1 Insider dealing
Public company shares and securities are bought and sold on a stock exchange. To maintain public confidence in the stock market, it is important that all users have the same information about shares and securities. A person should not use any inside information that they have to gain an unfair advantage when they are involved in share and securities trading. Insider dealing is also prohibited under statute in England and Wales, principally under the Criminal Justice Act 1993 (CJA 1993).
A company’s share value reflects its profitability and future prospects. Outside investors normally use earnings per share (EPS) or the price-to-earnings (P/E) ratio to assess a company’s performance. For example, if the business has a high EPS, it indicates that business is more profitable and will potentially attract more investors.
The prospective purchaser can only access this type of information after it has been made publicly available in the company’s annual report. However, if prospective purchasers could access such information before it was made public, they could use this inside information to gain an unfair advantage in transactions involving company shares and securities (Jones, 2019, p. 521). This behaviour is called ‘insider dealing’.
Insider dealing was made a criminal offence under section 52 of the Criminal Justice Act 1993 (CJA 1993) because this behaviour can potentially undermine stock market integrity. Considering section 55 of the CJA 1993, ‘dealing’ refers to both purchasing and selling company shares and securities in the market. Section 56 of the CJA 1993 outlines what is meant by ‘insider information’, as shown in Box 1.
Box 1 Section 56(1), CJA 1993
56 ‘Inside information’, etc.
(1) For the purposes of this section and section 57, ‘inside information’ means information which—
- a.relates to particular securities or to a particular issuer of securities or to particular issuers of securities and not to securities generally or to issuers of securities generally;
- b.is specific or precise;
- c.has not been made public; and
- d.if it were made public would be likely to have a significant effect on the price of any securities.
Section 57 of the CJA 1993 clarifies when a person has information as an insider, as shown in Box 2.
Box 2 Section 57, CJA 1993
57 ‘Insiders’.
(1) For the purposes of this Part, a person has information as an insider if and only if—
- a.it is, and he knows that it is, inside information, and
- b.he has it, and knows that he has it, from an inside source.
(2) For the purposes of subsection (1), a person has information from an inside source if and only if—
- a.he has it through—
- i.being a director, employee or shareholder of an issuer of securities; or
- ii.having access to the information by virtue of his employment, office or profession; or
- b.the direct or indirect source of his information is a person within paragraph (a).
Under section 52 of the CJA 1993, individuals may be guilty of insider dealing if they use this inside information about shares and securities for their profit. It is also an offence for an individual to enable another person to use the inside information to deal. Furthermore, it is a criminal offence to disclose inside information to another person outside the scope of one’s job or profession.
There are three general defences available to anyone accused of insider dealing under section 53 of the CJA 1993:
- the individual did not expect this dealing to make a profit or avoid a loss
- the individual had reasonable grounds to believe that the information had been disclosed widely
- the individual would have done the same if they had not had the information.