Business Financial Crime Financial Markets Abuse

2

ldquoKnowledge is powerAdvance knowledge is profitrdquo

Attributed to the Rothschild Family

Almost 200 years ago the Rothschild Family secured their fortune by accumulating British Government securities on the basis of advance knowledge of Wellingtonrsquos victory over Napoleon at Waterloo

Although would not today be defined as illegal trading as would have been public knowledge

3

Conflicts Between Market Participants Information asymmetry occurs when one

party to a transaction has information that the other party doesnrsquot

Superior information creates a situation where one party can use that information for their own benefit at the expense of the other

So one party wins one loses

4

Insider Trading

A City banker nicknamed The Walrus has been jailed for five years for making a fortune through insider-trading

Asif Butt 35 was supposed to block information leaks at Credit Suisse First Boston (CSFB) but instead he used his knowledge to make money

He used old school friends to place bets of up to pound600000 often minutes before major financial announcements

Mr Butt has been convicted of making at least pound265000 though the police think the figure is closer to pound2m

Mr Butt was fired by CSFB in January 2002 when evidence of his activities first came to light and is thought to be the first City compliance officer to be found guilty of insider trading

5

Insider Trading

Judge Ewen also made it clear that this type of criminal activity was not victimless

If investors large and small come to the view that they cannot trust the market and that people are habitually stealing a market on them the health of the financial services industrywill suffer severely

6

Insider Trading

Almost a third of large UK takeover deals show signs of possible insider trading the Financial Services Authority (FSA) has warned

The UKs financial regulator analysed takeover bids in 2000 and 2004 and said it had found unusual share price movements before about 29 of them

Such movements suggest some informed trading was going on said an FSA spokesman

The FSA added that the situation appeared to be getting worse Its study also found signs of informed trading before 217 of

potentially market-moving announcements by companies listed on the FTSE 350 index between 1998 and 2003

The study researched a total of 1500 announcements by FTSE 350 members

7

Insider Trading

A Goldman Sachs analyst a Merrill Lynch banker and a printer have been arrested charged with insider trading

According to court documents the three along with another worker at Goldman Sachs took part in an insider trading plot that made more than $67m (pound38m)

The Goldman workers are alleged to have bribed staff at a printing plant to get early copies of Business Week magazine

The pair are also believed to have paid the Merrill analyst for inside information on takeovers

8

Insider Trading Barclays Settles SEC Insider Trading Case Insider trading can happen in lots of different ways and Barclays

Bank PLC chose an interesting one using information from the creditors committees of bankrupt companies to trade in their debt securities

Steven Landzberg a defendant in the case along with Barclays was the banks representative on the creditors committees for six different companies and as a member received private information about the financial condition of the debtors

Landzbergs more important job at Barclays was as head of its US Distressed Debt Desk which traded the bonds of companies in bankruptcy making it very hard to resist the opportunity to trade

SEC took action against Barclays Barclays settled the case by agreeing to pay over $109 million

$3971736 in disgorgement plus prejudgment interest of $971825 and a civil penalty of $6 million

9

Insider TradingSEC Files Civil Insider Trading Charges Against

Former Countrywide Exec October 29 2007 LOS ANGELES (AP) - A former executive at mortgage

lender Countrywide Financial Corp was charged Monday with insider trading after he sold stock before the company announced negative earning results three years ago regulators said

The Securities and Exchange Commission filed a civil complaint against Quan Zhu 43 in Los Angeles federal court Zhu has agreed to settle the charges without admitting or denying the allegations by paying nearly $109000 officials said

Regulators say Zhu was tipped to nonpublic information about the companys negative earning results in 2004

10

Insider Trading

Illegal insider trading refers generally to buying or selling a security in breach of a fiduciary duty or other relationship of trust and confidence

While in possession of material nonpublic information about the security

Insider trading violations may also include tipping such information securities trading by the person tipped and securities trading by those who misappropriate such information

11

SEC Define Insiders

Examples of insider trading cases that have been brought by the SEC are cases against

Corporate officers directors and employees who traded the corporations securities after learning of significant confidential corporate developments

Friends business associates family members and other tippees of such officers directors and employees who traded the securities after receiving such information

Employees of law banking brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded

Government employees who learned of such information because of their employment by the government and

Other persons who misappropriated and took advantage of confidential information from their employers

12

WHO ARE INSIDERS

A broad range of individuals A partner in a law firm representing the acquiring company in a

hostile takeover bid who traded in target company stock A Wall Street Journal columnist who traded prior to publication of

his column in the stock of companies he wrote about A psychiatrist who traded on the basis of information learned

from a patient A financial printer who traded in the stock of companies about

which he was preparing disclosure documents

13

REASONS FOR REGULATING INSIDER TRADING Unfair practice to public investors Prohibiting it promotes efficiency of markets Property of material information belongs to the

corporation for business purposes Enforce rules of the game Protect the weak from exploitation by cynical

operators

14

Securities and Exchange Commission 1920s were period of much fraud manipulation SEC part of Rooseveltrsquos New Deal 1934 Initially viewed by business as a radical almost

socialist institution Peculiar that it started in US imitated by other countries

Motive was repeated examples of exploitation of minority or unobservant shareholders

15

US REGULATION OF INSIDER TRADING

Section 16 of the 1934 Securities Exchange Act

SEC Rule 10b-5Misappropriation Theory

SEC Rule 14e-3

16

Rule 10b-5

Promulgated in 1942 under sect10(b) of the Securities Exchange Act of 1934

Covers material corporate misstatements or non

disclosures insider trading and corporate mismanagement cases

regarding transactions in shares or other securities

Today a major weapon to curb insider trading as a catch-all anti-fraud provision

17

Misappropriation Theory of Insider Trading

A person violates Rule 10b-5 if

Misappropriates material nonpublic information

by breaching a duty arising out of a relationship of trust or confidence to the source of information

and uses that information in a securities transaction

regardless of whether he owed any duty to the shareholders of the traded stock

18

SEC Enforcement of the Rule 10b-5 and Rule 14e-3

Permanent or a temporary injunction Disgorgement of profits (most commonly used) Correction of misleading statements

Disclosure of material information Cease and desist orders Disciplinary sanctions and civil penalties for securities

market professionals Bounty provisions by the sect20A of ITSFEA sect21A -gt civil monetary penalty of up to three times the

profit gained or loss avoided by a person who violates Rules 10b-5 and 14e-3

19

Implications of Financial Fraud for Financial Markets If investors are not convinced that the markets

are reasonably fair they will not invest Societies where individuals do not respect the rule of

law or where law breakers are not found and punished find that financial markets cannot develop

In these cases legitimate businesses operating those countries lack access to capital cannot invest cannot create jobs and cannot compete in international markets for their products and services

20

Arguments for legalising insider trading Some economists and legal scholars

argue that laws making insider trading illegal should be revoked They claim that insider trading based on material onpublic information benefits investors in general by more quickly introducing new information into the market

21

Arguments for legalising insider trading Milton Friedman said You want more insider

trading not less You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that

Friedman did not believe that the trader should be required to make his trade known to the public because the buying or selling pressure itself is information for the market

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

2

ldquoKnowledge is powerAdvance knowledge is profitrdquo

Attributed to the Rothschild Family

Almost 200 years ago the Rothschild Family secured their fortune by accumulating British Government securities on the basis of advance knowledge of Wellingtonrsquos victory over Napoleon at Waterloo

Although would not today be defined as illegal trading as would have been public knowledge

3

Conflicts Between Market Participants Information asymmetry occurs when one

party to a transaction has information that the other party doesnrsquot

Superior information creates a situation where one party can use that information for their own benefit at the expense of the other

So one party wins one loses

4

Insider Trading

A City banker nicknamed The Walrus has been jailed for five years for making a fortune through insider-trading

Asif Butt 35 was supposed to block information leaks at Credit Suisse First Boston (CSFB) but instead he used his knowledge to make money

He used old school friends to place bets of up to pound600000 often minutes before major financial announcements

Mr Butt has been convicted of making at least pound265000 though the police think the figure is closer to pound2m

Mr Butt was fired by CSFB in January 2002 when evidence of his activities first came to light and is thought to be the first City compliance officer to be found guilty of insider trading

5

Insider Trading

Judge Ewen also made it clear that this type of criminal activity was not victimless

If investors large and small come to the view that they cannot trust the market and that people are habitually stealing a market on them the health of the financial services industrywill suffer severely

6

Insider Trading

Almost a third of large UK takeover deals show signs of possible insider trading the Financial Services Authority (FSA) has warned

The UKs financial regulator analysed takeover bids in 2000 and 2004 and said it had found unusual share price movements before about 29 of them

Such movements suggest some informed trading was going on said an FSA spokesman

The FSA added that the situation appeared to be getting worse Its study also found signs of informed trading before 217 of

potentially market-moving announcements by companies listed on the FTSE 350 index between 1998 and 2003

The study researched a total of 1500 announcements by FTSE 350 members

7

Insider Trading

A Goldman Sachs analyst a Merrill Lynch banker and a printer have been arrested charged with insider trading

According to court documents the three along with another worker at Goldman Sachs took part in an insider trading plot that made more than $67m (pound38m)

The Goldman workers are alleged to have bribed staff at a printing plant to get early copies of Business Week magazine

The pair are also believed to have paid the Merrill analyst for inside information on takeovers

8

Insider Trading Barclays Settles SEC Insider Trading Case Insider trading can happen in lots of different ways and Barclays

Bank PLC chose an interesting one using information from the creditors committees of bankrupt companies to trade in their debt securities

