This guide is based on UK law as at 1st February 2010, unless otherwise stated. It is part of a series on the FSA and Securities Regulation.
Insider dealing has been a criminal offence since 1985 and is currently set out in Part V of the Criminal Justice Act 1993. It continues, though, to be a tricky area. The FSA believes that professional insider dealing rings as well as rogue individuals exist within the City and are regularly trading on inside information not available to the rest of the market. The regulator has increased its enforcement work in recent years, but successful prosecutions are by no means straightforward.
The first legislation to create a level playing field for all investors proved ineffective. Since then, efforts have been made to tighten up the law and close the loopholes, but there remains a perception that some ‘wrongdoers’ continue to escape conviction.
The attempt to come up with effective legislation in this difficult area means the offence is a complex one to describe; what follows should be taken only as a summary of the main elements. References are made to shares, but the legislation also covers other company securities such as warrants, debentures, futures and contracts for differences.
A person will commit the criminal offence of insider dealing if they have inside information and:
- that information is price-sensitive in relation to shares;
- they deal in those shares, or encourage someone else to deal in those shares or pass inside information to another person;
- the dealing takes place on a regulated market or through a professional intermediary such as a broker. (Included in the definition of a regulated market are exchanges elsewhere in the EU and some other overseas markets.)
‘Inside information’ has the same meaning described in OUT-LAW's guide on Breach of disclosure obligations, namely information relating to a particular company that would, if published, be likely to have a significant effect on the price of shares in the company. It will not necessarily be about the company the insider works for: it might be about a supplier or a competitor – for example, news of the winning or loss of a big contract.
The insider will not commit the offence if they pass on general information about the market a company operates in, however confidential it might be. A director of a house building company might be liable if they give their dentist the unpublished information that group sales were significantly ahead of market expectations; but not if they disclose advance knowledge of a rise in mortgage rates.
There are several other defences available to someone charged with insider dealing:
- they did not expect the dealing to result in a profit by virtue of the price-sensitive information;
- they reasonably believed that the information had been disclosed widely enough to avoid prejudicing other parties to the share transaction;
- the person who bought or sold the shares would have done so without the information – because they needed to sell the shares to raise the cash, or to come within a permitted dealing period, etc.
If successfully prosecuted, insider dealing can result in a fine and/or up to seven years’ imprisonment.
Since 2008, the FSA has made greater use of its criminal powers, particularly in the case of insider dealing. In a speech delivered that year, its director of enforcement explained her belief that the threat of a custodial sentence was a much more significant deterrent than civil penalties in cleaning up UK markets. To that end, the FSA has recruited more senior lawyers experienced in criminal prosecution work and liaised more with other regulators at home and overseas.
In January 2008, the FSA brought its first criminal prosecution for insider dealing (see the case of Christopher McQuoid, below), quickly followed by others. A major investigation into insider dealing rings was also begun, resulting in the execution of search warrants and the arrest of eight individuals.
Cases on insider dealing
Case 1: Christopher McQuoid
Christopher McQuoid was a solicitor, employed as general counsel at TTP Communications. In May 2006, he was told confidentially that Motorola was planning a takeover bid for TTP. He passed that information to his father-in-law, James Melbourne, and two days before the deal was publicly announced, Melbourne bought shares at 13p each. The takeover price was 45p a share and Melbourne’s profit was close to £50,000. Three months later, he gave a cheque for exactly half the gain to McQuoid.
Melbourne’s trade was spotted as being suspicious and reported to the FSA. It prosecuted, and McQuoid was sentenced to eight months. Melbourne, aged 75, was given the same sentence, but suspended for 12 months.
Case 2: Matthew and Neel Uberoi
Matthew Uberoi spent a six-month university placement at stockbroker Hoare Govett. While there, he learned confidential pricesensitive information about several of the firm’s clients. He passed that information to his dentist father, who bought shares on the strength of it and made profits amounting to £110,000 as a result.
Both father and son were prosecuted for insider dealing. Matthew told Southwark Crown Court that his only knowledge of the offence came from films such as Wall Street and that the compliance training he received on joining the broker went over his head. ‘When you are 20, you are just chuffed because there are biscuits on the table,’ he told the FSA after his arrest.
The two were convicted, with Matthew receiving a 12-month prison sentence for passing the information on and Neel 24 months for using it. Margaret Cole, the FSA director of enforcement, repeated her tough message: ‘Insider dealing is not a victimless crime and we remain committed to stamping out this type of fraud.’