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In the mid-2010s, a trader based in an EU country received what was at the time a record fine for insider dealing. The experienced investor (hereafter, Person A) had gleaned information from his cousin (Person B), who worked for a bank (Company A) that was involved in the takeover of a logistics business (Company B) by a major state-run organisation (Company C).
This anonymised case study highlights the value of the sanctions that can be handed out in such situations. It also stresses the importance of the proper handling of inside information in preventing reputational damage for entities embroiled in such misconduct.
Background
Person B held a senior role at Company A and, as such, met with other senior figures in the organisation on a regular basis. Following one such conversation, he became aware that Company C was formulating an offer to buy the almost 60% of shares that it did not already own in Company B. The move valued Company B at around €1 billion and, as a result, would cause a major stir in the markets.
Over a two-week period following this conversation, Person A accrued around €8 million worth of shares in Company B.
When the deal was announced to the market, two days after Person A had made his final investment in the business, shares in Company B rose significantly, leading to a profit of more than €6 million for Person A.
The investigation
Authorities in the EU nation became suspicious of the trades made by Person A. Not only were they not typical of his usual trading style, but the investment would have been extremely risky had he not known about the impending deal. Company B’s stock was on a downward trend and was considered to have low liquidity at the time of the purchase.
The financial regulator’s investigation team concluded that this information, coupled with the timing of the transactions, meant that they could only be explained by Person A being privy to information that ensured the price would rise soon afterwards.
Upon deeper inspection of the case, they linked Person A and Person B, finding Person A guilty of insider dealing and Person B guilty of unlawfully distributing inside information.
Inside information is non-public, specific information that, if it were to be made public, would significantly affect the price of a financial product. Insiders, those with access to that information, like Person B, are forbidden from unlawfully distributing that information, and those in receipt of the information must not make trades based on it.
The authority concluded that Person A, as an experienced investor, should have understood this law and could not use ignorance as a defence.
What happened next?
Person A received a fine of €14 million for insider dealing, with Person B being fined €400,000 for his role in the crime. The high-profile nature of the case must have been embarrassing for Company A, from where the information leak had originated.
Although there was no suggestion that Company A’s systems had failed, for its clients to discover that a senior employee had leaked details of such a significant non-public story can only be detrimental to its reputation as an issuer.
Manage insiders effectively
Companies must create an insider list for each piece of inside information generated within the business. This acts as a record to show who knew about the information at any one time, as well as an opportunity to remind insiders of their obligations regarding the information.
Insider list management software like InsiderLog automates this procedure to maintain compliance with the Market Abuse Regulation. Request a demo to see how it can streamline your efforts today.
References and further reading
- The Market Abuse Regulation explained
- Behaviours that qualify as market abuse
- How to enable market abuse monitoring
- Why you need a market abuse policy