Steven Landzberg a defendant in the case along with Barclays was the banks representative on the creditors committees for six different companies and as a member received private information about the financial condition of the debtors

Landzbergs more important job at Barclays was as head of its US Distressed Debt Desk which traded the bonds of companies in bankruptcy making it very hard to resist the opportunity to trade

SEC took action against Barclays Barclays settled the case by agreeing to pay over $109 million

$3971736 in disgorgement plus prejudgment interest of $971825 and a civil penalty of $6 million

9

Insider TradingSEC Files Civil Insider Trading Charges Against

Former Countrywide Exec October 29 2007 LOS ANGELES (AP) - A former executive at mortgage

lender Countrywide Financial Corp was charged Monday with insider trading after he sold stock before the company announced negative earning results three years ago regulators said

The Securities and Exchange Commission filed a civil complaint against Quan Zhu 43 in Los Angeles federal court Zhu has agreed to settle the charges without admitting or denying the allegations by paying nearly $109000 officials said

Regulators say Zhu was tipped to nonpublic information about the companys negative earning results in 2004

10

Insider Trading

Illegal insider trading refers generally to buying or selling a security in breach of a fiduciary duty or other relationship of trust and confidence

While in possession of material nonpublic information about the security

Insider trading violations may also include tipping such information securities trading by the person tipped and securities trading by those who misappropriate such information

11

SEC Define Insiders

Examples of insider trading cases that have been brought by the SEC are cases against

Corporate officers directors and employees who traded the corporations securities after learning of significant confidential corporate developments

Friends business associates family members and other tippees of such officers directors and employees who traded the securities after receiving such information

Employees of law banking brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded

Government employees who learned of such information because of their employment by the government and

Other persons who misappropriated and took advantage of confidential information from their employers

12

WHO ARE INSIDERS

A broad range of individuals A partner in a law firm representing the acquiring company in a

hostile takeover bid who traded in target company stock A Wall Street Journal columnist who traded prior to publication of

his column in the stock of companies he wrote about A psychiatrist who traded on the basis of information learned

from a patient A financial printer who traded in the stock of companies about

which he was preparing disclosure documents

13

REASONS FOR REGULATING INSIDER TRADING Unfair practice to public investors Prohibiting it promotes efficiency of markets Property of material information belongs to the

corporation for business purposes Enforce rules of the game Protect the weak from exploitation by cynical

operators

14

Securities and Exchange Commission 1920s were period of much fraud manipulation SEC part of Rooseveltrsquos New Deal 1934 Initially viewed by business as a radical almost

socialist institution Peculiar that it started in US imitated by other countries

Motive was repeated examples of exploitation of minority or unobservant shareholders

15

US REGULATION OF INSIDER TRADING

Section 16 of the 1934 Securities Exchange Act

SEC Rule 10b-5Misappropriation Theory

SEC Rule 14e-3

16

Rule 10b-5

Promulgated in 1942 under sect10(b) of the Securities Exchange Act of 1934

Covers material corporate misstatements or non

disclosures insider trading and corporate mismanagement cases

regarding transactions in shares or other securities

Today a major weapon to curb insider trading as a catch-all anti-fraud provision

17

Misappropriation Theory of Insider Trading

A person violates Rule 10b-5 if

Misappropriates material nonpublic information

by breaching a duty arising out of a relationship of trust or confidence to the source of information

and uses that information in a securities transaction

regardless of whether he owed any duty to the shareholders of the traded stock

18

SEC Enforcement of the Rule 10b-5 and Rule 14e-3

Permanent or a temporary injunction Disgorgement of profits (most commonly used) Correction of misleading statements

Disclosure of material information Cease and desist orders Disciplinary sanctions and civil penalties for securities

market professionals Bounty provisions by the sect20A of ITSFEA sect21A -gt civil monetary penalty of up to three times the

profit gained or loss avoided by a person who violates Rules 10b-5 and 14e-3

19

Implications of Financial Fraud for Financial Markets If investors are not convinced that the markets

are reasonably fair they will not invest Societies where individuals do not respect the rule of

law or where law breakers are not found and punished find that financial markets cannot develop

In these cases legitimate businesses operating those countries lack access to capital cannot invest cannot create jobs and cannot compete in international markets for their products and services

20

Arguments for legalising insider trading Some economists and legal scholars

argue that laws making insider trading illegal should be revoked They claim that insider trading based on material onpublic information benefits investors in general by more quickly introducing new information into the market

21

Arguments for legalising insider trading Milton Friedman said You want more insider

trading not less You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that

Friedman did not believe that the trader should be required to make his trade known to the public because the buying or selling pressure itself is information for the market

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

3

Conflicts Between Market Participants Information asymmetry occurs when one

party to a transaction has information that the other party doesnrsquot

Superior information creates a situation where one party can use that information for their own benefit at the expense of the other

So one party wins one loses

4

Insider Trading

A City banker nicknamed The Walrus has been jailed for five years for making a fortune through insider-trading

Asif Butt 35 was supposed to block information leaks at Credit Suisse First Boston (CSFB) but instead he used his knowledge to make money

He used old school friends to place bets of up to pound600000 often minutes before major financial announcements

Mr Butt has been convicted of making at least pound265000 though the police think the figure is closer to pound2m

Mr Butt was fired by CSFB in January 2002 when evidence of his activities first came to light and is thought to be the first City compliance officer to be found guilty of insider trading

5

Insider Trading

Judge Ewen also made it clear that this type of criminal activity was not victimless

If investors large and small come to the view that they cannot trust the market and that people are habitually stealing a market on them the health of the financial services industrywill suffer severely

6

Insider Trading

Almost a third of large UK takeover deals show signs of possible insider trading the Financial Services Authority (FSA) has warned

The UKs financial regulator analysed takeover bids in 2000 and 2004 and said it had found unusual share price movements before about 29 of them

Such movements suggest some informed trading was going on said an FSA spokesman

The FSA added that the situation appeared to be getting worse Its study also found signs of informed trading before 217 of

potentially market-moving announcements by companies listed on the FTSE 350 index between 1998 and 2003

The study researched a total of 1500 announcements by FTSE 350 members

7

Insider Trading

A Goldman Sachs analyst a Merrill Lynch banker and a printer have been arrested charged with insider trading

According to court documents the three along with another worker at Goldman Sachs took part in an insider trading plot that made more than $67m (pound38m)

The Goldman workers are alleged to have bribed staff at a printing plant to get early copies of Business Week magazine

The pair are also believed to have paid the Merrill analyst for inside information on takeovers

8

Insider Trading Barclays Settles SEC Insider Trading Case Insider trading can happen in lots of different ways and Barclays

Bank PLC chose an interesting one using information from the creditors committees of bankrupt companies to trade in their debt securities

Steven Landzberg a defendant in the case along with Barclays was the banks representative on the creditors committees for six different companies and as a member received private information about the financial condition of the debtors

Landzbergs more important job at Barclays was as head of its US Distressed Debt Desk which traded the bonds of companies in bankruptcy making it very hard to resist the opportunity to trade

SEC took action against Barclays Barclays settled the case by agreeing to pay over $109 million

$3971736 in disgorgement plus prejudgment interest of $971825 and a civil penalty of $6 million

9

Insider TradingSEC Files Civil Insider Trading Charges Against

Former Countrywide Exec October 29 2007 LOS ANGELES (AP) - A former executive at mortgage

lender Countrywide Financial Corp was charged Monday with insider trading after he sold stock before the company announced negative earning results three years ago regulators said

The Securities and Exchange Commission filed a civil complaint against Quan Zhu 43 in Los Angeles federal court Zhu has agreed to settle the charges without admitting or denying the allegations by paying nearly $109000 officials said

Regulators say Zhu was tipped to nonpublic information about the companys negative earning results in 2004

10

Insider Trading

Illegal insider trading refers generally to buying or selling a security in breach of a fiduciary duty or other relationship of trust and confidence

While in possession of material nonpublic information about the security

Insider trading violations may also include tipping such information securities trading by the person tipped and securities trading by those who misappropriate such information

11

SEC Define Insiders

Examples of insider trading cases that have been brought by the SEC are cases against

Corporate officers directors and employees who traded the corporations securities after learning of significant confidential corporate developments

Friends business associates family members and other tippees of such officers directors and employees who traded the securities after receiving such information

Employees of law banking brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded

Government employees who learned of such information because of their employment by the government and

Other persons who misappropriated and took advantage of confidential information from their employers

12

WHO ARE INSIDERS

A broad range of individuals A partner in a law firm representing the acquiring company in a

hostile takeover bid who traded in target company stock A Wall Street Journal columnist who traded prior to publication of

his column in the stock of companies he wrote about A psychiatrist who traded on the basis of information learned

from a patient A financial printer who traded in the stock of companies about

which he was preparing disclosure documents

13

REASONS FOR REGULATING INSIDER TRADING Unfair practice to public investors Prohibiting it promotes efficiency of markets Property of material information belongs to the

corporation for business purposes Enforce rules of the game Protect the weak from exploitation by cynical

operators

14

Securities and Exchange Commission 1920s were period of much fraud manipulation SEC part of Rooseveltrsquos New Deal 1934 Initially viewed by business as a radical almost

socialist institution Peculiar that it started in US imitated by other countries

Motive was repeated examples of exploitation of minority or unobservant shareholders

