5 Things You Need to Know about Insider Trading

Last updated on March 14, 2024

financial and trading graph

Intrigued about insider trading through watching American movies like “Wolf of Wall Street”, “Wall Street” and “Boiler Room”? Here are 5 things you need to know about insider trading in Singapore.

1. What is Insider Trading?

Insider trading is the process of intentionally trading upon proprietary, non-public information concerning a firm’s future by a corporate official or another party in possession of the non-public information.

In “traditional” insider trading cases, it involves a company officer like the director, the chief financial officer (CFO) or the company secretary misappropriating non-public information to trade on the company’s shares for their own benefit or to avoid some detriment.

In non-traditional cases, it involves a secondary party to the non-public information. Persons like a spouse of the key company officer, a stockbroker who accidentally received non-public information or a waiter who overheard discussion on the company’s non-public information might be found liable for breaching insider trading laws if they acted upon the non-public information.

2. There is Divided Opinion on Criminalising Insider Trading

Some have argued against criminalising insider trading on the basis that there are no victims to insider trading and that the market is not harmed.

Supporters of insider trading regulations argue that it goes against market fairness because it privileges some investors in the company over others who do not possess such exclusive information on the company in question.

The contrasting views towards insider trading was highlighted by the Court of Appeal in Lew Chee Fai Kevin v Monetary Authority of Singapore [2012] SGCA 12 where the Court recognised that there are two contrasting theories on insider trading:

  1. An equal access theory that adopts a strict approach towards insider trading; and
  2. A “market efficiency” theory that adopts a more benevolent approach towards insider trading.

3. Singapore Adopts an “Information-Connected” Approach to Combat Insider Trading

Singapore adopts an “information-connected” approach towards combating insider trading.

Under the “information-connected” approach, liability is found through identifying what constitutes as insider information. This is in contrast to the previous “person-connected” approach that focused on establishing the link between the information and the insider.

The “information-connected” approach adopted by Singapore makes it easier for enforcement because the authorities need not establish the links between the insider (non-public) information and the person who possess it.

This is especially important for prosecuting “outsiders” of the company who gained access to such inside information.

4. The Offence of Insider Trading is punishable under the Securities and Futures Act (SFA)

The offence of insider trading is set out under sections 218 and 219 of the Securities and Futures Act (SFA).

For a breach of section 218(1) of the SFA to be made out, it needs to be established that the person:

  1. Is a “person who is connected to a corporation”;
  2. Possesses “information concerning that corporation”;
  3. The information is not “generally available”;
  4. A reasonable person would, if that information were generally available, expect it to have a “material effect on the price or value of securities of that corporation”;
  5. The connected person knows or ought reasonably to know that the information is not generally available; and
  6. The connected person knows or ought reasonably to know that if the information were generally available, it might have a material effect on the price or value of those securities of that corporation.

Examples of connected persons can include an officer or substantial shareholder in a corporation or a related corporation, or a person who occupies a position that may reasonably be expected to give the person access to information of a kind by virtue of any professional or business relationship, e.g., a senior employee of a corporation.

For a breach of section 219(1) of the SFA to be made out, it needs to be established that the person:

  1. Is a “person who is not a connected person (i.e., an insider)”;
  2. Possesses “information that is generally not available”;
  3. A reasonable person would, if that information were generally available, expect it to have a “material effect on the price or value of securities, securities‑based derivatives contracts or CIS units”;
  4. The insider knows or ought reasonably to know that the information is not generally available; and
  5. The connected person knows or ought reasonably to know that if the information were generally available, it might have a material effect on the price or value of those securities, securities‑based derivatives contracts or CIS units.

Section 219(3) of the SFA further stipulates that the insider must not, directly or indirectly, communicate the information mentioned in section 219(1), or cause the information to be communicated, to another person if the insider knows, or ought reasonably to know, that the other person would or would be likely to:

  1. Subscribe for, purchase or sell, or enter into an agreement to subscribe for, purchase or sell, the securities, securities‑based derivatives contracts or CIS units;
  2. Procure a third person to subscribe for, purchase or sell, or to enter into an agreement to subscribe for, purchase or sell, the securities, securities‑based derivatives contracts or CIS units.

Should the insider breach section 219(3) of the SFA, and the other person commits section 291(3)(a) or (b), the other person would also be liable for an offence.

On 26 May 2023, Shae Toh Hock was convicted for communicating non-public and material information (i.e., inside Information) to his sister, Shae Hung Yee. The Inside Information concerned a proposed acquisition of DuluxGroup Limited by Nippon Paint Holdings Co. Ltd. DuluxGroup was listed on the Australian Securities Exchange at that time. He was fined $100,000.

Subsequently, Shae Hung Yee and her husband Siew Boon Liong, were each convicted for purchasing shares of DuluxGroup while in possession of inside information received from Shae Toh Hock and before the proposed acquisition was announced. Shae Hung Yee and Siew Boon Liong were fined $150,000 each.

5. There is a Civil and a Criminal Regime for Punishing Insider Trading

Not all perpetrators of insider trading will be imprisoned. The SFA provides for civil and criminal penalties to punish insider trading.

Under section 232(1) of the SFA, the Monetary Authority of Singapore (MAS) can take up a civil penalty action against the wrongdoer with the concurrence of the Public Prosecutor. The court may order the payment of a sum three times of the amount of profit gained or loss avoided as a result of the wrongdoer’s act.

If the wrongdoer did not make any profit or suffered any loss as a result of his act, then the court may order the wrongdoer to pay a penalty sum between S$50,000 to S$2 million.

Criminal penalties in respect of a breach of sections 218 and 219 of the SFA are provided for under section 221 of the SFA. A natural person may be fined up to S$250,000 or sentenced to imprisonment for up to 7 years or to both.

Section 333 of the SFA provides for a corporation to be fined up to twice the maximum amount prescribed for the relevant offence. When the company is found liable for offences under the SFA, the director, executive officer, secretary or similar officer of the company who knew of the transaction or is a party to the transaction shall also be guilty of the offence.

It is also important to note that once a wrongdoer has been penalised under the civil regime, he is not to be punished again under the criminal regime.

The standard of proof is also different between the civil and criminal regime in that the Prosecution is required to prove on a balance of probabilities in a civil action in contrast to a prove beyond reasonable doubt for a criminal prosecution.

If you are concerned that you might be in breach of insider trading laws, you can consult a criminal lawyer to seek advice on how you can comply with the law.

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