Insider trading is a form of corporate fraud that occurs when dealing with the purchase and/or sale of stocks during securities transaction. Insider trading happens when the transaction is influenced by the prior knowledge of future events by people involved in the transaction, hence putting the insider trader in an unfair advantage as financial gain may be benefitted from it.
The Securities and Exchange Commission of the United States has defined insider trading as ‘any securities transaction made when a person involved in the trade has non – public material information and uses this information to violate his or her duty to maintain confidentiality of such knowledge by using it for financial gain’.
An information is deemed material if its release would affect a company’s share price. Examples of such information would include an incoming merger, an offer for tender or the launch of a new product amongst others.
As such, when the ‘insider’ shares any confidential information of a company to their relationship, be it corporate, fiduciary or business, this is going to impact on the company’s stock price. Releasing information intentionally also denote bad faith on behalf of the insider and a disregard of the interest of the company they work for or own a duty to.
It is worth to note that in the world of insider trading, there are 2 parties, namely: the ‘tipper’ and the ‘tippee’. The tipper is the person who breaks his or her fiduciary duty towards the company by leaking confidential information entrusted to him to outsiders. On the other side, the ‘tippee’ is the person who makes use of the leaked information in an attempt of making a financial gain out of its trade.
In Mauritius, the Securities Act 2005 regulates the offence of insider dealing.
Penalty for the Offence of insider trading
Section 111(4) of the Securities Act 2005 spells out that when a person is convicted for the offence of insider dealing, he shall, on conviction, be liable to a fine of not less than 500,000 rupees and not more than one million rupees, or a fine not more than 3 times the amount of any profit gained or loss avoided by any person as a result of the offence, together with imprisonment for a term not exceeding 10 years.
In Mauritius, the only case whereby there was a conviction for the offence of insider dealing, under section 111 of the Securities Act 2005, as of now is Police v/s P. Beeharry 2017 INT 225.
In this case, the accused was a member of the Task Force set up by the Financial Services Commission (FSC). A meeting was held on the 11th of November 2009 with the representatives of the Stock Exchange of Mauritius (SEM), Compagnie d’Investissement et de Developpement Ltee (CIDL) and CIEL Investment Ltd (CIL) whereby it was decided that CIDL would purchase the minority shares of Ireland Blyth Limited (IBL) and the suspension of dealings in the shares would be notified after the close of business by SEM on 12th of November 2009 in the evening.
The accused sold his 11,000 shares of IBL at Rs.72 each at the Central Market of the Stock Exchange of Mauritius on the 12th of November 2009 at 10:29 hours. It is to be noted that the accused had previously purchased those shares at the price of Rs.62 each. Hence, it can be observed that the accused used the confidential information for his financial gain. The latter had to pay a fine of Rs 330,000 and undergo 12 months of imprisonment.
Points to Ponder:
The law regulating insider dealing came into force in 2005 and after 15 years, there is only one conviction under this legislation. Is Mauritius insider trader free? Is the existing legislation ineffective? Or the regulatory bodies are not competent enough to track this white collar crime?
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