BBBL2113 INVESTMENT INDUSTRY LAW

Tutorial 13

Insider Trading, Fraudulent Market, Manipulation, Short Selling & Remedies

1. Ng is a dealer’s representative at Hwang-DBS Securities Berhad. He planned a trading

in which he obtained co-operation from another six individuals who agreed to allow Ng to
use their accounts for trading between 7 – 9 November 2006.

Ng used the 6 accounts to transact in large volumes of APLI Industries Bhd shares. This
caused a surge in the volume and price of APLI on the stock market. Ng together with
the six individuals made some RM2.1 million out of the trading activities within the 3
days.

a) Identify Ng has committed which type of prohibited markets conduct under the
Capital Markets and Services Act 2007.
b) What could be the possible consequences to Ng for having committed such an
act against the Capital Markets and Services Act 2007? Discuss.

a)
Issue: Which prohibited markets conduct Ng has violated?

Law:

S175(1) CMSA - No person shall do anything likely to create a false or misleading

appearance of an active trading in any securities on a stock market.

S175 (2) CMSA - No person shall use any fictitious transactions or devices which
maintain, inflate, depress the market price of any securities that does not involve
any change in the beneficial ownership of the securities.

S176 CMSA – No person is to take part in any transaction that has the effect of
raising, lowering or pegging, fixing, maintaining or stabilising the price of any
securities with the intention to induce other persons to transact on the securities
concerned.

Application:

Ng’s actions in collaborating with 6 other individuals to transact APLI Industries

Bhd shares had created a false or misleading appearance of active trading with
respect to the shares of APLI shares. Thus, violating S.175(1) CMSA.

The transactions are fictitious and inflated the share price of APLI Industries Bhd
as the share price surged. Since all 6 account holders cooperate in the
transaction, there are no changes in the beneficial ownership as Ng and the other
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6 are the beneficial owners despite on its surface there are changes in the
shareholders’ names. Thus, violated S.175(2) CMSA.

Ng and the other 6 have also violated S.176 CMSA as they took part in
transactions that have the effect of raising the share price with intention to induce
other to buy in the shares, which have then enabled them to make a profit of
RM2.1mil out of the shares’ sold.

Conclusion:
Ng has committed market manipulation and breached S.175(1), S175(2) and S.176
CMSA.

b)

Issue: What are the possible consequences to Ng for having committed market
manipulation?

Law:
Criminal liability
S.182 CMSA 2007 – a person who contravenes S175, S176, S177, S178, S179 or S181
commits an offence and on conviction shall be punished to imprisonment for a term not
exceeding 10 years and to a fine of not less than RM1 million.

S.200(1) CMSA 2007– any person who contravenes S175, S176, S177, S178, S179 or
S181, the Commissioner in the public interest may institute civil proceedings
notwithstanding the person has not been charged or convicted of the offence. 3x times
difference and RM1 mil penalty.

S.199 (1) CMSA 2007 - A person who suffers loss or damage by reason of, or by relying
on, the conduct of another person who has contravened section 175, 176, 177, 178, 179
or 181 may recover the amount of loss or damage by instituting civil proceedings against
the other person, whether or not the other person has been charged with an offence in
respect of the contravention or, whether or not a contravention has been proved in a
prosecution.

S.199(2) CMSA 2007 –This section shall not affect any liability under any other written
law in respect of the conduct constituting the contravention.

Conclusion: Ng may have to face either criminal or civil action instituted by the SC
under S.182 and S.200 of the CMSA as well as personal suit by the victims under
S.199 CMSA.

2. Yeo is a dealer's representative of Jupiter Securities Sdn. Bhd., on 2 December 1999 he

sold 40 lots of Transocean Holdings Berhad shares. At that time of selling, Yeo has yet
to acquire any shares of Transocean Holdings Berhad.
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Discuss whether such conduct is permissible under the Capital Markets and Services
Act 2007?

Issue: whether Yeo’s conduct is permissible under the CMSA 2007?

Law:

S98(1) CMSA – a person shall not sell securities unless at the time when he sells
them, he has an exercisable and unconditional right to vest the securities in the
purchaser.

S98(4) permits 5 exemptions: -

● Brokers who deal in odd lots may short sell those transactions. Odd lots are
small parcels of shares which are less than a marketable lot – S98(4)(a); X

● Securities sold by a person who has entered into a contract to buy the
securities but has not completed the purchase – S98(4)(b); X

● Sales of a class of securities as may be permitted by rules of stock exchange

– S98(4)(c); IDSS, PSS, RSS PT Day

● Sales of Securities permitted by Bank Negara transacted in the short term

money market – S98(4)(d); X

● Sales as may be prescribed by the Minister of Finance – S98(4)(e).

S98(2) – the penalty of anyone violating s.98(1) is a fine not exceeding RM5 million
or to imprisonment not exceeding 10 years or both.

Application: By selling shares that Yeo has yet to acquired, he has breached S.98(1)
CMSA unless such short selling falls under the 5 exemptions.

However, three out of the five exemptions will not apply:

1. Despite Yeo is a dealer representative, he is not trading on odd lots, instead he is
trading on 40 broad lots, thus, S.98(4) (a) exemption will not apply.
2. Since question mentioned it clearly that Yeo has yet to acquire any shares of
Transocean Bhd, S.98(4)(b) will not apply too.
3. As the transactions is on the share of a listed company, Transocean Bhd, it is not a
short term money market transaction and will not falls under S.98(4)(d)

As for the other two exemptions, there is lack of information in the question, if the short
selling is one permitted by the rules of stock exchange, or Minister of Finance, then
it could potentially fall under the exceptions in S.98(4)(c) or S.98(4)(e).
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Conclusion: Yeo could have involved in short selling which is prohibited conduct under
S.98(1) CMSA unless it falls under the two of the exceptions i.e S.98(4)(c) or
S.98(4)(e). If Yeo’s conduct does not fall under the exceptions, then, he could be
subjected to S.98(2) for a fine not exceeding RM5 million or to imprisonment not
exceeding 10 years or both.

