IN MAY 2009, the Monetary Authority of Singapore (MAS) took civil penalty enforcement action against Ms Chua Yang Joo for insider trading under Section 218(2)(a) of the Securities and Futures Act (SFA).
Ms Chua, who was the Company Secretary and Senior Vice President of Biosensors International Group, had sold 100,000 shares of her company outside of the blackout period prior to the release of Biosensor’s 2006 financial results.
Chua admitted to civil penalty liability and paid MAS a civil penalty of S$77,000 as she had possessed non-public price sensitive information relating to Biosensor’s 2006 financial results. Through her sale, Chua had avoided a loss of S$38,500 on the shares.
To shed more light on the rules against insider trading, we consulted Robson Lee
(
Q Does it look like company officials are barred from trading even outside of blackout periods?
Robson: Indeed, the law prohibits dealing while in possession of non-public price sensitive information, regardless of whether the trades are conducted during or outside the blackout period. Accordingly, market participants should not trade at any time while in possession of such information.
Q The key people who face risks seem to be those working within companies and come into price-sensitive information. Can you elaborate on who these people are defined to be?
Robson: They are “connected persons”, namely:
1) an officer of that corporation or of a related corporation;
2) a substantial shareholder in that corporation or in a related corporation; or
3) one who occupies a position that may reasonably be expected to give him access to information of a kind to which the section applies by virtue of –
(i) any professional or business relationship existing between himself (or his employer or a corporation of which he is an officer) and that corporation or a related corporation; or
(ii) being an officer of a substantial shareholder in that corporation or in a related corporation.
Q Who exactly is ‘an officer in relation to a corporation’?
Robson: Such an officer includes 1) a director, secretary or employee of the corporation; 2) a receiver, or receiver and manager, of property of the corporation; 3) a judicial manager of the corporation; 4) a liquidator of the corporation; and 5) a trustee or other person administering a compromise or arrangement made between the corporation and another person.
Q We know that insider trading involves the sale or purchase of securities. Are there other actions that are also so defined?
Robson: The prohibition against insider trading prohibits a person, who is connected to a corporation, from communicating price-sensitive information which he constructively knows will likely cause the other person to subscribe, purchase or sell the relevant securities or to procure another to do the same. A connected person needs only to be in possession of inside information at the time the prohibited acts were carried out in order to be liable. This is because Section 218 presumes that the connected person knew or ought to have known of the sensitivity and general unavailability of the information when the trading took place.
Q: What if price-sensitive information was communicated which influenced someone's decision - but did not lead to him buying or selling securities? For example, he received information which caused him to not sell a stock or not buy a stock. Is 'insider trading' involved?
Robson: Under the Act, an insider will commit the offence when he communicates price sensitive inside information to another person and the insider knows or ought reasonably to know that the latter would be likely to trade or procure another person to trade in securities.
Even if the person (the "tippee") receiving the inside tip decides not to buy or sell securities as a result of receiving the inside information, the insider would be deemed to have procured the tippee to have breached the insider trading rule within the meaning of the Act. It would however be easier to uncover an act of insider trading by an act of buying or selling of securities, as compared to an omission to buy or sell securities after receiving an inside tip.
Q: We have talked about people and insider trading. Can companies be said to be involved, inadvertently or otherwise, in insider trading?
Robson: Yes, companies, partnerships and limited liability partnerships can be liable for an insider trading breach. In particular, a company should not undertake share buy-backs before the announcement of any price sensitive information by the company. This is irrespective of whether the share buy-backs are undertaken outside of the share trades window restriction period.
A corporation is presumed to possess any information which an officer of the corporation possesses in the course of the performance of his duties as such an officer. Likewise, the partners of a partnership or limited liability partnership are presumed to possess any information which another partner possesses in his capacity as a partner of the partnership or limited liability partnership, or which an employee of the partnership or a manager of a limited liability partnership possesses in the course of the performance of his duties as such an employee or manager.
A company, partnership or limited liability partnership is entitled to raise the Chinese Wall defence if it can be established that there were arrangements operational within the organisation which evidence that the decision to enter into a securities transaction or agreement was taken by another person who did not receive any information or advice from the person who was in possession of the inside information at the time when the former made the decision to enter into a securities transaction or agreement on behalf of the corporation, partnership or limited liability partnership.
Q You used the term ‘connected persons”. Are there ‘unconnected persons”?
Robson: Yes, there are, and the requirements for making out an offence are stricter because non-connected persons do not generally have an informational advantage. First, the person in possession of the sensitive information must actually know that the relevant information is price sensitive to the relevant securities and that it is generally unavailable to the public. It need not, however, be shown that he intended to use the information.
Second, there must be actual possession of the sensitive information which is then 1) used to subscribe for, purchase or sell the relevant securities, or procuring another to do the same; or 2) communicated to another person where the ‘insider’ constructively knows will likely cause the other person to subscribe, purchase or sell the relevant securities or to procure a third person to do the same. Examples of subscribing for securities, where securities are accepted from issuers, include the taking of securities for cash with a liability to pay the nominal value and the taking of securities in exchange for shares. It is worthy to note that under both Sections 218 and 219, a corporation can constitute an insider for purposes of the prohibition against insider trading.
