such defences as the defendant did not expect the dealings to result in a profit” or had reasonable grounds to believe “that the information had been disclosed” or that he would have “done what he did even if he had not had the information.” In addition there are four specified 'special defences' set out in Schedule 1 of the Act. Broadly speaking these are designed to ensure that the offences set out in Section 52 do not affect practices which have always been regarded as legitimate, e.g. having 'inside information' which is also just “market information”. Market information basically relates to information pertaining to the acquisition or disposal of particular securities and/or the fact that such transactions are under consideration or negotiation. Account is to be taken of whether the person was acting reasonably “despite having that information as an insider at the time” - these 'special defences' are simply broad and general in that they allow traders or buyers to plead that they were indeed doing no more than using information properly and reasonably with no intention of misusing inside information, particularly for personal gain.
The FSA has had since its beginning its own systems for monitoring movements within the markets. The FSA's figures showed that in the year end 2008, 53 out of 181 takeover transactions indicated an 'abnormal pre-announcement price movements' - i.e. just under 30% of the 181 transactions studied were announced to the world shortly after a sudden increase in the price of the company shares (see Compliance Officer Bulletin, Market Abuse, 2010).
However having a chat with a mate down the pub and getting him to buy shares that are about to increase in value is always going to be difficult to detect. That said, the more trusted associates/family members that are involved the greater the risk of compromise, hence the increased use of ingenuity on the part of those trading with inside knowledge. A typical example is the use of so-called Exchange Traded Funds (“ETFs”). ETFs are basically funds which comprise of a bundle of securities including shares. ETFs will be bought and sold in the same way as simple shares - unlike most conventional investment funds. Thus someone with inside information about company X can buy into an ETF that includes shares in company X and then short sell the other products - perhaps for a small loss. The effect is to hide the purchase of the shares because it is not purchased directly. A number of people have recently been charged in the US in relation to ETF trading.
Jonathan Lennon is a Barrister specialising in serious and complex criminal defence case at 23 Essex Street Chambers in London. He is a contributing author to Covert Human Intelligence Sources, (2008 Waterside Press) and has extensive experience in all aspects of the Proceeds of Crime Act 2002.
Aziz Rahman is a Solicitor - Advocate and Partner at the leading Criminal Defence firm Rahman Ravelli Solicitors, specialising in Human Rights, Financial Crime and Large Scale Conspiracies/Serious crime. Rahman Ravelli are members of the Specialist Fraud Panel.
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