Insider Trading (SEBI)
Insider Trading (SEBI)
Insider Trading (SEBI)
Avoid Losses
- Martha Stewart avoided a loss of $45, 673
Who are Insiders?
Types of Insiders
Officers
(10%)
PRIMARY INSIDERS…contd.
Constructive insiders
Persons who are not employed by the
corporation but receive confidential
information from a corporation while
providing services to the corporation.
e.g. professional advisers, lawyers, investment
bankers
SECONDARY INSIDERS
Accidental Insiders
Not liable for insider trading unless their
behavior proves otherwise
SECONDARY INSIDERS
Tippee
Tipper Tippee
Dirks v. SEC
Who are Insiders?
SEBI Defn.
A person who is or was connected to a
company or deemed to have been connected
with the company, and is reasonably expected
to have access to unpublished price sensitive
information in respect of securities or who has
received or has had access to such unpublished
price sensitive information.
Insider - SEBI Defn
Connected Person Deemed to be Connected Person
Director Companies under the same management
Malaysia/Singapore
Information that a reasonable person would expect to
have a material effect on the price of securities
Misappropriation Theory
Anyone who misappropriates (steals) information from their
employer and trades on that information in any stock (not just
their employers stock) is guilty of insider trading
US v. James O’Hagan
Methods of prevention of Insider
Trading
Disclosure of interest by corporate insiders
Listed companies
Persons holding more than 5% of the shares/voting rights
(if change exceeds 2% of total voting rights)
Directors and Officers
Other entities
Initial statement of holding
Periodic statement of holding
Methods of prevention of Insider
Trading
Disclosure of Price Sensitive Information
Chinese Wall
Separate inside areas from public areas
Bringing over the wall
Methods of prevention of Insider
Trading……contd.
published
Opened 24 hours after the information is made public
Pre-clearance of trades
All directors / officers / designated employees to pre
– clear their trades
Pre-clearance to be given by Compliance Officer
Valid for one week
Methods of prevention of Insider
Trading……contd.
Pre-clearance of trades/Restricted
Insider Trading
- Trading in violation of the rules & regulations
- Trading by tippee knowing that the tipper is
violating a fiduciary duty
Why forbid Insider Trading?
A Company’s information is its own property-
others should not profit from it
It disrupts market efficiency
Unfair competition to speculators outside the
company
It undermines investor confidence in the
fairness and integrity of the securities market
Penalties
US
Civil Penalties
4. 3 times profit made/loss avoided
5. Controlling persons -3 times profit made/loss
avoided or $1 million (higher)
6. Injunctions
Administrative Penalties
Cease and desist order
Penalties
Criminal Penalties