Q What are the defences against charges of insider trading?
Robson: There are 2 defences:
1) Unsolicited Transactions Defence: Situations may arise where a broker with inside information carries out a customer’s orders, exposing him to liability for insider trading. However, the broker may avail himself to the defence under Section 230 of the SFA in certain circumstances. A holder of capital market services license has a defence against insider trading where the licensed person trades on behalf of another person (a principal), under a specific instruction from the principal who is acting independently. The transaction must be an unsolicited transaction, and the licensed person has not given any advice to the principal or otherwise sought to procure the principal’s instructions to enter into the transaction. The principal must also not be an associate of the licensed person.
2) Parity of Information Defence: Where two transacting parties are in an equal informational position, Section 231 SFA provides a defense in situations where the counter-party to an otherwise prohibited dealing has actual or constructive knowledge of the sensitivity of the information when transacting. To invoke this defense, both parties to the prohibited dealing must have the same information or must have obtained the information in a manner that would ordinarily be made known to a person who commonly invests in such securities.
Parties dealing off market are deemed to be sophisticated investors who can be said to be in an equal informational position. An insider who wishes to deal in securities can raise this defense where the counterparty was also in possession of the information that is generally available and obtained by the counterparty without breaching the insider trading provisions, or the counterparty ought reasonably to have known of the information before the trade.
Q What might be exceptions?
Robson: They are the following:
1) Exception for withdrawal from registered scheme: The redemption of units in a collective investment scheme by a trustee or manager does not contravene the prohibition against insider trading. This exception is applicable only where the redemption is carried out in accordance with a buy-back covenant in a trust deed, which provides a reasonable basis by which the redemption price is to be calculated.
2) Exception for underwriters: Underwriting and sub-underwriting of issues of securities, and the subsequent sale of such securities, do not contravene the prohibition against insider trading. This is despite the communication of inside information by a person to another, provided the transmission of information is for the purpose of getting the person to enter into an underwriting agreement.
3) Exception for purchase pursuant to legal requirement: Purchases of securities made pursuant to legal requirements are excepted from the prohibition against insider trading.
4) Exception for knowledge of one’s own intentions or activities: Where individuals or corporations alike enter into transactions in relation to securities of which they have knowledge of their own previous actions or future intentions relating to the relevant securities, Section 228 and 229 of the SFA exclude such dealings from the insider trading prohibitions. An instance where this exception may be of assistance is where a person intending to launch a takeover bid makes market purchases before the takeover announcement is made.
5) Chinese wall exceptions within corporations and partnerships: Corporations and partnerships will not be found to have breached insider trading rules if the decision to enter into the transaction was taken by someone other than the officer or partner. There must have been in place, however, arrangements that could reasonably be expected to ensure that the information was not communicated and that the advice was not given to the person in possession of the advice, who subsequently entered into the transaction.
6) Other Exempted Transactions - (1) Stabilizing actions during IPO involving an over-allotment of securities and (2) Market maker The SFA also excludes from the insider trading prohibition stabilizing actions during an initial public offer involving an over-allotment of securities by a stabilizing manager or dealer and the exercise of a bank security over securities.
Q If the profit from an insider trading case is miniscule, is that possibly a defence?
Robson: No, the prohibition against insider trading applies no matter how small a profit was derived from the dealing. Consider the case of Mr Yap Siew. In September 2008, the MAS took civil penalty enforcement action against him for insider trading under Section 218(2)(a) of the SFA.
See Hup Seng Limited (“SHS”) announced on 25 July 2006 that it had entered into an acquisition agreement with CT Holdings Pte Ltd (“CTH”). Between 21 and 24 July 2006, Yap purchased a total of 900,000 SHS shares while he was in possession of non-public price sensitive information by virtue of being SHS’ consultant, and made a profit of S$4,020. Yap admitted to civil penalty liability for contravening the prohibition against insider trading and paid a civil penalty of S$50,000 to MAS.
Q Finally, what are the penalties for insider trading?
Robson: Civil Liability/Penalty
The MAS and persons who have suffered loss when trading contemporaneously with the contravening person may seek an order against the contravening person for the payment of a civil penalty and/or civil liability. The amount of civil liability that is payable is calculated by measuring the difference between the price of the securities at which the securities were dealt with in that transaction and their likely price if the contravention had not been committed.
Under Section 232 of the SFA, the court may, if satisfied that a person has contravened a provision in the SFA, Part XII, make an order against that person for the payment of a civil penalty of a sum not exceeding 3 times the amount of profit gained or loss avoided by that person, subject to a minimum of $50,000, where the contravention has resulted in the person gaining a profit or avoiding a loss. Where the contravention did not result in the person gaining a profit or avoiding a loss, the court may make an order against that person for the payment of a civil penalty of a sum between S$50,000 and S$2 million.
Criminal Sanctions
Alternatively, there can be criminal sanctions for breaching the prohibition against insider trading. Persons liable for insider trading shall be guilty of an offence and shall be liable on conviction to a fine not exceeding S$250,000 or to imprisonment not exceeding 7 years or to both. Courts have indicated that in insider trading cases, the punishment meted out must not only adequately punish the offender but also, must deter similar acts by other potential offenders.
Comments
has a still committed insider trading?