Critical Appraisal Of The

Concept Of Insider Trading

Under Nigerian Company Law

Critical Appraisal Of The Concept Of Insider Trading Under

Nigerian Company Law

Abstract

Insider trading has been understood to

the act of dealing in unpublished price
sensitive information and it is seen to go
against the principle of equal access to
information. This work made an unfair
appraisal of the concept of insider
trading in Nigeria in the course of the
work. The origin of inside trading
regulation was examined and a cursory
literature review of the concept of insider
trading was made. In the courses of
examine the overview of this concept, the
argument both for and against the
prohibition of insider trading was made.
This study paid primary attention to the
prohibition of regulation of this concept
in Nigeria from its conception to date. A
look was taken at the regulation of the
concept in some other jurisdiction and
finally some recommendations were
made.

Chapter One

1.0 Introduction
As the business world continues to
expand in global markets, trading of
shares, bonds, derivatives and other
instruments continue to increase. One
corm of trading that has received
considerable interest in recent years is
insider trading. Insider trading occurs
when individuals with potential access to
non-public information about a
corporation buy or sell stock of that
corporation. When the information is
material and non-public, such trading is
illegal. In these cases, individuals are
aware non-public information gained
through the performance of their duties
and thereby are in breach of a fiduciary
or other position of trust. However, if the
trading is done in a manner that does not
take advantage of non-public
information, it is often permissible. For
example, if a director of a company
knows that the company is crashing due
to some unsuccessful business risks, and
then sells his shares knowing that the
board has decided to cut the dividend
and that this will be announced in a few
days, he is guilty of insider trading. In a
similar vein, where a director knowing
that diamond or has been discovered on
the company’s land, without the fat
being known to the public, buys more
shares in anticipation of a considerably
high rise in the value of shares, he is also
guilty of insider trading. It is clear that
the use of such “insider” information by
an insider to benefit himself at the
expense of others, not so well places, is
unfair. The director, as we have seen
earlier, owes a fiduciary duty to the
company, and so if he is allowed to use
his inside knowledge of the affairs of his
company for his personal benefit then a
conflict of interest is inevitable. This is
apart from the unfairness to the
individual shareholders.

Regulation and enforcement of insider

trading laws is important to investors for
a number of reasons. The first reason is
that investors are likely to be more
confident in the financial statements of
companies that operate in countries with
strong insider trading laws if such laws
are enforced consistently. In addition,
investments within such countries may
be viewed as less risky as the informant is
considered to be more reliable. Finally, as
risk and the return investors require on
an investment are positively correlated
investments may have a lower required
rate of return.

1.1 Background
Insider trading is one of the corporate ills
that have existed since the emergence of
the abstract entity known as company.
Incidentally, this corporate evil has
existed unchecked for over a century of
the development of company law. As
noted by Orojo , at common law no clear
prohibition was imposed on the use of
insider information except only in the
case of industrial and trade secrets. In
other respects, the directors or other
officers were free to hold and deal in the
shares of the companies. The lack of
legislative check on the ills of insider
trading was feature of company law in
most jurisdictions including Nigeria until
recently.

In the United Kingdom it was not until

the mid-80, whens Ivan Boesky, an
American admitted to large scale
dealings on the basis of insider
information, and handed over some 100
million USW Dollars of alleged profit to
the security and Exchange Commission
and other instances of the practice
involving ring of bankers, lawyers and
others that issues of insider trading came
to the Iront burner of company
legislation in England, ultimately
resulting in the passing of the Company
Securities (Insider Dealing) Act 1985.

The United States of America has

historically been the world leader in
insider trading law. In 1909, the US.
Supreme Court ruled in Strong v Repids
that because a company director could
affect the value of his company’s shares,
keeping buyers ignorant of his expected
actions while selling his own shares
would be deceitful and therefore
fraudulent. This case was the first major
step in the foundation for insider trading
in which an insider was obliged to
disgorge his ill-gotten gains to the
company or to the persons with whom he
dealt.

Insider trading was not treated as a

statutory offence in Nigeria until 1990.
The move towards a prohibition and the
regulation of insider trading in Nigeria
was orchestrated by the Nigerian Law
Reform Commission. The acknowledge
that insider trading was a serious
malpractice. The recommendation of eh
commission led to the enactment of
provisions on insider trading prohibition
in Section 614 – 620 cof the companies
and Allied Matters Act 1990. The
provisions were copied from the English
Company Securities (Insider Dealing) Act
1985. However, the above provisions of
CAMA turned out to be inadequate and
ineffective for purpose of combating
insider trading, because for almost ten
years after its inception, no person was
successfully prosecuted under the
sections. Consequently, the provisions
under CAMA were repealed and replaced
by the Investment and securities Act
1999. The 1999 Act has been repealed and
replaced by the Investment and
Securities Act 2007. The new provisions
like its predecessors have its own flaws as
not person is also yet to be reported to
have been convicted of insider trading.

1.2 Statement of the Problem

One of the major challenges which
various jurisdictions across the globe is
facing in respect of companies is the
control of insider trading. There are
some countries that are at eh forefronts
in the fight against insider trading and
they include the United States of
America, the Greek, British, etc.

