DG SEC, Arunma Oteh
As the nation’s stock market continues its bull-run, the Securities and Exchange Commission (SEC) must be committed to its promise of zero tolerance to infractions so as to prevent events that led to the market crisis of 2008, writes Eromosele Abiodun
Recently, eight people suspected of being involved in an insider dealing ring were arrested in a raid across London, by the United Kingdom’s financial watchdog, Financial Services Authority (FSA).
The swoop, the FSA said, was part of its effort to get tough on insider dealing, the illegal trading on price-sensitive information not available to their wider market.
In a brief statement, the FSA said the operation, the biggest of its kind in the UK, had involved 40 FSA staff, with back-up from officers from City of London Police. Search warrants were executed in what the FSA described as a "major on-going investigation into insider dealing rings".
Director of Enforcement at the FSA, Margaret Cole, in the statement said the regulator intended, "to be bolder and more resolute about proceeding with market abuse and insider dealing cases so that we can actually bring about a change in the culture of the city".
She admitted the threat of civil fines had not been a strong enough deterrent and signalled a shift to more criminal prosecutions.
"If people have to go to prison for us to achieve that aim, then that is what we are prepared to do. The maximum prison sentence for insider dealing is seven years, and those found guilty are also liable to an unlimited fine.
The FSA has had powers to prosecute insider dealing through the criminal courts since 2001 but has only begun using those powers recently. It has brought three criminal prosecutions for insider dealing so far since January. Insider dealing is notoriously difficult to prove and is thought to be rife in the city. Recent figures from the FSA show unusual share price movements ahead of almost 29 per cent of takeover announcements last year,” she said.
Since her appointment as the Director General of SEC, Ms. Arunma Oteh, has not failed to stress the commission's zero tolerance to infractions.
Addressing dealing members of the exchange recently, Oteh, warned stockbrokers who engaged in sharp practices to desist from such act as the commission was set to fish out undesirable elements in the trade.
The SEC boss stated that the stock market was important to the Nigerian economy and so should be guided firmly to ensure transparency and fairness.
“We are determined to make the Nigerian stock market a world-class market. I started my carrier on this trading floor and what has happened in the last two years does not paint us in good light. We are ready to do what is needful to take this market to where it ought to be,” she said.
Oteh assured that the commission would seek to change the behaviour of people operating in the capital market by making illegal conduct unattractive, while upping the standards of its regulatory functions.
The SEC boss also stated that any operator found engaging in illegal conduct would be suspended, warned or fined depending on the gravity of the offence committed.
“While effective governance is key to a well-functioning capital markets, the Nigerian capital market has in the last two years been characterised by governance weaknesses that led to improper behaviours and sharp practices such as insider trading and share price manipulation. We must therefore implement the SEC zero tolerance policy in a decisive and far reaching manner. I am therefore determined to eliminate sharp practices; deter malpractice and change behaviours by ensuring that both the institutional and personal costs of any wrong doing is extremely high. We will ensure high standards in regulatory oversight and enforcement and will name and shame where necessary.”
She added that: “We have continued to strengthen inspections and investigations and any operator found erring will be suspended, issued a warning, or fined depending on the gravity and nature of violation. We hope that the various enforcement actions against erring operators, including their suspension from participating in capital market activities will deter other operators from breaching rules, we will also continue to strengthen all processes related to investigation, enforcement, prosecution and publicity of outcomes in line with international standards and ensuring that messages are well communicated to the market.”
“I must say that what has happened in the last two years has that has eroded investor confidence in the market cannot be attributed to sharp practices alone, some were normal. It is these few bad eggs that we are going to take out of the market. I also want you to take exams in other markets so that you can be proven. It is not enough to pride yourselves local champions.”
Stakeholders Worries, NSE’s Response
Meanwhile, since the rebound of the Nigerian stock market in 2012, some stakeholders have expressed fears that there might be a repeat of the lax regulation that led to stock market crash in 2008. However, the Chief Executive Officer of the Nigerian Stock Exchange (NSE), Mr. Oscar Onyema, has stressed that the NSE was doing what it could to ensure that the market was free from abuses.
“I can’t wait to prosecute the first offender. Like all of you, I am worried. But I assure you that our system is strong enough to detect any malpractice. If any dealing member firm is found wanting, that firm will be exposed and dealt with according to the law of the land. There is no sacred cow in our market. Our effort to build a world-class market cannot be scuttled by a few greedy individuals.”
Insider trading could be described as the trading of a company’s stock or other securities (e.g. bonds or stock options) by individuals with potential access to non-public information about the company. In most countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of non-public information.
However, the term is frequently used to refer to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the corporation, or otherwise in breach of a fiduciary or other relationship of trust and confidence or where the non-public information was misappropriated from the company.
Insider dealing constitutes an offence in different respect, a stockbroker and Managing Director/Chief Executive Officer of Emerging Capital Limited, Mr. Chidi Agbapu, believed an insider dealer did not have to work for a particular company for his dealing to be an offence.
He said a stockbroker who knew about an impending takeover offer, who bought shares in the target company with the intention of making a profit, was guilty; if he got a friend to buy the shares, he was still guilty.
“But it is perfectly legal for directors to buy or sell shares in their own company provided certain rules are observed. Directors are not allowed to use unpublished price sensitive information, which they have got from their job to reach a decision about buying and selling shares (known as insider dealing).
Directors are not allowed to buy or sell shares in their company for two months before the announcement of results (the 'closed period'). The process of tracking directors dealings has become a more accepted means of identifying stocks with potential - if the directors are buying, they think the shares are undervalued; if they are selling, they think the shares are overvalued,” he said.
Insider trading, he added, raised the cost of capital for securities issuers, thus decreasing overall economic growth.
Legal Insider Dealing
Agbapu added: ‘Legal’ trades by insiders are common, as employees of publicly-traded companies often have stock or stock options.
“For example, if a corporate insider plans on retiring after a period of time and, as part of his or her retirement planning, adopts a written, binding plan to sell a specific amount of the company's stock every month for the next two years, and during this period the insider comes into possession of material non-public information about the company, any subsequent trades based on the original plan might not constitute prohibited insider trading.”
He noted that rules against insider trading on material non-public information exist in most jurisdictions around the world, though the details and the efforts to enforce them vary considerably.
On his part, another stockbroker and a former trader with Dependable Securities Limited, Mr. Sunday Ojo, stressed that liability for insider trading violations could not be avoided by passing on the information in an "I scratch your back, you scratch mine" or quid pro quo arrangement, as long as the person receiving the information knew or should have known that the information was a company’s property.
“For example, if Company A's CEO did not trade on the undisclosed takeover news, but instead passed the information on to his brother-in-law who traded on it, illegal insider trading would still have occurred,” he said.
Trading on Information in General
Ojo however pointed out that not all trading on information was illegal insider trading.
“For example, while dining at a restaurant, you hear the CEO of company A at the next table telling the CFO that the company's profits will be higher than expected and then you buy the stock, you are not guilty of insider trading unless there was some closer connection between you, the company, or the company officers. However, information about a tender offer (usually regarding a merger or acquisition) is held to a higher standard. If this type of information is obtained (directly or indirectly) and there is reason to believe it is non-public, there is a duty to disclose it or abstain from trading,” he added.
Tracking Insider Trades
Ojo noted that since insiders were required to report their trades, others often track these traders adding that there was a school of investing, which followed the lead of insiders.
“This is of course subject to the risk that an insider is making a buy specifically to increase investor confidence, or making a sell for reasons unrelated to the health of the company (e.g. a desire to diversify or pay a personal expense),” he said.