15

US REGULATION OF INSIDER TRADING

Section 16 of the 1934 Securities Exchange Act

SEC Rule 10b-5Misappropriation Theory

SEC Rule 14e-3

16

Rule 10b-5

Promulgated in 1942 under sect10(b) of the Securities Exchange Act of 1934

Covers material corporate misstatements or non

disclosures insider trading and corporate mismanagement cases

regarding transactions in shares or other securities

Today a major weapon to curb insider trading as a catch-all anti-fraud provision

17

Misappropriation Theory of Insider Trading

A person violates Rule 10b-5 if

Misappropriates material nonpublic information

by breaching a duty arising out of a relationship of trust or confidence to the source of information

and uses that information in a securities transaction

regardless of whether he owed any duty to the shareholders of the traded stock

18

SEC Enforcement of the Rule 10b-5 and Rule 14e-3

Permanent or a temporary injunction Disgorgement of profits (most commonly used) Correction of misleading statements

Disclosure of material information Cease and desist orders Disciplinary sanctions and civil penalties for securities

market professionals Bounty provisions by the sect20A of ITSFEA sect21A -gt civil monetary penalty of up to three times the

profit gained or loss avoided by a person who violates Rules 10b-5 and 14e-3

19

Implications of Financial Fraud for Financial Markets If investors are not convinced that the markets

are reasonably fair they will not invest Societies where individuals do not respect the rule of

law or where law breakers are not found and punished find that financial markets cannot develop

In these cases legitimate businesses operating those countries lack access to capital cannot invest cannot create jobs and cannot compete in international markets for their products and services

20

Arguments for legalising insider trading Some economists and legal scholars

argue that laws making insider trading illegal should be revoked They claim that insider trading based on material onpublic information benefits investors in general by more quickly introducing new information into the market

21

Arguments for legalising insider trading Milton Friedman said You want more insider

trading not less You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that

Friedman did not believe that the trader should be required to make his trade known to the public because the buying or selling pressure itself is information for the market

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

4

Insider Trading

A City banker nicknamed The Walrus has been jailed for five years for making a fortune through insider-trading

Asif Butt 35 was supposed to block information leaks at Credit Suisse First Boston (CSFB) but instead he used his knowledge to make money

He used old school friends to place bets of up to pound600000 often minutes before major financial announcements

Mr Butt has been convicted of making at least pound265000 though the police think the figure is closer to pound2m

Mr Butt was fired by CSFB in January 2002 when evidence of his activities first came to light and is thought to be the first City compliance officer to be found guilty of insider trading

5

Insider Trading

Judge Ewen also made it clear that this type of criminal activity was not victimless

If investors large and small come to the view that they cannot trust the market and that people are habitually stealing a market on them the health of the financial services industrywill suffer severely

6

Insider Trading

Almost a third of large UK takeover deals show signs of possible insider trading the Financial Services Authority (FSA) has warned

The UKs financial regulator analysed takeover bids in 2000 and 2004 and said it had found unusual share price movements before about 29 of them

Such movements suggest some informed trading was going on said an FSA spokesman

The FSA added that the situation appeared to be getting worse Its study also found signs of informed trading before 217 of

potentially market-moving announcements by companies listed on the FTSE 350 index between 1998 and 2003

The study researched a total of 1500 announcements by FTSE 350 members

7

Insider Trading

A Goldman Sachs analyst a Merrill Lynch banker and a printer have been arrested charged with insider trading

According to court documents the three along with another worker at Goldman Sachs took part in an insider trading plot that made more than $67m (pound38m)

The Goldman workers are alleged to have bribed staff at a printing plant to get early copies of Business Week magazine

The pair are also believed to have paid the Merrill analyst for inside information on takeovers

8

Insider Trading Barclays Settles SEC Insider Trading Case Insider trading can happen in lots of different ways and Barclays

Bank PLC chose an interesting one using information from the creditors committees of bankrupt companies to trade in their debt securities

Steven Landzberg a defendant in the case along with Barclays was the banks representative on the creditors committees for six different companies and as a member received private information about the financial condition of the debtors

Landzbergs more important job at Barclays was as head of its US Distressed Debt Desk which traded the bonds of companies in bankruptcy making it very hard to resist the opportunity to trade

SEC took action against Barclays Barclays settled the case by agreeing to pay over $109 million

$3971736 in disgorgement plus prejudgment interest of $971825 and a civil penalty of $6 million

9

Insider TradingSEC Files Civil Insider Trading Charges Against

Former Countrywide Exec October 29 2007 LOS ANGELES (AP) - A former executive at mortgage

lender Countrywide Financial Corp was charged Monday with insider trading after he sold stock before the company announced negative earning results three years ago regulators said

The Securities and Exchange Commission filed a civil complaint against Quan Zhu 43 in Los Angeles federal court Zhu has agreed to settle the charges without admitting or denying the allegations by paying nearly $109000 officials said

Regulators say Zhu was tipped to nonpublic information about the companys negative earning results in 2004

10

Insider Trading

Illegal insider trading refers generally to buying or selling a security in breach of a fiduciary duty or other relationship of trust and confidence

While in possession of material nonpublic information about the security

Insider trading violations may also include tipping such information securities trading by the person tipped and securities trading by those who misappropriate such information

11

SEC Define Insiders

Examples of insider trading cases that have been brought by the SEC are cases against

Corporate officers directors and employees who traded the corporations securities after learning of significant confidential corporate developments

Friends business associates family members and other tippees of such officers directors and employees who traded the securities after receiving such information

Employees of law banking brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded

Government employees who learned of such information because of their employment by the government and

Other persons who misappropriated and took advantage of confidential information from their employers

12

WHO ARE INSIDERS

A broad range of individuals A partner in a law firm representing the acquiring company in a

hostile takeover bid who traded in target company stock A Wall Street Journal columnist who traded prior to publication of

his column in the stock of companies he wrote about A psychiatrist who traded on the basis of information learned

from a patient A financial printer who traded in the stock of companies about

which he was preparing disclosure documents

13

REASONS FOR REGULATING INSIDER TRADING Unfair practice to public investors Prohibiting it promotes efficiency of markets Property of material information belongs to the

corporation for business purposes Enforce rules of the game Protect the weak from exploitation by cynical

operators

14

Securities and Exchange Commission 1920s were period of much fraud manipulation SEC part of Rooseveltrsquos New Deal 1934 Initially viewed by business as a radical almost

socialist institution Peculiar that it started in US imitated by other countries

Motive was repeated examples of exploitation of minority or unobservant shareholders

15

US REGULATION OF INSIDER TRADING

Section 16 of the 1934 Securities Exchange Act

SEC Rule 10b-5Misappropriation Theory

SEC Rule 14e-3

16

Rule 10b-5

Promulgated in 1942 under sect10(b) of the Securities Exchange Act of 1934

Covers material corporate misstatements or non

disclosures insider trading and corporate mismanagement cases

regarding transactions in shares or other securities

Today a major weapon to curb insider trading as a catch-all anti-fraud provision

17

Misappropriation Theory of Insider Trading

A person violates Rule 10b-5 if

Misappropriates material nonpublic information

by breaching a duty arising out of a relationship of trust or confidence to the source of information

and uses that information in a securities transaction

regardless of whether he owed any duty to the shareholders of the traded stock

18

SEC Enforcement of the Rule 10b-5 and Rule 14e-3

Permanent or a temporary injunction Disgorgement of profits (most commonly used) Correction of misleading statements

Disclosure of material information Cease and desist orders Disciplinary sanctions and civil penalties for securities

market professionals Bounty provisions by the sect20A of ITSFEA sect21A -gt civil monetary penalty of up to three times the

profit gained or loss avoided by a person who violates Rules 10b-5 and 14e-3

19

Implications of Financial Fraud for Financial Markets If investors are not convinced that the markets

are reasonably fair they will not invest Societies where individuals do not respect the rule of

law or where law breakers are not found and punished find that financial markets cannot develop

In these cases legitimate businesses operating those countries lack access to capital cannot invest cannot create jobs and cannot compete in international markets for their products and services

20

Arguments for legalising insider trading Some economists and legal scholars

argue that laws making insider trading illegal should be revoked They claim that insider trading based on material onpublic information benefits investors in general by more quickly introducing new information into the market

21

Arguments for legalising insider trading Milton Friedman said You want more insider

trading not less You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that

Friedman did not believe that the trader should be required to make his trade known to the public because the buying or selling pressure itself is information for the market

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

5

Insider Trading

Judge Ewen also made it clear that this type of criminal activity was not victimless

If investors large and small come to the view that they cannot trust the market and that people are habitually stealing a market on them the health of the financial services industrywill suffer severely

6

Insider Trading

Almost a third of large UK takeover deals show signs of possible insider trading the Financial Services Authority (FSA) has warned

The UKs financial regulator analysed takeover bids in 2000 and 2004 and said it had found unusual share price movements before about 29 of them

Such movements suggest some informed trading was going on said an FSA spokesman

The FSA added that the situation appeared to be getting worse Its study also found signs of informed trading before 217 of

potentially market-moving announcements by companies listed on the FTSE 350 index between 1998 and 2003

The study researched a total of 1500 announcements by FTSE 350 members

7

Insider Trading

A Goldman Sachs analyst a Merrill Lynch banker and a printer have been arrested charged with insider trading

According to court documents the three along with another worker at Goldman Sachs took part in an insider trading plot that made more than $67m (pound38m)

The Goldman workers are alleged to have bribed staff at a printing plant to get early copies of Business Week magazine

The pair are also believed to have paid the Merrill analyst for inside information on takeovers

8

Insider Trading Barclays Settles SEC Insider Trading Case Insider trading can happen in lots of different ways and Barclays

Bank PLC chose an interesting one using information from the creditors committees of bankrupt companies to trade in their debt securities

Steven Landzberg a defendant in the case along with Barclays was the banks representative on the creditors committees for six different companies and as a member received private information about the financial condition of the debtors