Insider trading being a global issue is

also being tackled in Nigeria. Nigeria
woke up to the fact that insider trading is
a serious malpractice in 1988 following
the report of the Nigerian Law Reform
Commission. In accordance with the
recommendation of the commission
several laws have been made to control
this corporate. Regrettably, unlike what
the position is in the United State, British
and some other jurisdictions, no
successful conviction has been recorded
for insider trading in Nigeria in spite of
the metamorphosis we have had in the
laws regulating insider trading in Nigeria
that has made it difficult for the law to
successfully catch at least one person.

1.3 Research Question

Against the background of the research
objectives, the following are the research
question for investigation.

1 What is insider trading?

2 What is an insider?

3 Who is a connected person?

4 What is unpublished price

sensitive information?

5 To what extent has the

Investment and Securities Act

2007 assisted in the light

against trading in Nigeria?

6 Is there the need for

amendment?

1.4 Aims and Objectives of the

Study
The broad aim of this work is to do a
critical appraisal of the concept of insider
trading under Nigerian company law. To
this end, the specific objectives of the
work include:

1 To give a general overviews of

the concept of insider trading

2 To assess the effect of insider

trading on the development of

Nigeria.

3 To analyze the approaches to

insider trading

4 To appraise the role of the

Security and Exchange

Commission in the Securities

Act relating to insider trading

have succeeded or failed in its

quest to control insider trading

in Nigeria.

1.5 Research Method

In the course of doing a critical appraisal
of the concept of insider trading under
Nigerian company law, the researcher
adopted hermeneutical of the various
materials studied.

1.6 Significant of the Study

The important of this work stems from
the huge benefit it will bring to everyone
that may develop an interest in the
elimination of insider trading in Nigeria.
A remarkable and interesting
contribution of the study is the boost
that the findings from the investigation
will give to everyone interested in the
fight against the menace called insider
trading.

In addition to the aforementioned

significance of the study is the fact that it
will add to the studies previously carried
out in respect of insider trading which
will at the same time reinforce the
prevailing opinion among scholars.

1.7 Limitation and Scope of the

Study
To complete this work without an
expression of the imitation encountered
may amount to an unhealthy
presumption. To this end, the work set
out to critically appraise the concept of
insider trading under Nigerian company
law. Though this work may appear to be
comprehensive, it cannot be said to be an
exclusive appraised of the concept of
insider trading under Nigeria company
law.

Another limitation encountered in the

course of this study is scarcity of local
material dealing on insider trading
despite the fact that insider trading is not
a new concept. There is also a limitation
in respect of time. Since this study has to
be concluded within a few months, the
line needed to thoroughly investigate is
short.

1.8 Definition of Terms

1.8.1 Insider
The black’s law dictionary simply defined
insider thus:

A person who has knowledge of fails not

available to the general public; 2. One
who takes part in the controls of a
corporation, such as an officer or director
is one who owns 10% of more of the
corporation stock .

The term insider is, however,

comprehensively defined under Section
315 of the investment and securities Act
thus
“Insider” means:

(a) Any person who is connected with the

company in one or more of the following
capacities

A director of the company or a

related company;

An officer of the company or a

related company;

An employer of the company or a

related company;

An employee of the company

involved in a professional or

business relationship to the

company.

Any shareholder of the company

who owes 5 percent or more of

any class of securities or any

person who is or can be deemed

to have any relationship with the

company or member;

Member of audit committee of a

company; and

(b) Any of the person listed in paragraph

(a), who by virtue of having been
connected with any other way, possesses
unpublished price sensitive information
in relation to the securities of the
company is reference to information
which:

Relates to specific matters

relating or of concern (directly or

indirectly) to that company that

is, is not of a general nature

relating or of concern to that

company; and

Is not generally known to those

who are accustomed to or would

be likely to deal in those

securities but which would, if

were generally known to them be

likely material to affect the price

of those securities.

1.8.2 Trading
The Black’s Law Dictionary simply
defined the term “trading’ thus

The business of buying and selling,

especially, of commodities and securities.

1.8.3 Insider Trading

It has been explained that insider trading
occurs where an individual or
organization buys or sells securities
while knowingly in possession if some
piece of confidential information which
is not generally available and which is
likely if made available to the general
public, to materially affect the price of
these securities.

Under the Investment and securities Act

2007 insider trading was termed “insider
dealing” and defined thus
Insider dealing includes insider trading
and occurs when a group of persons who
being in possession of some confidential
and price sensitive information not
generally available to the public, utilizes
such information to buy or sell securities
for the benefit of himself, itself or any
person.

The Black’s Law Dictionary define

trading as the use of material, nonpublic
information in trading the share of a
company by corporate insider or other
person who owes fiduciary duty to the
company. This is the classic definition.
The Supreme Court has also approved a
broader definition known as the
“misappropriation theory” the deceitful
acquisition and misuse of information
that properly belongs to persons to
whom one owes a duty.

1.8.4 Securities
The Black’s Law Dictionary defines
security as collateral given or pledged to
guarantee the fulfillment of an
obligation; especially the assurance that
a creditor will be repaid (usually with
interest) any money or credit entered to a
debtor. An instrument that evidences the
holder’s ownership rights in a firm (e.g a
stock), the holder’s creditor relationship
with a firm or government (e.g; a bond),
or the holder’s other rights (e.g. an
option)
Under the Act the term securities was
elaborately defined thus

Securities means