3. Sally is one of the 3 officers of S Bhd. who negotiated a multi-billion deal with a Chinese
company in Shanghai. Sally knows that the shares of S Bhd. would rise sharply because
of certain information of this favorable deal which has yet been announced to Bursa
Malaysia and the public respectively. She quickly asked her boyfriend, Willy to buy large
number of the said shares and he bought.

(a) Discuss the offence(s) likely committed by Sally and Willy.

Issue: 1) which offence Sally is likely to have committed?

2) Which offence Willy is likely to have committed?

Law:

• Section 188 of CMSA - Insider Trading

• Insider trading or dealing is the purchase or sell of a company's securities effected by or
on behalf of a person with knowledge of relevant but non-public material information
regarding the company that may affect the price of the company's securities (price
sensitive information) if made public.

Who is insider?
S.188(1) CMSA– a person is an “insider” if that person possesses information that
is not generally available which on becoming generally available a reasonable
person would expect that information to have a material effect on the price of that
company’s securities AND knows or ought reasonably to know that the information is
not generally available.

What is “information”?
S.183 CMSA defines information to includes:-
(a) Matters of supposition and other matters that are insufficiently definite to warrant
being made known to the public
(b) matters relating to Intentions or likely intentions of a person
(c) Matters relating to negotiations or proposals with respect to commercial dealings
or dealings in securities
(d) information relating to financial performance of a company
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(e) 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.
(f) Matters relating to the future.

“Material effect on price or value of securities”

S.185 CMSA – an information that on becoming generally available would or would
tend to have a material effect on the price or value of securities. and would or would
tend to on becoming generally available, influence reasonable persons who invest in
securities in deciding whether or not to acquire or to dispose of such securities, or
enter into an agreement with a view to acquire or dispose of such securities.

The offence of insider trading can be committed in 3 separate ways by reading S188
of the provision in the CMSA 2007:-
(a) The trading offence – S188(2) (a) CMSA
(b) The procuring offence– S188(2) (b) CMSA
(c) The tipping-off offence– S188(3) CMSA

S.188(2) (a) CMSA The trading offence

A person commits a trading offence if the person trades in securities by acquiring
and/or disposing of them or to enter into an agreement to trade the securities using
material inside information (price sensitive information) that is not generally available.

S.188(2) (b) CMSA The procuring offence

An insider commits the procuring offence if he procures another person to trade or
to enter into an agreement to trade those securities concerned. ‘Procures’ means to
‘incite’ ‘induce’ ‘encourage’ and ‘direct’ that other person to it.

S.188(3) CMSA The tipping-off offence

An insider commits a tipping offence when he communicates the insider
information to another party whom the insider knows or ought reasonably to know
would either trade or would procure another person to trade those securities
concerned.

Application 1:

Based on S.188(1) CMSA, Sally is an insider because she possesses information

about the favourable dealing S BHd has secured, this information is not generally
available yet as it has not been announced at Bursa. Further, Sally knows that the
share price will go up once the information is made public. More importantly, she
knows the information has not been announced to Bursa yet.

The information with regard to S Bhd having secured a multi-billion deal with a
company from Shanghai is “matters relating to negotiations or proposals with respect
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to commercial dealings or dealings in securities”. Thus, it is an information defined in

S.183 ( c) CMSA.

As the information of S Bhd having secured a multi-billion deal with a company from
Shanghai will have caused the share price to shoot up when it is becoming generally
available, and reasonable investors will invest in the shares in view of the news, it is
considered as information that will materially affect the share price following S.185
CMSA.

When Sally asked her boyfriend, Willy to subscribe to the shares of S Bhd, Sally
would have committed procuring offence under S.188(2)(b). If in procuring Willy to
buy the shares, Sally did share with him the information, then Sally would have
committed tipping off offence under S.188(3).

Application 2:

Whether Willy is an insider depends on whether Willy did get to know about the
multi-billion deal sealed with the Shanghai company before it becomes generally
available to the public. If Willy knows about the insider information and still proceed
to buy the shares in reliance on the information, then Willy has breached S.188(2)(a)
CMSA trading offence. If Willy is not aware of the insider information, then he would
have not breached any laws.

Conclusion:
Sally has breached S.188(2)(b) procuring offence by asking Willy to buy S Bhd’s
Shares. If Sally did share the insider information then both Sally and Willy would
have committed tipping off offence (S.188(3)) and trading offence (S.188(2)(a))
respectively.

(b) The actions Securities Commission can institute against them.

Issue: what actions could SC took against Sally and Willy (assuming Willy is also an
insider)?

Law:
• Criminal liability
S188(4) CMSA – a person who commits any of the above offence on conviction can be
imprisoned for a term not exceeding 10 years and to a fine of not less than RM1
million.

• Recovery by civil action and claim for civil penalty.

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(i) CMSA empowers the Securities Commission to institute civil action against the
insider or other person involved in insider trading whether or not they have been
charged or convicted;
(ii) S.201(5) &(6) CMSA 2007 - The SC can institute civil action to recover an
amount equal to 3 times the difference between the price at which the securities
were disposed/acquired and the price likely to have been disposed/acquired.
(iii) The Securities Commission can also claim a civil penalty in such amount of not
more than RM1million as the court deems appropriate.

Conclusion: Sally and Willy may face criminal liability or civil liability if SC decided to take
an action against them.