Landzbergs more important job at Barclays was as head of its US Distressed Debt Desk which traded the bonds of companies in bankruptcy making it very hard to resist the opportunity to trade

SEC took action against Barclays Barclays settled the case by agreeing to pay over $109 million

$3971736 in disgorgement plus prejudgment interest of $971825 and a civil penalty of $6 million

9

Insider TradingSEC Files Civil Insider Trading Charges Against

Former Countrywide Exec October 29 2007 LOS ANGELES (AP) - A former executive at mortgage

lender Countrywide Financial Corp was charged Monday with insider trading after he sold stock before the company announced negative earning results three years ago regulators said

The Securities and Exchange Commission filed a civil complaint against Quan Zhu 43 in Los Angeles federal court Zhu has agreed to settle the charges without admitting or denying the allegations by paying nearly $109000 officials said

Regulators say Zhu was tipped to nonpublic information about the companys negative earning results in 2004

10

Insider Trading

Illegal insider trading refers generally to buying or selling a security in breach of a fiduciary duty or other relationship of trust and confidence

While in possession of material nonpublic information about the security

Insider trading violations may also include tipping such information securities trading by the person tipped and securities trading by those who misappropriate such information

11

SEC Define Insiders

Examples of insider trading cases that have been brought by the SEC are cases against

Corporate officers directors and employees who traded the corporations securities after learning of significant confidential corporate developments

Friends business associates family members and other tippees of such officers directors and employees who traded the securities after receiving such information

Employees of law banking brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded

Government employees who learned of such information because of their employment by the government and

Other persons who misappropriated and took advantage of confidential information from their employers

12

WHO ARE INSIDERS

A broad range of individuals A partner in a law firm representing the acquiring company in a

hostile takeover bid who traded in target company stock A Wall Street Journal columnist who traded prior to publication of

his column in the stock of companies he wrote about A psychiatrist who traded on the basis of information learned

from a patient A financial printer who traded in the stock of companies about

which he was preparing disclosure documents

13

REASONS FOR REGULATING INSIDER TRADING Unfair practice to public investors Prohibiting it promotes efficiency of markets Property of material information belongs to the

corporation for business purposes Enforce rules of the game Protect the weak from exploitation by cynical

operators

14

Securities and Exchange Commission 1920s were period of much fraud manipulation SEC part of Rooseveltrsquos New Deal 1934 Initially viewed by business as a radical almost

socialist institution Peculiar that it started in US imitated by other countries

Motive was repeated examples of exploitation of minority or unobservant shareholders

15

US REGULATION OF INSIDER TRADING

Section 16 of the 1934 Securities Exchange Act

SEC Rule 10b-5Misappropriation Theory

SEC Rule 14e-3

16

Rule 10b-5

Promulgated in 1942 under sect10(b) of the Securities Exchange Act of 1934

Covers material corporate misstatements or non

disclosures insider trading and corporate mismanagement cases

regarding transactions in shares or other securities

Today a major weapon to curb insider trading as a catch-all anti-fraud provision

17

Misappropriation Theory of Insider Trading

A person violates Rule 10b-5 if

Misappropriates material nonpublic information

by breaching a duty arising out of a relationship of trust or confidence to the source of information

and uses that information in a securities transaction

regardless of whether he owed any duty to the shareholders of the traded stock

18

SEC Enforcement of the Rule 10b-5 and Rule 14e-3

Permanent or a temporary injunction Disgorgement of profits (most commonly used) Correction of misleading statements

Disclosure of material information Cease and desist orders Disciplinary sanctions and civil penalties for securities

market professionals Bounty provisions by the sect20A of ITSFEA sect21A -gt civil monetary penalty of up to three times the

profit gained or loss avoided by a person who violates Rules 10b-5 and 14e-3

19

Implications of Financial Fraud for Financial Markets If investors are not convinced that the markets

are reasonably fair they will not invest Societies where individuals do not respect the rule of

law or where law breakers are not found and punished find that financial markets cannot develop

In these cases legitimate businesses operating those countries lack access to capital cannot invest cannot create jobs and cannot compete in international markets for their products and services

20

Arguments for legalising insider trading Some economists and legal scholars

argue that laws making insider trading illegal should be revoked They claim that insider trading based on material onpublic information benefits investors in general by more quickly introducing new information into the market

21

Arguments for legalising insider trading Milton Friedman said You want more insider

trading not less You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that

Friedman did not believe that the trader should be required to make his trade known to the public because the buying or selling pressure itself is information for the market

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

6

Insider Trading

Almost a third of large UK takeover deals show signs of possible insider trading the Financial Services Authority (FSA) has warned

The UKs financial regulator analysed takeover bids in 2000 and 2004 and said it had found unusual share price movements before about 29 of them

Such movements suggest some informed trading was going on said an FSA spokesman

The FSA added that the situation appeared to be getting worse Its study also found signs of informed trading before 217 of

potentially market-moving announcements by companies listed on the FTSE 350 index between 1998 and 2003

The study researched a total of 1500 announcements by FTSE 350 members

7

Insider Trading

A Goldman Sachs analyst a Merrill Lynch banker and a printer have been arrested charged with insider trading

According to court documents the three along with another worker at Goldman Sachs took part in an insider trading plot that made more than $67m (pound38m)

The Goldman workers are alleged to have bribed staff at a printing plant to get early copies of Business Week magazine

The pair are also believed to have paid the Merrill analyst for inside information on takeovers

8

Insider Trading Barclays Settles SEC Insider Trading Case Insider trading can happen in lots of different ways and Barclays

Bank PLC chose an interesting one using information from the creditors committees of bankrupt companies to trade in their debt securities

Steven Landzberg a defendant in the case along with Barclays was the banks representative on the creditors committees for six different companies and as a member received private information about the financial condition of the debtors

Landzbergs more important job at Barclays was as head of its US Distressed Debt Desk which traded the bonds of companies in bankruptcy making it very hard to resist the opportunity to trade

SEC took action against Barclays Barclays settled the case by agreeing to pay over $109 million

$3971736 in disgorgement plus prejudgment interest of $971825 and a civil penalty of $6 million

9

Insider TradingSEC Files Civil Insider Trading Charges Against

Former Countrywide Exec October 29 2007 LOS ANGELES (AP) - A former executive at mortgage

lender Countrywide Financial Corp was charged Monday with insider trading after he sold stock before the company announced negative earning results three years ago regulators said

The Securities and Exchange Commission filed a civil complaint against Quan Zhu 43 in Los Angeles federal court Zhu has agreed to settle the charges without admitting or denying the allegations by paying nearly $109000 officials said

Regulators say Zhu was tipped to nonpublic information about the companys negative earning results in 2004

10

Insider Trading

Illegal insider trading refers generally to buying or selling a security in breach of a fiduciary duty or other relationship of trust and confidence

While in possession of material nonpublic information about the security

Insider trading violations may also include tipping such information securities trading by the person tipped and securities trading by those who misappropriate such information

11

SEC Define Insiders

Examples of insider trading cases that have been brought by the SEC are cases against

Corporate officers directors and employees who traded the corporations securities after learning of significant confidential corporate developments

Friends business associates family members and other tippees of such officers directors and employees who traded the securities after receiving such information

Employees of law banking brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded

Government employees who learned of such information because of their employment by the government and

Other persons who misappropriated and took advantage of confidential information from their employers

12

WHO ARE INSIDERS

A broad range of individuals A partner in a law firm representing the acquiring company in a

hostile takeover bid who traded in target company stock A Wall Street Journal columnist who traded prior to publication of

his column in the stock of companies he wrote about A psychiatrist who traded on the basis of information learned

from a patient A financial printer who traded in the stock of companies about

which he was preparing disclosure documents

13

REASONS FOR REGULATING INSIDER TRADING Unfair practice to public investors Prohibiting it promotes efficiency of markets Property of material information belongs to the

corporation for business purposes Enforce rules of the game Protect the weak from exploitation by cynical

operators

14

Securities and Exchange Commission 1920s were period of much fraud manipulation SEC part of Rooseveltrsquos New Deal 1934 Initially viewed by business as a radical almost

socialist institution Peculiar that it started in US imitated by other countries

Motive was repeated examples of exploitation of minority or unobservant shareholders

15

US REGULATION OF INSIDER TRADING

Section 16 of the 1934 Securities Exchange Act

SEC Rule 10b-5Misappropriation Theory

SEC Rule 14e-3

16

Rule 10b-5

Promulgated in 1942 under sect10(b) of the Securities Exchange Act of 1934

Covers material corporate misstatements or non

disclosures insider trading and corporate mismanagement cases

regarding transactions in shares or other securities

Today a major weapon to curb insider trading as a catch-all anti-fraud provision

17

Misappropriation Theory of Insider Trading

A person violates Rule 10b-5 if

Misappropriates material nonpublic information

by breaching a duty arising out of a relationship of trust or confidence to the source of information

and uses that information in a securities transaction

regardless of whether he owed any duty to the shareholders of the traded stock

18

SEC Enforcement of the Rule 10b-5 and Rule 14e-3

Permanent or a temporary injunction Disgorgement of profits (most commonly used) Correction of misleading statements

Disclosure of material information Cease and desist orders Disciplinary sanctions and civil penalties for securities

market professionals Bounty provisions by the sect20A of ITSFEA sect21A -gt civil monetary penalty of up to three times the

profit gained or loss avoided by a person who violates Rules 10b-5 and 14e-3

19

Implications of Financial Fraud for Financial Markets If investors are not convinced that the markets

are reasonably fair they will not invest Societies where individuals do not respect the rule of

law or where law breakers are not found and punished find that financial markets cannot develop

