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					Insider dealing
Insider dealing is the illegal trading in shares by someone or at the instigation
of someone with knowledge of unpublished business data or information that
would affect the price of shares being bought or sold.

The offence of insider dealing is contained in Part V Criminal Justice Act 1993
(CJA 93).

Proceedings can only be commenced by or with the consent of the Secretary
of State or the DPP.

The offence

An insider dealing offence is committed by an individual who has information
as an insider and who:

   •   deals in securities that are price-affected securities in relation to the
       information;
   •   encourages another person to deal in securities that are price-affected
       securities in relation to the information; or
   •   discloses the information, otherwise than in the proper performance of
       the functions of his employment, office or profession, to another
       person.

Sentence

The maximum sentence on conviction on indictment for insider dealing is
seven years’ imprisonment, or a fine, or both. A person convicted of insider
dealing may also be disqualified from acting as the director of a company: R v
Goodman (1993) 97 Cr App R 210.

Definitions

S57(1) CJA 93 provides that a person has information as an insider if and
only if it is inside information and that it is from an inside source.

Inside information

“Inside information” is defined in s56 CJA 93, and means information that –

   •   relates to particular securities or to a particular issuer or issuers of
       securities and not to securities generally or to issuers of securities
       generally;
   •   is specific or precise;
   •   has not been made public; and


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   •   if it were made public would be likely to have significant effect on the
       price of any securities.

Price Sensitive

S56(2) CJA 93 provides that inside information is price sensitive information in
relation to securities if and only if the information would, if made public, be
likely to have a significant effect on the price of the securities. Therefore
‘price’ must be taken to include the ‘value’ of securities.

The fact that the information would be likely to have a significant effect on the
price of securities may be proved by reference to evidence of the conduct of
the defendants themselves as well as by an expert witness, R v Gray [1995] 2
Cr App R 100.

Securities

The securities to which Part V CJA 93 applies are those listed in Schedule 2.
A security appearing in Schedule 2 must also satisfy any conditions applying
to it under an order made by the Treasury; and such conditions are laid down
by the Insider Dealing (Securities and Regulated Markets) Order 1994.

An “issuer” of securities is any company, public sector body or individual by
which or by whom the securities have been or are to be issued.

Insider

S57(2) CJA 93 provides that for the purposes of s57(1) CJA 93, a person has
information from an inside source if and only if he has it through:

   a) Being a director, employee or shareholder of an issuer of securities; or
   b) Having access to the information by virtue of his employment, office or
      profession; or
   c) The direct or indirect source of his information is a person within (a).

A person does not have information as an insider merely because it is inside
information and he has it from an inside source. He must have actual
knowledge that it is inside information and that is from an insider.

Public

Whether or not information has been made public is broadly dependent on the
general availability of the information. Information is made public if:

   •   it is published in accordance with the rules of a regulated market for the
       purpose of informing investors and their professional advisers:
       s58(2)(a) CJA 93;



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   •       it is contained in records which by virtue of any enactment are open to
           inspection by the public: s58(2)(b) CJA 93;
   •       it can be readily acquired by those likely to deal in any securities to
           which the information relates; or of an issuer to which the information
           relates: s58(2)(c) CJA 93.

Under s58(3) CJA 93 information may also be treated as being made public
even though it can only be acquired by persons exercising diligence or
expertise even though:

   •       it is communicated to a section of the public but not the whole public at
           large;
   •       it can be acquired only by observation;
   •       it is communicated only on payment of a fee; or
   •       it is published only outside the UK.

Regulated markets

For the purposes of insider dealing, a regulated market is said to mean any
market which is identified as a regulated market for the purposes of Part V
CJA 93 by an order made by the Treasury. Certain markets have been
identified as regulated markets for these purposes and that includes the
London Stock Exchange: Insider Dealing (Securities and Regulated Markets)
Order 1994.

Offences

There are three types of insider dealing offence:

   •       dealing ;
   •       encouraging another to deal ; and
   •       disclosing information.

