What is Market Abuse & Insider Trading? How do the UK and US Compare?

2. 
The Rothschild´s secured
their fortune by accumulating
British Government securities
on the basis of advance
knowledge of Wellington’s
victory over Napoleon at
Waterloo.
2

3. 
Information asymmetry occurs when one party to a
transaction has information that the other party doesn’t.

Superior information where one party can use that
information for their own benefit at the expense of the other.

One party wins, one loses
3

4. 
The need for the market place to be fair, efficient and
transparent

Potential to undermine consumer confidence in the market

May lead to Systemic risk
4

5. Victimless
Crime?
Common perception of
White Collar Crimes as
“victimless” is false!
Value of securities
central to free market
economy- “demand
and supply”
Trading in stock based
on inside information
can artificially deflate
or increase prices
For example, selling
may increase downside
pressure on prices as
others may also follow:
“herd mentality”

6. 
Some economists and legal scholars argue that laws making
insider trading illegal should be revoked. They claim that
insider trading based on material nonpublic information
benefits investors, in general, by more quickly introducing
new information into the market

Legalization advocates also question why activity that is
similar to insider trading is legal in other markets, such as
land and housing
6

8. 
Asif Butt, 35, was supposed to block information leaks at
Credit Suisse First Boston (CSFB), but instead he used his
knowledge to make money

He used old school friends to place bets of up to £600,000
often minutes before major financial announcements

Mr Butt has been convicted of making at least £265,000,
though the police think the figure is closer to £2m

Mr Butt, was fired by CSFB in January 2002 when evidence of
his activities first came to light, and is thought to be the first
City compliance officer to be found guilty of insider trading
8

9. "If investors, large and small, come to the view that they cannot
trust the market and that people are habitually stealing a
market on them, the health of the financial services
industry.....will suffer severely."
9

10. 
The UK's financial regulator analysed takeover bids between
2000 and 2004 and said it had found unusual share price
movements before about 29% of them

Such movements "suggest some informed trading was
going on", said an FSA spokesman

The FSA added that the situation appeared to be getting
worse

Another study: FSA researched a total of 1,500
announcements by FTSE 350 members

Also found signs of informed trading before 21.7% of
announcements by companies listed on the FTSE 350 index
between 1998 and 2003
10

11. 
According to court documents the three, along with another
worker at Goldman Sachs, took part in an insider trading plot
that made more than $6.7m (£3.8m)

The Goldman workers are alleged to have bribed staff at a
printing plant to get early copies of Business Week magazine

The pair are also believed to have paid the Merrill analyst for
inside information on takeovers
11

12. 
Insider trading can happen in lots of different ways, and Barclays Bank
PLC chose an interesting one: using information from the creditors
committees of bankrupt companies to trade in their debt securities

Steven Landzberg, a defendant in the case along with Barclays, was the
bank's representative on the creditors committees for six different
companies, and as a member received private information about the
financial condition of the debtors

Landzberg's more important job at Barclays was as head of its U.S.
Distressed Debt Desk, which traded the bonds of companies in
bankruptcy, making it very hard to resist the opportunity to trade

SEC took action against Barclays

Barclays settled the case by agreeing to pay over $10.9 million sanctions
12

13. 
Illegal insider trading refers generally to buying or selling a
security while in possession of privileged, material, nonpublic
information about the security

Insider trading violations may also include "tipping" such
information, securities trading by the person "tipped," and
securities trading by those who misappropriate such
information
13

14. 
A broad range of individuals
 A partner in a law firm representing the acquiring company in a hostile
takeover bid who traded in target company stock
 A Wall Street Journal columnist who traded prior to publication of his
column in the stock of companies he wrote about
 A psychiatrist who traded on the basis of information learned from a
patient.
 A financial printer who traded in the stock of companies about which
he was preparing disclosure documents
NB: They do not necessarily have to be from the Inside!
14

