What is insider dealing?
Insider dealing is prohibited by law. The definition of insider dealing under the law is quite complicated. Basically, insider dealing normally takes place when:
- a person connected with a listed company, i.e. an insider (e.g. director, staff member or auditor, etc.), possesses privileged information which could affect the share price when disclosed, and trades, or procures other persons to trade in the securities or derivatives of the company so as to make profits or avoid losses before the public are aware of the information; or
- a person obtains information through another person whom he knows is connected with a listed company, i.e. an insider, trades or procures other persons to trade in the securities or derivatives of the company so as to make profits or avoid losses before the public are aware of the information.
Is it illegal to deal in shares based on insider information provided by a relative that works in a listed company?
Anyone would have committed an offence under the law, if he obtained non-public price-sensitive information of the securities of a listed company through a "relative" working in that company, and made use of the information dealing in the shares. That "relative" may also be prosecuted for disclosing insider information of the company to other people, and for counselling or procuring other people to deal in the shares.
What is the difference between insider dealing and market manipulation?
People often mix up the concepts "insider dealing" and "market manipulation". They are different types of market misconduct.
Insider dealing is the use of news or information obtained from an insider to trade, or to procure someone else to trade the relevant securities or derivatives so as to make profits or avoid losses. An example would be that an accountant of a listed company (i.e. an insider), knowing that the annual financial results of the company will be better than forecast, buys the company's shares for himself before the results are released to the public. The company's share price increases dramatically upon the release of its annual financial results. The accountant then sells the shares purchased earlier at a low price and thus makes a profit.
On the other hand, market manipulation is the conducting of market activities to interfere with the actual supply and demand of securities or derivatives so as to create a false or misleading appearance of the price or turnover of the securities or derivatives. Market manipulation does not involve insider information.
An example of market manipulation is when someone purposely buys a low price stock, and thus disseminates false information that is favourable to the stock price, hyping the stock. The manipulator might then sell the stock at a high price and, when the information is found to be false, the price of the stock will tumble, leaving its followers with substantial losses.
What is the penalty for insider dealing?
Offenders of insider dealing will be subject to severe punishment. Starting from 1 April 2003, the parallel civil and criminal regimes under the Securities and Futures Ordinance enable the SFC more effectively to combat market misconduct like insider dealing. A Market Misconduct Tribunal (MMT) has been set up to handle civil cases of all forms of market misconduct including insider dealing, market manipulation and the dissemination of false and misleading information about securities or futures contracts. The MMT will decide cases on the civil standard of proof and can impose a range of civil sanctions such as ordering the disgorgement of profits, "cease and desist" and "cold shoulder" orders, and disqualifying a person from directorship or management of a company.
On the other hand, offenders will be prosecuted where there is sufficient evidence for a criminal prosecution. If convicted, offenders of insider dealing may be subject to imprisonment for a period of up to 10 years and a fine of up to HK$10 million.
Furthermore, any SFC licensee found to have taken part in any insider dealing may have their licence suspended or revoked.
How to avoid information imbalance?
When a listed company is involved in material corporate activities, such as finalising a major transaction, arranging a placement of shares, or contemplating a rights issue, it may need to request a suspension of trading on the Stock Exchange in order to prevent an unfair and disorderly market from arising due to leakage of price-sensitive information, and to avoid opportunities for insider dealing. When the matter in question has been satisfactorily concluded, and after making a public announcement, trading will normally resume and all investors can trade on a fully informed basis.
How can retail investors obtain up-to-date company information?
Investors should look out for announcements from a company to keep themselves fully informed about its latest position. If you are a non-registered share owner because your shares are registered in a nominee name held in CCASS, and wish to receive any company notice mentioned in an announcement, then you should contact your broker or bank for this information. Alternatively, you can ask your broker or bank to forward your name and address to Hongkong Clearing, who will then pass your personal particulars to the relevant registrar, who will send you the shareholder information directly.