Insider trading has been a hot topic in the finance world. Over the last year, the Securities and Exchange Commission (SEC) has fined or charged dozens of analysts and traders as part of an investigation several years in the making – the same investigation that resulted in Raj Rajaratnam being sentenced to 11 years in prison.
Recently, David Einhorn’s Greenlight Capital was fined for what Britain’s Financial Services Authority (FSA) for what it calls ‘insider dealing’ over his trades with Punch Taverns (read his story here). However, it is unlikely that the SEC would try to convict him for the same. “While insider trading cases have garnered significant attention lately, it is unlikely the Securities and Exchange Commission would pursue securities fraud charges based on the information that led the F.S.A. to impose approximately $11.6 million in civil penalties,” reports the New York Times. “The crucial difference between British and American insider trading law centers on when liability attaches for trading on confidential information. The violation charged against Mr. Einhorn and Greenlight was “market abuse” under § 118 of the Financial Services and Markets Act of 2000, which makes it a violation for an insider to buy or sell shares “on the basis of inside information relating to the investment in question.”
In the UK, the definition of an “insider” is fairly broad, “encompassing any person who learns confidential information ‘as a result of having access to the information through the exercise of his employment, profession or duties’ or which was ‘obtained by other means and which he knows, or could reasonably be expected to know, is inside information.” This is known as the “possession theory” of insider trading. It basically means that any person who is given confidential information violates the law by trading on it. In the US, the Supreme Court rejected the “possession theory” argument, going so far even to overturn the conviction of a financial printer who learned the identities of takeover targets and then bought their stock before the deal announcements (Chiarella vs. United States). They ruled that “insider trading requires the government to prove the person charged had a duty to disclose arising from a relationship of trust and confidence between parties to a transaction.”