In these cases legitimate businesses operating those countries lack access to capital cannot invest cannot create jobs and cannot compete in international markets for their products and services

20

Arguments for legalising insider trading Some economists and legal scholars

argue that laws making insider trading illegal should be revoked They claim that insider trading based on material onpublic information benefits investors in general by more quickly introducing new information into the market

21

Arguments for legalising insider trading Milton Friedman said You want more insider

trading not less You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that

Friedman did not believe that the trader should be required to make his trade known to the public because the buying or selling pressure itself is information for the market

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

7

Insider Trading

A Goldman Sachs analyst a Merrill Lynch banker and a printer have been arrested charged with insider trading

According to court documents the three along with another worker at Goldman Sachs took part in an insider trading plot that made more than $67m (pound38m)

The Goldman workers are alleged to have bribed staff at a printing plant to get early copies of Business Week magazine

The pair are also believed to have paid the Merrill analyst for inside information on takeovers

8

Insider Trading Barclays Settles SEC Insider Trading Case Insider trading can happen in lots of different ways and Barclays

Bank PLC chose an interesting one using information from the creditors committees of bankrupt companies to trade in their debt securities

Steven Landzberg a defendant in the case along with Barclays was the banks representative on the creditors committees for six different companies and as a member received private information about the financial condition of the debtors

Landzbergs more important job at Barclays was as head of its US Distressed Debt Desk which traded the bonds of companies in bankruptcy making it very hard to resist the opportunity to trade

SEC took action against Barclays Barclays settled the case by agreeing to pay over $109 million

$3971736 in disgorgement plus prejudgment interest of $971825 and a civil penalty of $6 million

9

Insider TradingSEC Files Civil Insider Trading Charges Against

Former Countrywide Exec October 29 2007 LOS ANGELES (AP) - A former executive at mortgage

lender Countrywide Financial Corp was charged Monday with insider trading after he sold stock before the company announced negative earning results three years ago regulators said

The Securities and Exchange Commission filed a civil complaint against Quan Zhu 43 in Los Angeles federal court Zhu has agreed to settle the charges without admitting or denying the allegations by paying nearly $109000 officials said

Regulators say Zhu was tipped to nonpublic information about the companys negative earning results in 2004

10

Insider Trading

Illegal insider trading refers generally to buying or selling a security in breach of a fiduciary duty or other relationship of trust and confidence

While in possession of material nonpublic information about the security

Insider trading violations may also include tipping such information securities trading by the person tipped and securities trading by those who misappropriate such information

11

SEC Define Insiders

Examples of insider trading cases that have been brought by the SEC are cases against

Corporate officers directors and employees who traded the corporations securities after learning of significant confidential corporate developments

Friends business associates family members and other tippees of such officers directors and employees who traded the securities after receiving such information

Employees of law banking brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded

Government employees who learned of such information because of their employment by the government and

Other persons who misappropriated and took advantage of confidential information from their employers

12

WHO ARE INSIDERS

A broad range of individuals A partner in a law firm representing the acquiring company in a

hostile takeover bid who traded in target company stock A Wall Street Journal columnist who traded prior to publication of

his column in the stock of companies he wrote about A psychiatrist who traded on the basis of information learned

from a patient A financial printer who traded in the stock of companies about

which he was preparing disclosure documents

13

REASONS FOR REGULATING INSIDER TRADING Unfair practice to public investors Prohibiting it promotes efficiency of markets Property of material information belongs to the

corporation for business purposes Enforce rules of the game Protect the weak from exploitation by cynical

operators

14

Securities and Exchange Commission 1920s were period of much fraud manipulation SEC part of Rooseveltrsquos New Deal 1934 Initially viewed by business as a radical almost

socialist institution Peculiar that it started in US imitated by other countries

Motive was repeated examples of exploitation of minority or unobservant shareholders

15

US REGULATION OF INSIDER TRADING

Section 16 of the 1934 Securities Exchange Act

SEC Rule 10b-5Misappropriation Theory

SEC Rule 14e-3

16

Rule 10b-5

Promulgated in 1942 under sect10(b) of the Securities Exchange Act of 1934

Covers material corporate misstatements or non

disclosures insider trading and corporate mismanagement cases

regarding transactions in shares or other securities

Today a major weapon to curb insider trading as a catch-all anti-fraud provision

17

Misappropriation Theory of Insider Trading

A person violates Rule 10b-5 if

Misappropriates material nonpublic information

by breaching a duty arising out of a relationship of trust or confidence to the source of information

and uses that information in a securities transaction

regardless of whether he owed any duty to the shareholders of the traded stock

18

SEC Enforcement of the Rule 10b-5 and Rule 14e-3

Permanent or a temporary injunction Disgorgement of profits (most commonly used) Correction of misleading statements

Disclosure of material information Cease and desist orders Disciplinary sanctions and civil penalties for securities

market professionals Bounty provisions by the sect20A of ITSFEA sect21A -gt civil monetary penalty of up to three times the

profit gained or loss avoided by a person who violates Rules 10b-5 and 14e-3

19

Implications of Financial Fraud for Financial Markets If investors are not convinced that the markets

are reasonably fair they will not invest Societies where individuals do not respect the rule of

law or where law breakers are not found and punished find that financial markets cannot develop

In these cases legitimate businesses operating those countries lack access to capital cannot invest cannot create jobs and cannot compete in international markets for their products and services

20

Arguments for legalising insider trading Some economists and legal scholars

argue that laws making insider trading illegal should be revoked They claim that insider trading based on material onpublic information benefits investors in general by more quickly introducing new information into the market

21

Arguments for legalising insider trading Milton Friedman said You want more insider

trading not less You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that

Friedman did not believe that the trader should be required to make his trade known to the public because the buying or selling pressure itself is information for the market

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

8

Insider Trading Barclays Settles SEC Insider Trading Case Insider trading can happen in lots of different ways and Barclays

Bank PLC chose an interesting one using information from the creditors committees of bankrupt companies to trade in their debt securities

Steven Landzberg a defendant in the case along with Barclays was the banks representative on the creditors committees for six different companies and as a member received private information about the financial condition of the debtors

Landzbergs more important job at Barclays was as head of its US Distressed Debt Desk which traded the bonds of companies in bankruptcy making it very hard to resist the opportunity to trade

SEC took action against Barclays Barclays settled the case by agreeing to pay over $109 million

$3971736 in disgorgement plus prejudgment interest of $971825 and a civil penalty of $6 million

9

Insider TradingSEC Files Civil Insider Trading Charges Against

Former Countrywide Exec October 29 2007 LOS ANGELES (AP) - A former executive at mortgage

lender Countrywide Financial Corp was charged Monday with insider trading after he sold stock before the company announced negative earning results three years ago regulators said

The Securities and Exchange Commission filed a civil complaint against Quan Zhu 43 in Los Angeles federal court Zhu has agreed to settle the charges without admitting or denying the allegations by paying nearly $109000 officials said

Regulators say Zhu was tipped to nonpublic information about the companys negative earning results in 2004

10

Insider Trading

Illegal insider trading refers generally to buying or selling a security in breach of a fiduciary duty or other relationship of trust and confidence

While in possession of material nonpublic information about the security

Insider trading violations may also include tipping such information securities trading by the person tipped and securities trading by those who misappropriate such information

11

SEC Define Insiders

Examples of insider trading cases that have been brought by the SEC are cases against

Corporate officers directors and employees who traded the corporations securities after learning of significant confidential corporate developments

Friends business associates family members and other tippees of such officers directors and employees who traded the securities after receiving such information

Employees of law banking brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded

Government employees who learned of such information because of their employment by the government and

Other persons who misappropriated and took advantage of confidential information from their employers

12

WHO ARE INSIDERS

A broad range of individuals A partner in a law firm representing the acquiring company in a

hostile takeover bid who traded in target company stock A Wall Street Journal columnist who traded prior to publication of

his column in the stock of companies he wrote about A psychiatrist who traded on the basis of information learned

from a patient A financial printer who traded in the stock of companies about

which he was preparing disclosure documents

13

REASONS FOR REGULATING INSIDER TRADING Unfair practice to public investors Prohibiting it promotes efficiency of markets Property of material information belongs to the

corporation for business purposes Enforce rules of the game Protect the weak from exploitation by cynical

operators

14

Securities and Exchange Commission 1920s were period of much fraud manipulation SEC part of Rooseveltrsquos New Deal 1934 Initially viewed by business as a radical almost

socialist institution Peculiar that it started in US imitated by other countries

Motive was repeated examples of exploitation of minority or unobservant shareholders

15

US REGULATION OF INSIDER TRADING

Section 16 of the 1934 Securities Exchange Act

SEC Rule 10b-5Misappropriation Theory

SEC Rule 14e-3

16

Rule 10b-5

Promulgated in 1942 under sect10(b) of the Securities Exchange Act of 1934

Covers material corporate misstatements or non

disclosures insider trading and corporate mismanagement cases

regarding transactions in shares or other securities

Today a major weapon to curb insider trading as a catch-all anti-fraud provision

17

Misappropriation Theory of Insider Trading

A person violates Rule 10b-5 if

Misappropriates material nonpublic information

by breaching a duty arising out of a relationship of trust or confidence to the source of information

and uses that information in a securities transaction

regardless of whether he owed any duty to the shareholders of the traded stock

18

SEC Enforcement of the Rule 10b-5 and Rule 14e-3

Permanent or a temporary injunction Disgorgement of profits (most commonly used) Correction of misleading statements

