In early 2016, a scandal erupted that nearly cost the reputation of the German stock exchange Deutsche Börse and the London Stock Exchange. The Frankfurt prosecutor's office charged Deutsche Börse with an unspoken agreement with the London Stock Exchange, and the head of Deutsche Börse with the acquisition of shares based on insider information.
In an official response to the allegations, the Deutsche Börse administration indicated that it did not agree with the accusations made by the prosecutor's office and denied the fact of insider trading. However, the management of the exchange agreed to sign an agreement with the authorities, according to which it is obliged to pay a fine of $ 10.5 million. According to the Deutsche Börse administration, the decision was dictated by the desire to complete the investigation and return to business management.
What is insider trading?
Let's look at the example of the case with the German and London stock exchanges. In early 2016, the London Stock Exchange and Deutsche Börse announced a merger, prompting a rise in the value of the German company's shares. However, it turned out that two months before the official announcement of the deal, the leading manager of Deutsche Börse had bought up the shares for 4.5 million euros.
Despite the assurances of the head of the German stock exchange that the acquisition of shares took place before the start of negotiations, the prosecutor's office in Frankfurt found evidence indicating that the deal began to be discussed in mid-2015. Thus, the director of the German stock exchange had insider information at his disposal, which he used to buy shares, and then sell - and make money on the difference in the cost of securities.
The European Commission ultimately blocked the merger, as such deals significantly limit competition. As a result, Deutsche Börse lost 77 million euros.
Who are insiders?
The American Securities and Exchange Commission (SEC) gives the following definition to the concept: "insider" - a shareholder of a company, which owns more than 10% of shares. Most often, insiders simultaneously serve as managing managers or CEOs of companies.
High-ranking employees have unlimited access to classified, non-public information that is relevant to the operation of the company and, therefore, know more about its financial position than minority shareholders. In addition, they are aware of the factors that can cause fluctuations in stock prices. All such information is considered insider until it becomes public.
It is important to understand that an insider does not necessarily have a leadership position. It can be an ordinary employee or even a cleaning lady, as well as people from the inner circle, who may be employees of other enterprises. The main thing is having access to insider information.
Access to non-public information provides an insider with the opportunity to manipulate the stock market and receive illegal excess profits. Small shareholders are deprived of such an opportunity.
Concluding transactions using non-public information is insider trading. The laws of many countries, including the Russian Federation and the United States of America, prohibit the use of inside information. However, the statistics of the analytics center of the US Securities Commission of the SEC records that a third of transactions in the international stock market are insider deals. Since 2010, the Central Bank of Russia has officially recorded only four facts of insider trading in shares.
How do insiders make money from unpublished information?
Trade in stocks using proprietary information provides individual participants with significant advantages and the ability to conclude a successful transaction bypassing competitors. For example, having gained access to reports on the successful implementation of innovative developments, a potential investor buys up shares before the price increases.
Insider trading harms the stock markets, destroys the credibility of fair competition on the stock exchange, and turns the stock market game into an insider chase. Of course, not all successful gamblers use classified information and not all insider trading is done bypassing the law. Most joint stock companies give managers the right to sell or buy shares of a company on stock exchanges. The only condition for such transactions is the provision of information by the insider to the exchange regulator or registration in a source with public access.
How much do insiders make from trades?
Profit depends on many factors, first of all - on the value of shares on the market. In 2006, Gillette and Procter & Gamble agreed to merge. The deal was supported by Merrill Lynch. The firm's advisor conspired with friends and passed inside information to people from his inner circle, who earned from 300 to 500 thousand dollars. The total profit of the insider friends was only $ 100 thousand, but the aunt of one of them earned 2 million. The large income of the pensioner, who had not previously been fond of trading on the stock exchange, aroused the interest of the American Securities Commission, which revealed the scheme.
Sometimes, in the pursuit of profit, scammers who cannot get classified information create it on their own. In April 2017, explosions thundered near the bus carrying the footballers of the German club Borussia. At the trial, the defendant, a citizen of Russia and Germany, admitted that in this way he planned to earn $ 4 million by reducing the value of the club's shares. Shortly before the explosion, he bought an exchange contract that allows him to profit from a fall in shares. However, the quotes lost only 0.33 euros and the potential profit on the contract amounted to 500 thousand euros. However, this was enough for the bank to pay attention to the transaction and report the suspicions to the police. The story came out resonant and formed the basis of the essay "Bad way to make money on options . "
Is inside information always true?
No, insider information is by no means always true. Manipulating options and quotes on stock exchanges with false information is a common method of dishonest trading. The source of false insider information is the media and the Internet, and this is not always a planned "stuffing". Sometimes journalists misinterpret the speech of a politician, stock exchange expert or head of a large company, as a result of which they publish false information.
In 2003, a scandal erupted around the Yukos firm. It turned out that unscrupulous shareholders artificially inflated the value of shares and managed to raise the share price by almost a quarter in a month. And immediately afterwards, information appeared in the press about the merger of YUKOS and the Sibneft corporation. Insider profits were estimated to be $ 10 million.
What is the legal liability for insider trading?
Insider trading is illegal in most parts of the world, and the war on fraudulent transactions has been going on for decades. However, eliminating illegal trade completely is not easy. There are reasons for this.
In insider trading cases, it is difficult to identify the perpetrator. An insider can be not only a company employee who has access to classified information, but also any exchange player who has become aware of unpublished data. Such an exchange participant violates the duty of trust.
Trust as a duty of participants in exchange transactions is legally enshrined in many states. This helps to achieve fair trading on the stock exchange. A breach of trust is even a hint to third parties to change stock quotes based on data that has not yet been published. In this case, it is the insider who is found guilty of concluding an illegal transaction.
An employee of the company is always responsible for the release of unpublished information. For example, the president of a company may not directly participate in exchange trading. Close relatives can gamble on options, and he provides them with inside information. And then the situation falls into the category of illegal - insider - trading.
An active fight against insiders began in the United States during the Great Depression. In 1929, they investigated the causes of the crisis on the stock exchange and it turned out that the leading financiers violated the rules for the use of unpublished information. Five years later, the Pecora Act was passed.
In the late 1960s, a new insider scandal erupted in the United States. The vice president of the mining company TGS, Charles Fogarty, began to buy shares in the company after the discovery of new deposits. After the news was published, TGS shares rose, and the insider became richer by $ 150,000. The history of TGS has served as the impetus for tougher liability for insider trading in the United States.
Until 2009, in Russia, the only rule of law establishing liability for insider operations was Article 15.21 of the Code of Administrative Offenses. Then, Article 185.3 appeared in the Criminal Code, which provides for a tougher punishment for fraud in the securities market: the maximum sanction of the article is six years in prison.
The main initiator of changes in the fight against insider trading is the Bank of Russia. When the amendments to the law “On Countering the Misuse of Insider Information and Market Manipulation” are adopted, the Bank of Russia will be able to participate in operational activities on an equal basis with the employees of the Ministry of Internal Affairs.
If there is information about the performance of insider transactions, the regulator has the right to send a request to law enforcement officers and receive information about the conduct of operational operations, including:
- access to private correspondence;
- wiretapping of telephone conversations;
- surveillance of suspects.
From the point of view of the Bank of Russia, access to such information will increase the effectiveness of investigations into facts of insider trading. Despite the adopted in 2010, the court practice does not contain examples of cases of insider trading on the exchange being heard in court.