15. 
Can be dichotomized into:
 Primary: Person who by virtue of their employment or involvement
with a company comes into possession of inside information.
Directors, employees, Shareholders, agents contractors etc.,
(US: referred to as ``access insiders``)
 Secondary: Person who receives information either directly or
indirectly, which they know is inside information and act upon it.
Sometimes referred to as ``Tippees``
15

16. Why Regulate
Insider
Trading?
Unfair practice to
public investors
Prohibiting it
promotes efficiency
of markets
Property of material
information belongs
to the corporation for
business purposes
Enforce rules of the
game
Protect the weak
from exploitation by
cynical operators.
16

17. 
In the U.S., insider-trading prosecutions are almost all based on the "classical
theory" of insider trading:


Purchase or sale of securities with guilty knowledge, while in possession of material,
nonpublic information in breach of a duty arising out of a fiduciary relationship to the issuer of
the security
The "misappropriation theory" of insider trading:

Misappropriation and trading on the basis of confidential information in a breach of a duty of
trust or confidence owed to the source of the information

Under current law and practice, a fiduciary or fiduciary-like relationship (or, in the case of a
claim under the misappropriation theory, a "duty of trust or confidence") is required to
impose insider-trading liability.

A fiduciary duty is a legal or ethical relationship of confidence or trust between two or more
parties.

Duty of confidence: obliges one party to respect the confidentiality of another. Information
obtained may be confidential, and must not be used for personal benefit

18. 
Under Section 118(2) of FSMA, market abuse is when "an insider
deals or attempts to deal, in a qualifying investment or related
investment on the basis of inside information relating to the
investment in question´´

An "insider" is any person who has inside information and he
knows, or is reasonably expected to know, is inside information

19. 
"Inside information" is information of a precise nature that
(a) is not generally available,
(b) relates, directly or indirectly, to one or more issuers of the qualifying
investments and
(c) would, if generally available, be likely to have a significant effect on
the price of the qualifying investments

Information is precise if it indicates circumstances that may
reasonably be expected to come into existence or occur, and is
specific enough to enable a conclusion to be drawn as to the
possible effect of those circumstances

20. 
FSA imposed a £7.2 fine on US hedge fund Greenlight Capital Inc. and its
owner, David Einhorn, in January 2012 for trading in shares of Punch
Taverns plc, a U.K. pubs business, ahead of a planned equity offering

Fine Imposed on the grounds that Greenlight traded on inside
information conveyed to Einhorn during a June 2009 conference call with
the CEO and corporate broker of Punch. During the call, Greenlight was
asked if it would be "wall crossed“

Greenlight declined, and the conference call was conducted on a
nonwall-crossed basis. However, during call, Einhorn learned that Punch
was considering an equity offering of around £350 million to retire
outstanding debt. Prior to the conference call, Greenlight held
approximately 13.3% of Punch's shares.

Following the conference call, it reduced its holdings to 9%, which
allegedly allowed Greenlight to avoid losses of approximately £5.8
million. The FSA determined that inside information was conveyed on
the conference call and Greenlight traded on this information in violation
of U.K. market abuse rules.

21. 
US lawyers and hedge fund traders outraged: Did not
believe what Mr Einhorn did was illegal

Greenlight's actions are unlikely to have constituted a
violation of the U.S. federal securities laws. Greenlight
and, by extension, Einhorn were not insiders with a
fiduciary relationship based on their shareholdings as
Greenlight was a noncontrolling shareholder

Greenlight and Einhorn did not take on any role that
would imply a fiduciary duty to Punch, and did not agree
to keep confidential the information disclosed or refrain
from trading

22. 
The FSA concluded Einhorn engaged in market abuse. Einhorn
had access to information by virtue of being a Greenlight
employee and a fund manager

Trading shares constituted dealing in a qualifying investment. The
information was inside information because it:
 Was not generally available (being conveyed only during the
conference call) and could not have been deduced by market
participants;
 Related to Punch and its shares;
 Was precise (the offering was reasonably likely to occur in the near
future) and specific enough to draw a conclusion as to the effect on
the share price; and
 Would have had a significant impact on the share price had the
information been generally available (a sizable equity offering would
likely depress the share price).