Dealing

Insiders in possession of price sensitive inside information in relation to
securities are prohibited from dealing in those securities on any regulated
market or through any professional intermediary or as a professional
intermediary: s52(1) CJA 93. Dealing is widely defined by s55 CJA 93 so that
a person deals in securities if:

       •    they acquire or dispose of the securities (whether as principal or
            agent); or
       •    they procure, directly or indirectly, an acquisition or disposal of the
            securities by any other person.




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There is no need to establish any causal link between the information and the
dealing, though it is a defence if an insider can prove he would have dealt the
same way even if he had not had the inside information.

Encouraging others to deal

An individual who has information as an insider may also commit an insider
dealing offence by encouraging another person to deal in securities that are
price-affected securities in relation to the information, knowing or having
reasonable cause to believe that the dealing would take place s52(2)(a) CJA
93. The offence is complete when the encouragement is given regardless of
whether or not the other person acts upon it.

Disclosing Information

Insiders are also prohibited from disclosing inside information to any other
person if they know or have reasonable cause to believe that that person will
deal in the securities on any regulated market or through any professional
intermediary or as a professional intermediary, s52(2)(b) CJA 93.

The disclosure offence only applies where an individual ‘discloses’ the
information to another person ‘otherwise than in the proper performance of
the functions of his employment, office or profession’. Disclosure for these
purposes could be in writing but is more likely to be oral.

Territorial scope

The territorial scope of insider dealing is limited by s62 CJA 93. An individual
is not guilty of an insider dealing offence unless:

   •   he was within the United Kingdom at the time when he is alleged to
       have done any act constituting or forming part of the alleged dealing;
   •   the regulated market on which the dealing is alleged to have occurred
       is one which, by an order made by the Treasury, is identified as being
       regulated in the UK; or
   •   the professional intermediary was within the UK at the time he was
       alleged to have done anything by means of which the offence was
       committed;
   •   he was within the United Kingdom at the time when he is alleged to
       have disclosed the information or encouraged the dealing; or
   •   the alleged recipient of the information or encouragement was within
       the UK at the time he received the information or encouragement.




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Insider dealing and market abuse

Insider dealing is one of the categories of behaviour that can amount to
market abuse under s118 Financial Services and Markets Act 2000. It can
therefore be dealt with as a criminal or civil offence.

An example of insider dealing as both a criminal and civil offence is the
treatment of spread-betting. This can be approached in the alternative as
either an offence under s52 CJA 1993 or the insider dealing limb of Market
Abuse under s118 FSMA 2000.

Under CJA 1993, spread betting comes within dealing under s55(b):

       ‘he procures, directly or indirectly an acquisition or disposal of the
       securities by any other person.’

When a bet is placed the betting firm enters a derivative contract on the
relevant exchange to hedge against the risk of the party making the bet being
successful. Under s52 a derivative contract is a price affected security and
therefore the suspect has procured its acquisition and therefore falls within
dealing under s52.

For more on market abuse see the Financial Services Offences topic.

Defences

If an individual can bring himself within the terms of the general defences set
out in s53 CJA 93, or within the special defences in Schedule 1, then the
prohibitions against dealing, encouraging dealing or disclosing information do
not apply. In each case, the burden of proof (on the balance of probabilities)
is on the defence.

For information on case law where there has been an ECHR challenge to
reverse onus provisions under the Human Rights Act 1998 [see “ECHR”].

No expectation of profit

Where the individual dealing in securities or encouraging another person to
deal in securities is able to show that he did not, at the time, expect the
dealing to result in a profit or in the avoidance of a loss which was attributable
to the fact that the information he held was price-sensitive information in
relation to the securities in question, he will have a defence, s.53(1)(a), s.
53(2)b and s.53(3) b.

He must be able to show that he did not expect the dealing to result in a profit
or in the avoidance of a loss which, in either case, was attributable to the fact
that the information in question was price-sensitive.



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Belief information sufficiently disclosed

Where the individual is able to show that, at the time of dealing in securities
he believed on reasonable grounds that the information had already been
disclosed widely enough to ensure that none of those taking part in the
dealing would be prejudiced by not having knowledge of the information, he
will have a defence. For this defence to be applicable, the disclosure will
have had to have been effected widely enough to ensure that none of those
taking part in the dealing were prejudiced by not having the information,
s53(1)(b) CJA 93.