Disclosure of material information Cease and desist orders Disciplinary sanctions and civil penalties for securities

market professionals Bounty provisions by the sect20A of ITSFEA sect21A -gt civil monetary penalty of up to three times the

profit gained or loss avoided by a person who violates Rules 10b-5 and 14e-3

19

Implications of Financial Fraud for Financial Markets If investors are not convinced that the markets

are reasonably fair they will not invest Societies where individuals do not respect the rule of

law or where law breakers are not found and punished find that financial markets cannot develop

In these cases legitimate businesses operating those countries lack access to capital cannot invest cannot create jobs and cannot compete in international markets for their products and services

20

Arguments for legalising insider trading Some economists and legal scholars

argue that laws making insider trading illegal should be revoked They claim that insider trading based on material onpublic information benefits investors in general by more quickly introducing new information into the market

21

Arguments for legalising insider trading Milton Friedman said You want more insider

trading not less You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that

Friedman did not believe that the trader should be required to make his trade known to the public because the buying or selling pressure itself is information for the market

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

9

Insider TradingSEC Files Civil Insider Trading Charges Against

Former Countrywide Exec October 29 2007 LOS ANGELES (AP) - A former executive at mortgage

lender Countrywide Financial Corp was charged Monday with insider trading after he sold stock before the company announced negative earning results three years ago regulators said

The Securities and Exchange Commission filed a civil complaint against Quan Zhu 43 in Los Angeles federal court Zhu has agreed to settle the charges without admitting or denying the allegations by paying nearly $109000 officials said

Regulators say Zhu was tipped to nonpublic information about the companys negative earning results in 2004

10

Insider Trading

Illegal insider trading refers generally to buying or selling a security in breach of a fiduciary duty or other relationship of trust and confidence

While in possession of material nonpublic information about the security

Insider trading violations may also include tipping such information securities trading by the person tipped and securities trading by those who misappropriate such information

11

SEC Define Insiders

Examples of insider trading cases that have been brought by the SEC are cases against

Corporate officers directors and employees who traded the corporations securities after learning of significant confidential corporate developments

Friends business associates family members and other tippees of such officers directors and employees who traded the securities after receiving such information

Employees of law banking brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded

Government employees who learned of such information because of their employment by the government and

Other persons who misappropriated and took advantage of confidential information from their employers

12

WHO ARE INSIDERS

A broad range of individuals A partner in a law firm representing the acquiring company in a

hostile takeover bid who traded in target company stock A Wall Street Journal columnist who traded prior to publication of

his column in the stock of companies he wrote about A psychiatrist who traded on the basis of information learned

from a patient A financial printer who traded in the stock of companies about

which he was preparing disclosure documents

13

REASONS FOR REGULATING INSIDER TRADING Unfair practice to public investors Prohibiting it promotes efficiency of markets Property of material information belongs to the

corporation for business purposes Enforce rules of the game Protect the weak from exploitation by cynical

operators

14

Securities and Exchange Commission 1920s were period of much fraud manipulation SEC part of Rooseveltrsquos New Deal 1934 Initially viewed by business as a radical almost

socialist institution Peculiar that it started in US imitated by other countries

Motive was repeated examples of exploitation of minority or unobservant shareholders

15

US REGULATION OF INSIDER TRADING

Section 16 of the 1934 Securities Exchange Act

SEC Rule 10b-5Misappropriation Theory

SEC Rule 14e-3

16

Rule 10b-5

Promulgated in 1942 under sect10(b) of the Securities Exchange Act of 1934

Covers material corporate misstatements or non

disclosures insider trading and corporate mismanagement cases

regarding transactions in shares or other securities

Today a major weapon to curb insider trading as a catch-all anti-fraud provision

17

Misappropriation Theory of Insider Trading

A person violates Rule 10b-5 if

Misappropriates material nonpublic information

by breaching a duty arising out of a relationship of trust or confidence to the source of information

and uses that information in a securities transaction

regardless of whether he owed any duty to the shareholders of the traded stock

18

SEC Enforcement of the Rule 10b-5 and Rule 14e-3

Permanent or a temporary injunction Disgorgement of profits (most commonly used) Correction of misleading statements

Disclosure of material information Cease and desist orders Disciplinary sanctions and civil penalties for securities

market professionals Bounty provisions by the sect20A of ITSFEA sect21A -gt civil monetary penalty of up to three times the

profit gained or loss avoided by a person who violates Rules 10b-5 and 14e-3

19

Implications of Financial Fraud for Financial Markets If investors are not convinced that the markets

are reasonably fair they will not invest Societies where individuals do not respect the rule of

law or where law breakers are not found and punished find that financial markets cannot develop

In these cases legitimate businesses operating those countries lack access to capital cannot invest cannot create jobs and cannot compete in international markets for their products and services

20

Arguments for legalising insider trading Some economists and legal scholars

argue that laws making insider trading illegal should be revoked They claim that insider trading based on material onpublic information benefits investors in general by more quickly introducing new information into the market

21

Arguments for legalising insider trading Milton Friedman said You want more insider

trading not less You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that

Friedman did not believe that the trader should be required to make his trade known to the public because the buying or selling pressure itself is information for the market

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

10

Insider Trading

Illegal insider trading refers generally to buying or selling a security in breach of a fiduciary duty or other relationship of trust and confidence

While in possession of material nonpublic information about the security

Insider trading violations may also include tipping such information securities trading by the person tipped and securities trading by those who misappropriate such information

11

SEC Define Insiders

Examples of insider trading cases that have been brought by the SEC are cases against

Corporate officers directors and employees who traded the corporations securities after learning of significant confidential corporate developments

Friends business associates family members and other tippees of such officers directors and employees who traded the securities after receiving such information

Employees of law banking brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded

Government employees who learned of such information because of their employment by the government and

Other persons who misappropriated and took advantage of confidential information from their employers

12

WHO ARE INSIDERS

A broad range of individuals A partner in a law firm representing the acquiring company in a

hostile takeover bid who traded in target company stock A Wall Street Journal columnist who traded prior to publication of

his column in the stock of companies he wrote about A psychiatrist who traded on the basis of information learned

from a patient A financial printer who traded in the stock of companies about

which he was preparing disclosure documents

13

REASONS FOR REGULATING INSIDER TRADING Unfair practice to public investors Prohibiting it promotes efficiency of markets Property of material information belongs to the

corporation for business purposes Enforce rules of the game Protect the weak from exploitation by cynical

operators

14

Securities and Exchange Commission 1920s were period of much fraud manipulation SEC part of Rooseveltrsquos New Deal 1934 Initially viewed by business as a radical almost

socialist institution Peculiar that it started in US imitated by other countries

Motive was repeated examples of exploitation of minority or unobservant shareholders

15

US REGULATION OF INSIDER TRADING

Section 16 of the 1934 Securities Exchange Act

SEC Rule 10b-5Misappropriation Theory

SEC Rule 14e-3

16

Rule 10b-5

Promulgated in 1942 under sect10(b) of the Securities Exchange Act of 1934

Covers material corporate misstatements or non

disclosures insider trading and corporate mismanagement cases

regarding transactions in shares or other securities

Today a major weapon to curb insider trading as a catch-all anti-fraud provision

17

Misappropriation Theory of Insider Trading

A person violates Rule 10b-5 if

Misappropriates material nonpublic information

by breaching a duty arising out of a relationship of trust or confidence to the source of information

and uses that information in a securities transaction

regardless of whether he owed any duty to the shareholders of the traded stock

18

SEC Enforcement of the Rule 10b-5 and Rule 14e-3

Permanent or a temporary injunction Disgorgement of profits (most commonly used) Correction of misleading statements

Disclosure of material information Cease and desist orders Disciplinary sanctions and civil penalties for securities

market professionals Bounty provisions by the sect20A of ITSFEA sect21A -gt civil monetary penalty of up to three times the

profit gained or loss avoided by a person who violates Rules 10b-5 and 14e-3

19

Implications of Financial Fraud for Financial Markets If investors are not convinced that the markets

are reasonably fair they will not invest Societies where individuals do not respect the rule of

law or where law breakers are not found and punished find that financial markets cannot develop

In these cases legitimate businesses operating those countries lack access to capital cannot invest cannot create jobs and cannot compete in international markets for their products and services

20

Arguments for legalising insider trading Some economists and legal scholars

argue that laws making insider trading illegal should be revoked They claim that insider trading based on material onpublic information benefits investors in general by more quickly introducing new information into the market

21

Arguments for legalising insider trading Milton Friedman said You want more insider

trading not less You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that

Friedman did not believe that the trader should be required to make his trade known to the public because the buying or selling pressure itself is information for the market

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

11

SEC Define Insiders

Examples of insider trading cases that have been brought by the SEC are cases against

Corporate officers directors and employees who traded the corporations securities after learning of significant confidential corporate developments

Friends business associates family members and other tippees of such officers directors and employees who traded the securities after receiving such information

Employees of law banking brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded

Government employees who learned of such information because of their employment by the government and

Other persons who misappropriated and took advantage of confidential information from their employers

12

WHO ARE INSIDERS

A broad range of individuals A partner in a law firm representing the acquiring company in a

hostile takeover bid who traded in target company stock A Wall Street Journal columnist who traded prior to publication of

his column in the stock of companies he wrote about A psychiatrist who traded on the basis of information learned

from a patient A financial printer who traded in the stock of companies about

which he was preparing disclosure documents

13

REASONS FOR REGULATING INSIDER TRADING Unfair practice to public investors Prohibiting it promotes efficiency of markets Property of material information belongs to the

corporation for business purposes Enforce rules of the game Protect the weak from exploitation by cynical

operators

14

Securities and Exchange Commission 1920s were period of much fraud manipulation SEC part of Rooseveltrsquos New Deal 1934 Initially viewed by business as a radical almost

socialist institution Peculiar that it started in US imitated by other countries

Motive was repeated examples of exploitation of minority or unobservant shareholders

