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An EU-based office of a global investment bank was fined nearly €200,000 for failing to prevent an employee from conspiring in multiple acts of insider dealing over the course of two years.
The employee, known in this anonymised case study as Person A, passed non-public details of upcoming takeovers of which the company had knowledge to another party, Person B. Person B then used these tips to inform investment decisions, with the understanding that the price of the derivatives and shares would rise upon the publication of the deals.
This article illustrates the importance of having stringent security processes to prevent the misuse of inside information.
Background
Person A was working in the mergers department of the bank and, as such, had access to inside information, defined as non-public information that, if made public, could reasonably be expected to influence the price of a financial instrument.
However, not only did the employee have access to the deals on which he was working, but he could also access details of other deals being handled within the department. It was this information that he passed on to Person B.
Person B then bought shares and derivatives in the target companies, making a profit on their investment when the news was distributed. Person B accrued gains of €8.5 million over the course of time that the two individuals carried out the strategy.
What happened?
The regulator in the EU country in which Person A was based investigated complaints about insider dealing and alerted prosecutors to the possibility of criminal activity. Under the Market Abuse Regulation (MAR), it is illegal to use inside information to inform investments, and to distribute inside information for such a use.
Although Person B denied the charges levelled in the case, he was found guilty and sentenced to serve more than three years in prison. Person A cooperated with the investigation and admitted his role in passing on the information. He was given a suspended jail sentence. Both parties were ordered to repay amounts of money gained from the scheme.
A year later, prosecutors accused the bank of violating its responsibilities to prevent insider dealing. The judge in the case found that the bank had insufficient safety protocols in place to prevent Person A from accessing information on mergers to which he was not attached and fined the organisation almost €200,000. The bank acknowledged the shortcomings and insisted that it had dismissed the employee as soon as it learned of the activity. It accepted the sanction and said that it had carried out an internal investigation, culminating in the implementation of new security protocols.
Insider dealing and MAR
Whenever a company becomes aware of inside information, even if it relates to a client and not the company itself, it is required to draw up an event-based insider list that includes all individuals with access to that information. The company should also have insiders acknowledge their duty not to unlawfully distribute the information or to use it to inform investments.
In the case of the bank in this case study, it should have blocked access to inside information from those not working on that case. As this was not the case, anyone else who accessed the information, such as Person A, should have been included on an insider list. This acknowledgement of his status as an insider may have deterred them from passing on that information to Person B.
Create and maintain insider lists
InsiderLog is insider list management software that helps you create insider lists that comply with the strict formatting requirements of MAR. In addition, it automates the process of informing insiders of their place on the list and prompting them to acknowledge their responsibilities and input the necessary information.
It also provides you with a record of the changes to the list, in accordance with MAR, and an audit trail to show that you have made every effort to comply with the regulation.
Reduce the administrative burden on your business with InsiderLog. Request a demo right now.
References and further reading
- How to prevent insider trading
- Why you need a market abuse policy
- MAR and MiFID II
- What is a confidential list?
- What are market soundings?