Where an individual has encouraged another person to deal in securities, if he
is able to show that, at the time, he believed on reasonable grounds that the
information had been or would be disclosed widely enough to ensure that
none of those taking part in the dealing would be prejudiced by not having
knowledge of the information, he will have a defence, s53(2)(b) CJA 93.

Defendant would have done the same

Where the defendant is able to show that he would have dealt with the
securities in the same way or encouraged another to deal with the securities
in the same way, even if he had not possessed the inside information he will
have a defence: s53(1)(c), s53(2)(c) CJA 93. The defendant will need to
show that he had a compelling reason for dealing in the securities in question
and that he would have done so on that basis regardless of the inside
information.

Disclosure defences

In cases involving offences for the disclosure of inside information, it is a
defence if an individual is able to show that he did not expect any person to
deal in securities on any regulated market or through any professional
intermediary, or as a professional intermediary due to the disclosure of the
inside information; or even if he did have an expectation that they might deal,
that he did not expect the dealing to result in a profit attributable to the fact
that the information was price sensitive information in relation to securities,
s53(3) CJA 93.

Market makers

This defence protects market makers carrying on their business. A “market
maker” is a person who holds himself out at all normal times, in compliance
with the rules of a regulated market or an approved organisation, as willing to
acquire or dispose of securities and is recognised as doing so under those
rules: para 1(2) Schedule 1 CJA 93.




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An “approved organisation” means an international securities self-regulating
organisation approved by the Treasury under any relevant order under s22
FSMA 2000.

Market information

There is a market information defence contained in paragraph 2 of Schedule 1
CJA 93, by which an individual is not guilty of insider dealing by virtue of
dealing in securities or encouraging another person to deal if he shows that
the information that he had as an insider was market information and it was
reasonable for him to have acted as he did despite having that information as
an insider.

Market information is defined in paragraph 4 as consisting of one or more of
the following facts:

   •   that securities of a particular kind have been or are to be acquired or
       disposed of, or that their acquisition or disposal is under consideration
       or the subject of negotiation;
   •   that securities of a particular kind have not been or are not to be
       acquired or disposed of;
   •   the number of securities acquired or disposed of or to be acquired or
       disposed of or whose acquisition or disposal is under consideration or
       the subject of negotiation;
   •   the price or range of prices at which securities have been or are to be
       acquired or disposed of or the price or range of prices at which
       securities whose acquisition or disposal is under consideration or the
       subject of negotiation may be acquired or disposed of;
   •   the identity of the person involved or likely to be involved in any
       capacity in an acquisition or disposal.

Acquisition or disposal

By paragraph 3 Schedule 1 CJA 93, an individual is not guilty of insider
dealing by virtue of dealing in securities or encouraging another person to
deal if he shows:

   •   that he acted in connection with an acquisition or disposal which was
       under consideration or the subject of negotiation, or in the course of a
       series of such acquisitions or disposals; and
   •   with a view to facilitating the accomplishment of the acquisition or
       disposal or the series of acquisitions or disposals; and
   •   that the information he had as an insider was market information
       arising out his involvement in the acquisition or disposal or series of
       acquisitions or disposals.




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Price stabilisation

Price stabilisation involves the price of securities being maintained artificially,
and is therefore a form of market manipulation. Price stabilisation generally
involves a stabilising manager supporting the price of newly issued securities
for a limited period following their issue, while they are being offered to the
public. The purpose is to ensure the success of the issue by keeping the
price steady. The stabilising manager is usually the securities house
responsible for the new issue and stabilisation will involve it in purchasing
some of the newly issued securities from the market to steady the price and
prevent its decline.

Price stabilisation actions would be an offence of insider dealing, as a
stabilising manager would have information as an insider and would be
dealing in securities that were price-affected in relation to his inside
information. By paragraph 5(1) of Schedule 1 CJA 93 however, an individual
is not guilty of insider dealing by virtue of dealing in securities or encouraging
another person to deal if he shows that he acted in conformity with the price
stabilisation rules. “Price stabilisation rules” means rules made under s144(1)
of the FSMA 2000.




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