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Fair-play in business transactions:
The new Insider Trading Act
The extent of insider trading is still largely unknown but its impact has been felt in stock markets around the world. In South Africa, a major case of insider trading has yet to be reported. New legislation — the Insider Trading Act, 1998 — prohibits insider trading and dramatically increases penalties for those found guilty.
Insider trading has been defined as the ‘illegal practice of using information known only to few people to make profits from the buying or selling of stocks’. A typical case of insider trading involves confidential information being leaked to a privileged few at the expense of other potential investors before it becomes public.
For example, a group from Fedsure (an insurance firm) were recently accused of having leaked information before it was officially published on the stock exchange News Services. If a case can be made against Fedsure the matter will be handed to the Director of Public Prosecution for prosecution.
In a similar case in the United States, the head of Harper Hospital’s gastroenterology division was accused of tipping off friends, relatives and business associates about the poor performance of a particular drug before the news became public. Investors privy to this information managed to avoid losses of US$300000 because they sold their shares in time.
The recent allegations against George W Bush Jr for abusing the president’s office for his personal deals illustrates the damaging effects of insider trading on the national integrity of a country — in this case the United States. Bush Jr managed to sell his oil stock just before the Iraqi oil embargo, thus avoiding losses. If acts of this sort are not discouraged, there will be little distinction between the criminal and formal economy.
In the long term, insider trading harms an individual company’s integrity as well as the country’s economic viability. For example, Hong Kong’s success in the past few decades as one of the leading financial and business centres in the world is attributed to its commitment to a clean and efficient businss environment which encourages equal opportunities for all investors.
The Act
In South Africa insider trading was until recently prohibited by section 440F of the Companies Act 61 of 1973. This section has been repealed and replaced by the Insider Trading Act 135 of 1998 (referred to as the Act). The Act aims to:
- Prohibit individuals who have inside information relating to securities or financial instruments from dealing in such securities or financial instruments.
- Provide criminal and civil law penalties for such dealing.
- Empower the Financial Services Board to investigate matters relating to such dealing and institute proceedings in relation thereto and to administer the proof of claims and distribution of payments received as a result of any such proceedings.
- Establish the Directorate as a committee of the Financial Services Board for exercising the power to institute proceedings.
The Financial Services Board has a mandate to regulate all activities under the Act and in addition to its powers it may:
- Investigate.
- Institute legal action.
- Administer the proof of claims and distribution of payments in terms of section 6 of the Act.
- Subpoena any person.
- Interrogate (subject to rules of fair trial) any person under oath or affirmation.
- Search and seize (without a warrant if the person in conrol of any premises consents to the actions contemplated in this Act).
The introduction of the Act adds to efforts to promote integrity in business transactions in South Africa. The Act expressly creates the insider trading offence and tacitly makes industrial espionage an offence. The offences created are not that new but the penalties imposed by the Act indicates a commitment to tighten what has until now been lax controls over illegal business transactions.
Penalties
The new Act imposes harsher penalties against would-be perpetrators of insider trading. Previously any person convicted of an offence under section 440F(1) would be sentenced to a fine not exceeding R500000 or imprisonment for a period not exceeding 10 years or to both a fine and imprisonment.
The new Act has not only created separate legislation but follows the universal trend of treating insider trading as a serious economic offence by increasing the maximum penalty.
Any individual convicted of an offence shall be liable to a fine not exceeding R2 million or to imprisonment for a period not exceeding 10 years, or to both the fine and prison term. In addition the perpetrator may be liable for further civil liabilities depending on the court’s assessment of the Fiancial Services Board’s case. The Board has responsibility to act on behalf of the state on both criminal and civil cases.
The Act is an important step towards tighter regulation and prevention of insider trading. It will enhance South Africa’s endeavour to promote economic justice through business intergrity. Business integrity should be an integral part of any management strategy to ensure a competitive advantage in the 21st century. Southern Africa’s economic success depends on an efficient business environment that provides a fair playing field for all investors.
Nceba Gomomo
Institute for Security Studies
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