15

US REGULATION OF INSIDER TRADING

Section 16 of the 1934 Securities Exchange Act

SEC Rule 10b-5Misappropriation Theory

SEC Rule 14e-3

16

Rule 10b-5

Promulgated in 1942 under sect10(b) of the Securities Exchange Act of 1934

Covers material corporate misstatements or non

disclosures insider trading and corporate mismanagement cases

regarding transactions in shares or other securities

Today a major weapon to curb insider trading as a catch-all anti-fraud provision

17

Misappropriation Theory of Insider Trading

A person violates Rule 10b-5 if

Misappropriates material nonpublic information

by breaching a duty arising out of a relationship of trust or confidence to the source of information

and uses that information in a securities transaction

regardless of whether he owed any duty to the shareholders of the traded stock

18

SEC Enforcement of the Rule 10b-5 and Rule 14e-3

Permanent or a temporary injunction Disgorgement of profits (most commonly used) Correction of misleading statements

Disclosure of material information Cease and desist orders Disciplinary sanctions and civil penalties for securities

market professionals Bounty provisions by the sect20A of ITSFEA sect21A -gt civil monetary penalty of up to three times the

profit gained or loss avoided by a person who violates Rules 10b-5 and 14e-3

19

Implications of Financial Fraud for Financial Markets If investors are not convinced that the markets

are reasonably fair they will not invest Societies where individuals do not respect the rule of

law or where law breakers are not found and punished find that financial markets cannot develop

In these cases legitimate businesses operating those countries lack access to capital cannot invest cannot create jobs and cannot compete in international markets for their products and services

20

Arguments for legalising insider trading Some economists and legal scholars

argue that laws making insider trading illegal should be revoked They claim that insider trading based on material onpublic information benefits investors in general by more quickly introducing new information into the market

21

Arguments for legalising insider trading Milton Friedman said You want more insider

trading not less You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that

Friedman did not believe that the trader should be required to make his trade known to the public because the buying or selling pressure itself is information for the market

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

12

WHO ARE INSIDERS

A broad range of individuals A partner in a law firm representing the acquiring company in a

hostile takeover bid who traded in target company stock A Wall Street Journal columnist who traded prior to publication of

his column in the stock of companies he wrote about A psychiatrist who traded on the basis of information learned

from a patient A financial printer who traded in the stock of companies about

which he was preparing disclosure documents

13

REASONS FOR REGULATING INSIDER TRADING Unfair practice to public investors Prohibiting it promotes efficiency of markets Property of material information belongs to the

corporation for business purposes Enforce rules of the game Protect the weak from exploitation by cynical

operators

14

Securities and Exchange Commission 1920s were period of much fraud manipulation SEC part of Rooseveltrsquos New Deal 1934 Initially viewed by business as a radical almost

socialist institution Peculiar that it started in US imitated by other countries

Motive was repeated examples of exploitation of minority or unobservant shareholders

15

US REGULATION OF INSIDER TRADING

Section 16 of the 1934 Securities Exchange Act

SEC Rule 10b-5Misappropriation Theory

SEC Rule 14e-3

16

Rule 10b-5

Promulgated in 1942 under sect10(b) of the Securities Exchange Act of 1934

Covers material corporate misstatements or non

disclosures insider trading and corporate mismanagement cases

regarding transactions in shares or other securities

Today a major weapon to curb insider trading as a catch-all anti-fraud provision

17

Misappropriation Theory of Insider Trading

A person violates Rule 10b-5 if

Misappropriates material nonpublic information

by breaching a duty arising out of a relationship of trust or confidence to the source of information

and uses that information in a securities transaction

regardless of whether he owed any duty to the shareholders of the traded stock

18

SEC Enforcement of the Rule 10b-5 and Rule 14e-3

Permanent or a temporary injunction Disgorgement of profits (most commonly used) Correction of misleading statements

Disclosure of material information Cease and desist orders Disciplinary sanctions and civil penalties for securities

market professionals Bounty provisions by the sect20A of ITSFEA sect21A -gt civil monetary penalty of up to three times the

profit gained or loss avoided by a person who violates Rules 10b-5 and 14e-3

19

Implications of Financial Fraud for Financial Markets If investors are not convinced that the markets

are reasonably fair they will not invest Societies where individuals do not respect the rule of

law or where law breakers are not found and punished find that financial markets cannot develop

In these cases legitimate businesses operating those countries lack access to capital cannot invest cannot create jobs and cannot compete in international markets for their products and services

20

Arguments for legalising insider trading Some economists and legal scholars

argue that laws making insider trading illegal should be revoked They claim that insider trading based on material onpublic information benefits investors in general by more quickly introducing new information into the market

21

Arguments for legalising insider trading Milton Friedman said You want more insider

trading not less You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that

Friedman did not believe that the trader should be required to make his trade known to the public because the buying or selling pressure itself is information for the market

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

13

REASONS FOR REGULATING INSIDER TRADING Unfair practice to public investors Prohibiting it promotes efficiency of markets Property of material information belongs to the

corporation for business purposes Enforce rules of the game Protect the weak from exploitation by cynical

operators

14

Securities and Exchange Commission 1920s were period of much fraud manipulation SEC part of Rooseveltrsquos New Deal 1934 Initially viewed by business as a radical almost

socialist institution Peculiar that it started in US imitated by other countries

Motive was repeated examples of exploitation of minority or unobservant shareholders

15

US REGULATION OF INSIDER TRADING

Section 16 of the 1934 Securities Exchange Act

SEC Rule 10b-5Misappropriation Theory

SEC Rule 14e-3

16

Rule 10b-5

Promulgated in 1942 under sect10(b) of the Securities Exchange Act of 1934

Covers material corporate misstatements or non

disclosures insider trading and corporate mismanagement cases

regarding transactions in shares or other securities

Today a major weapon to curb insider trading as a catch-all anti-fraud provision

17

Misappropriation Theory of Insider Trading

A person violates Rule 10b-5 if

Misappropriates material nonpublic information

by breaching a duty arising out of a relationship of trust or confidence to the source of information

and uses that information in a securities transaction

regardless of whether he owed any duty to the shareholders of the traded stock

18

SEC Enforcement of the Rule 10b-5 and Rule 14e-3

Permanent or a temporary injunction Disgorgement of profits (most commonly used) Correction of misleading statements

Disclosure of material information Cease and desist orders Disciplinary sanctions and civil penalties for securities

market professionals Bounty provisions by the sect20A of ITSFEA sect21A -gt civil monetary penalty of up to three times the

profit gained or loss avoided by a person who violates Rules 10b-5 and 14e-3

19

Implications of Financial Fraud for Financial Markets If investors are not convinced that the markets

are reasonably fair they will not invest Societies where individuals do not respect the rule of

law or where law breakers are not found and punished find that financial markets cannot develop

In these cases legitimate businesses operating those countries lack access to capital cannot invest cannot create jobs and cannot compete in international markets for their products and services

20

Arguments for legalising insider trading Some economists and legal scholars

argue that laws making insider trading illegal should be revoked They claim that insider trading based on material onpublic information benefits investors in general by more quickly introducing new information into the market

21

Arguments for legalising insider trading Milton Friedman said You want more insider

trading not less You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that

Friedman did not believe that the trader should be required to make his trade known to the public because the buying or selling pressure itself is information for the market

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

14

Securities and Exchange Commission 1920s were period of much fraud manipulation SEC part of Rooseveltrsquos New Deal 1934 Initially viewed by business as a radical almost

socialist institution Peculiar that it started in US imitated by other countries

Motive was repeated examples of exploitation of minority or unobservant shareholders

15

US REGULATION OF INSIDER TRADING

Section 16 of the 1934 Securities Exchange Act

SEC Rule 10b-5Misappropriation Theory

SEC Rule 14e-3

16

Rule 10b-5

Promulgated in 1942 under sect10(b) of the Securities Exchange Act of 1934

Covers material corporate misstatements or non

disclosures insider trading and corporate mismanagement cases

regarding transactions in shares or other securities

Today a major weapon to curb insider trading as a catch-all anti-fraud provision

17

Misappropriation Theory of Insider Trading

A person violates Rule 10b-5 if

Misappropriates material nonpublic information

by breaching a duty arising out of a relationship of trust or confidence to the source of information

and uses that information in a securities transaction

regardless of whether he owed any duty to the shareholders of the traded stock

18

SEC Enforcement of the Rule 10b-5 and Rule 14e-3

Permanent or a temporary injunction Disgorgement of profits (most commonly used) Correction of misleading statements

Disclosure of material information Cease and desist orders Disciplinary sanctions and civil penalties for securities

market professionals Bounty provisions by the sect20A of ITSFEA sect21A -gt civil monetary penalty of up to three times the

profit gained or loss avoided by a person who violates Rules 10b-5 and 14e-3

19

Implications of Financial Fraud for Financial Markets If investors are not convinced that the markets

are reasonably fair they will not invest Societies where individuals do not respect the rule of

law or where law breakers are not found and punished find that financial markets cannot develop

In these cases legitimate businesses operating those countries lack access to capital cannot invest cannot create jobs and cannot compete in international markets for their products and services

20

Arguments for legalising insider trading Some economists and legal scholars

argue that laws making insider trading illegal should be revoked They claim that insider trading based on material onpublic information benefits investors in general by more quickly introducing new information into the market

