If you come across information you know is likely to affect the price of shares but you know that information is not public, it is best to resist any temptation to profit from that information. Insider dealing is not a victimless crime and is considered a type of fraud. This article summarises what insider dealing is, what enforcement against insider dealing and market abuse involves, and what companies and individuals ought to look out for to avoid allegations of wrongdoing.
A wide range of individuals may come across insider information: directors and shareholders, advisors on a transaction, lower-level managers, gossip overheard in the office, friends and family of insiders.
Insider dealing offences are usually investigated by the Financial Conduct Authority (FCA) on a “dual-track” basis. This gives the regulator the flexibility to decide later whether to pursue criminal or civil enforcement. Having said this, there is an increased willingness by the FCA to use its criminal powers to achieve its aims – as set out later in this article.
Criminal Insider Dealing
The offence of insider dealing is set out in section 52 of the Criminal Justice Act 1993. This outlines that insider dealing takes place where an individual trades in “price-affected” securities when in possession of inside information. There are also similar offences for encouraging another person to deal in price-affected securities and for disclosing inside information to another person, otherwise than in the proper performance of the functions of his or her employment. This would cover a scenario where someone tips-off another person about price-sensitive, non-public information.
In each of the three offences, the relevant information must be “price-affected” and “inside information”. Price-affected means price-sensitive, that is, if the information were made public it would be likely to have a significant effect on the price of the securities. Inside information means information that concerns specific shares or securities, has not been made public, and if made public it would be likely to have a significant effect on the price of any shares or securities.
Insider dealing is triable either way, meaning that it can be dealt with in either a Magistrates’ or a Crown Court. If dealt with in the Crown Court and the offence took place on or after 1 November 2021, the maximum sentence is 10 years’ imprisonment. If the offence was committed before 1 November 2021, the maximum sentence is 7 years’ imprisonment. The FCA has also indicated that it expects to pursue confiscation against those convicted of insider dealing.1
Civil Insider Dealing / Market Abuse
The civil insider dealing / market abuse regime arises from the Market Abuse Regulation (MAR).
Market abuse encompasses different kinds of wrongdoing under a regulatory framework; it is wider than the criminal offence of insider dealing. For the purposes of this note, the more relevant misconduct that the MAR empowers the FCA to investigate and penalise includes insider dealing and unlawful disclosure of inside information. The purpose of the civil / regulatory regime under MAR is to increase confidence and enhance integrity in the UK financial system. It applies to individuals as well as companies.
The relevant misconduct prohibited under Article 14 of MAR includes: engaging in or attempting to engage in insider dealing; recommending or inducing another person to engage in insider dealing; and unlawfully disclosing inside information.
As with the criminal regime, the treatment of “inside information” is central to any wrongdoing. It involves misconduct relating to precise, non-public information, relating to one or more financial instruments and that if the information were made public, would be likely to have a significant effect on the prices of those financial instruments. For the offences of recommending or inducing another person to engage in insider dealing, this must be on the basis of where the recommending/inducing party possesses inside information.
There are a range of penalties available to the FCA if it makes a finding of market abuse. These include unlimited fines, in which the figure takes into account all the factors surrounding the misconduct; public statements identifying the individual; compensation (if appropriate); and injunctions aimed at preventing market abuse or to require someone to remedy their conduct.
Recent cases
In February 2024, a former analyst at Goldman Sachs was convicted of six counts of insider dealing and three counts of fraud by false representation.2 The individual made a profit of approximately £140,000 and was sentenced to 22 months’ imprisonment.
Another individual was prosecuted in March 2024, a site manager at a manufacturing company who came into possession of inside information relating to an upcoming acquisition.3 The defendant made a profit of £132,000 and was sentenced to 18 months’ imprisonment, suspended for two years.
Recently, the FCA announced the prosecution of two individuals for conspiracy to deal in four stocks while in possession of insider information.4 The alleged profit made between the two suspects is £110,000.
These three cases seem to be ‘low-hanging fruit’ for the FCA to demonstrate its ability and willingness to use its criminal powers to enforce insider dealing legislation. Each instance appears to be an isolated example and, on the face of it, not a particularly resource-intensive investigation for the FCA.
Steps to take if you are accused of insider dealing
Suspects will understandably be concerned whether their identity will be made public, once informed that they are the subject of an insider dealing investigation. The FCA’s position appears to have softened from its initial stance that they would name and shame individuals and companies that are subject to investigation. Under its now walked-back proposals, the FCA’s “commitment to transparency” would have identified subjects in its enforcement activities where in the public interest to do so – even before any final outcome or charging decision had been reached.5
If a suspect can point to any relevant research or evidence they were undertaking around the time of the trading, this may help demonstrate that the trading would have taken place in any event, and was not undertaken on the basis of inside information.
Companies ought to note that in instances of alleged insider dealing, the FCA will look at the systems and controls in place to ensure that access to inside information was properly controlled. Maintaining insider lists is expected, with justification needed for the inclusion of each individual on the list. The FCA monitors this through its Supervision function as well as through Enforcement, meaning that this is an ongoing commitment for firms – not just something to look at after the fact.
The law of insider dealing is complex and the consequences for those accused of it can be devastating. Seeking early legal advice is strongly recommended.
If you have any questions arising from the above note, please contact its author, Matt Davies.
1 https://www.fca.org.uk/news/speeches/teamwork-smart-way-tackle-financial-crime
3 https://www.fca.org.uk/news/press-releases/stuart-bayes-sentenced-insider-dealing
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