23. UK

The U.K. approach does not require a fiduciary or
fiduciary-like relationship or a duty of trust or
confidence between the source and recipient of the
information

Wider definition of insider dealing – anyone can be an
Insider if they reasonably know they have inside
information

24. 
If investors are not convinced that the markets are
reasonably fair, they will not invest

Societies where individuals do not respect the market rule of
law, or where law breakers are not found and punished, find
that financial markets cannot develop

In these cases, legitimate businesses operating those
countries lack access to capital, cannot invest, cannot create
jobs and cannot compete in international markets for their
products and services
24

26. 
The Market Abuse Directive came into force on 1 July 2005.
Aims to fight cross-border market abuse by establishing a
common approach among EU member states

Directive deals with insider dealing and market manipulation
(together, Market Abuse)

27. 
Seven types of behaviour can amount to market abuse:
1)
2)
3)
4)
5)
6)
7)

Insider trading
Improper disclosure
Misuse of information
Manipulating transactions
Manipulating devices
Dissemination
Distortion and misleading behaviour
Following examples illustrate Market Abusive behaviour
27

28. When an insider deals, or tries to deal, on the basis of inside information;
Improper disclosure and misuse of information are kinds of insider dealing

For example
 An employee finds out that his company is about to become the target of a
takeover bid
 Before the information is made public, he buys shares in his company because
he knows a takeover bid may be imminent
 He then discloses the information to a friend. This behaviour creates an unfair
market place because the person who sold the shares to the employee might
not have done so if he had known of the potential takeover
 The employee’s friend also has this information and could profit unfairly from
it
28

29. Where an insider improperly discloses inside information to another person
For example:
An employee finds out that his company is about to become
the target of a takeover bid. He then discloses the
information to a friend. Before the
information is made public, his friend buys shares in the
company because he knows a takeover bid may be
imminent.
This behaviour creates an unfair market place because the
person who sold the shares to the friend might not have
done so if he had known of the potential takeover.
29

30. Behaviour based on information that is not generally
available but would affect an investor’s decision about the
terms on which to deal
 An employee learns that his company may lose a significant contract
with its main customer
 The employee then sells his shares, based on his assessment that it is
reasonably certain the contract will be lost
 This behavior creates an unfair market place as the person buying the
shares from the employee might not have done so had he been aware
of the information about the potential loss of the contract

31. Trading, or placing orders to trade, that gives a false or
misleading impression of the supply of, or demand for, one or
more investments, raising the price of the investment to an
abnormal or artificial level

For example
 A person buys a large number of a particular share near the end
of the day, aiming to drive the stock price higher to improve the
performance of their investment
 The market price is pushed to an artificial level and investors get
a false impression of the price of those shares and the value of
any portfolio or fund that holds the stock
 This could lead to people making the wrong investment
decisions
31

32. Trading, or placing orders to trade, which employs fictitious
devices or any other form of deception or contrivance

For example
 Buying shares and then spreading misleading information with a view
to increasing the price (pump and dump)
 Using spam and other illegal marketing such as email and boiler
rooms to increase prices
 This could give investors a false impression of the price of a share and
lead them to make the wrong investment decisions
32

33. Giving out information that conveys a false or misleading
impression about an investment or the issuer of an
investment where the person doing this knows the
information to be false or misleading

For example
 A person uses an internet bulletin board or chat room to post
information about the takeover of a company
 The person knows the information to be false or misleading
 This could artificially raise or reduce the price of a share and lead to
people making the wrong investment decisions
33

34. Behaviour that gives a false or misleading impression of either the
supply of, or demand for, an investment; or behaviour that
otherwise distorts the market in an investment

For example
 The movement of an empty cargo ship that is used to transport a
particular commodity
 This could create a false impression of changes in the supply of, or
demand for, that commodity or the related futures contract
 It could also artificially change the price of that commodity or the futures
contract, and lead to people making the wrong investment decisions
34

35. Any Questions?