21

Arguments for legalising insider trading Milton Friedman said You want more insider

trading not less You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that

Friedman did not believe that the trader should be required to make his trade known to the public because the buying or selling pressure itself is information for the market

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

15

US REGULATION OF INSIDER TRADING

Section 16 of the 1934 Securities Exchange Act

SEC Rule 10b-5Misappropriation Theory

SEC Rule 14e-3

16

Rule 10b-5

Promulgated in 1942 under sect10(b) of the Securities Exchange Act of 1934

Covers material corporate misstatements or non

disclosures insider trading and corporate mismanagement cases

regarding transactions in shares or other securities

Today a major weapon to curb insider trading as a catch-all anti-fraud provision

17

Misappropriation Theory of Insider Trading

A person violates Rule 10b-5 if

Misappropriates material nonpublic information

by breaching a duty arising out of a relationship of trust or confidence to the source of information

and uses that information in a securities transaction

regardless of whether he owed any duty to the shareholders of the traded stock

18

SEC Enforcement of the Rule 10b-5 and Rule 14e-3

Permanent or a temporary injunction Disgorgement of profits (most commonly used) Correction of misleading statements

Disclosure of material information Cease and desist orders Disciplinary sanctions and civil penalties for securities

market professionals Bounty provisions by the sect20A of ITSFEA sect21A -gt civil monetary penalty of up to three times the

profit gained or loss avoided by a person who violates Rules 10b-5 and 14e-3

19

Implications of Financial Fraud for Financial Markets If investors are not convinced that the markets

are reasonably fair they will not invest Societies where individuals do not respect the rule of

law or where law breakers are not found and punished find that financial markets cannot develop

In these cases legitimate businesses operating those countries lack access to capital cannot invest cannot create jobs and cannot compete in international markets for their products and services

20

Arguments for legalising insider trading Some economists and legal scholars

argue that laws making insider trading illegal should be revoked They claim that insider trading based on material onpublic information benefits investors in general by more quickly introducing new information into the market

21

Arguments for legalising insider trading Milton Friedman said You want more insider

trading not less You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that

Friedman did not believe that the trader should be required to make his trade known to the public because the buying or selling pressure itself is information for the market

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

16

Rule 10b-5

Promulgated in 1942 under sect10(b) of the Securities Exchange Act of 1934

Covers material corporate misstatements or non

disclosures insider trading and corporate mismanagement cases

regarding transactions in shares or other securities

Today a major weapon to curb insider trading as a catch-all anti-fraud provision

17

Misappropriation Theory of Insider Trading

A person violates Rule 10b-5 if

Misappropriates material nonpublic information

by breaching a duty arising out of a relationship of trust or confidence to the source of information

and uses that information in a securities transaction

regardless of whether he owed any duty to the shareholders of the traded stock

18

SEC Enforcement of the Rule 10b-5 and Rule 14e-3

Permanent or a temporary injunction Disgorgement of profits (most commonly used) Correction of misleading statements

Disclosure of material information Cease and desist orders Disciplinary sanctions and civil penalties for securities

market professionals Bounty provisions by the sect20A of ITSFEA sect21A -gt civil monetary penalty of up to three times the

profit gained or loss avoided by a person who violates Rules 10b-5 and 14e-3

19

Implications of Financial Fraud for Financial Markets If investors are not convinced that the markets

are reasonably fair they will not invest Societies where individuals do not respect the rule of

law or where law breakers are not found and punished find that financial markets cannot develop

In these cases legitimate businesses operating those countries lack access to capital cannot invest cannot create jobs and cannot compete in international markets for their products and services

20

Arguments for legalising insider trading Some economists and legal scholars

argue that laws making insider trading illegal should be revoked They claim that insider trading based on material onpublic information benefits investors in general by more quickly introducing new information into the market

21

Arguments for legalising insider trading Milton Friedman said You want more insider

trading not less You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that

Friedman did not believe that the trader should be required to make his trade known to the public because the buying or selling pressure itself is information for the market

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

17

Misappropriation Theory of Insider Trading

A person violates Rule 10b-5 if

Misappropriates material nonpublic information

by breaching a duty arising out of a relationship of trust or confidence to the source of information

and uses that information in a securities transaction

regardless of whether he owed any duty to the shareholders of the traded stock

18

SEC Enforcement of the Rule 10b-5 and Rule 14e-3

Permanent or a temporary injunction Disgorgement of profits (most commonly used) Correction of misleading statements

Disclosure of material information Cease and desist orders Disciplinary sanctions and civil penalties for securities

market professionals Bounty provisions by the sect20A of ITSFEA sect21A -gt civil monetary penalty of up to three times the

profit gained or loss avoided by a person who violates Rules 10b-5 and 14e-3

19

Implications of Financial Fraud for Financial Markets If investors are not convinced that the markets

are reasonably fair they will not invest Societies where individuals do not respect the rule of

law or where law breakers are not found and punished find that financial markets cannot develop

In these cases legitimate businesses operating those countries lack access to capital cannot invest cannot create jobs and cannot compete in international markets for their products and services

20

Arguments for legalising insider trading Some economists and legal scholars

argue that laws making insider trading illegal should be revoked They claim that insider trading based on material onpublic information benefits investors in general by more quickly introducing new information into the market

21

Arguments for legalising insider trading Milton Friedman said You want more insider

trading not less You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that

Friedman did not believe that the trader should be required to make his trade known to the public because the buying or selling pressure itself is information for the market

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

18

SEC Enforcement of the Rule 10b-5 and Rule 14e-3

Permanent or a temporary injunction Disgorgement of profits (most commonly used) Correction of misleading statements

Disclosure of material information Cease and desist orders Disciplinary sanctions and civil penalties for securities

market professionals Bounty provisions by the sect20A of ITSFEA sect21A -gt civil monetary penalty of up to three times the

profit gained or loss avoided by a person who violates Rules 10b-5 and 14e-3

19

Implications of Financial Fraud for Financial Markets If investors are not convinced that the markets

are reasonably fair they will not invest Societies where individuals do not respect the rule of

law or where law breakers are not found and punished find that financial markets cannot develop

In these cases legitimate businesses operating those countries lack access to capital cannot invest cannot create jobs and cannot compete in international markets for their products and services

20

Arguments for legalising insider trading Some economists and legal scholars

argue that laws making insider trading illegal should be revoked They claim that insider trading based on material onpublic information benefits investors in general by more quickly introducing new information into the market

21

Arguments for legalising insider trading Milton Friedman said You want more insider

trading not less You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that

Friedman did not believe that the trader should be required to make his trade known to the public because the buying or selling pressure itself is information for the market

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

19

Implications of Financial Fraud for Financial Markets If investors are not convinced that the markets

are reasonably fair they will not invest Societies where individuals do not respect the rule of

law or where law breakers are not found and punished find that financial markets cannot develop

In these cases legitimate businesses operating those countries lack access to capital cannot invest cannot create jobs and cannot compete in international markets for their products and services

20

Arguments for legalising insider trading Some economists and legal scholars

argue that laws making insider trading illegal should be revoked They claim that insider trading based on material onpublic information benefits investors in general by more quickly introducing new information into the market

21

Arguments for legalising insider trading Milton Friedman said You want more insider

trading not less You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that

Friedman did not believe that the trader should be required to make his trade known to the public because the buying or selling pressure itself is information for the market

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

20

Arguments for legalising insider trading Some economists and legal scholars

argue that laws making insider trading illegal should be revoked They claim that insider trading based on material onpublic information benefits investors in general by more quickly introducing new information into the market

21

Arguments for legalising insider trading Milton Friedman said You want more insider

trading not less You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that

Friedman did not believe that the trader should be required to make his trade known to the public because the buying or selling pressure itself is information for the market

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

21

Arguments for legalising insider trading Milton Friedman said You want more insider

trading not less You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that

Friedman did not believe that the trader should be required to make his trade known to the public because the buying or selling pressure itself is information for the market

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

22

Arguments for legalising insider trading Legalization advocates also question why

activity that is similar to insider trading is legal in other markets such as land

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

23

Results of Market Surveillance

May 1995 secretary at IBM was asked to xerox documents related to secret plans to take over Lotus to be announced June 5

She told husband a beeper salesman June 2 he told two friends who immediately

bought By June 5 25 people spent half a million dollars to

buy on this tip pizza chef electrical engineer bank executive dairy wholesaler schoolteacher and four stockbrokers All caught by surveillance

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

24

Emulex Corporation

Mark S Jacob 23 had shorted stock of his former employer stood to lose money

Sent fake news release to Internet wire was picked up by Bloomberg Dow Jones News Wire and CNBC He immediately covered

FBI using Internet Protocol Numbers tracked down initial news to El Camino Community College library Police questioned librarians and eventually tracked him down

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

25

Weakness of Securities Regulation Outside US From 1995-99 there were only 19 successful

prosecutions for insider trading in all of the UK France Germany Italy and Switzerland

Manhattan Federal Court alone prosecuted 46 in that period

European regulators do not have the budgets or sophisticated computer systems that US SEC does

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

26

United Kingdom

Until 2000 varied agencies performed task of SEC

United in 2000 under FSA (Financial Services Authority

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

27

UK Perspective

Criminal Offences Insider Dealing

Criminal Justice Act 1993bull Non-public price-sensitive informationbull From insiderbull Organised securities marketbull Criminal sanctions

FSMA 2000 s397bull Market Misconduct ndash Misleading Statements amp

Practices

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

28

More Weakness of Regulation

In Britain Italy and Switzerland it has been impossible to bring a civil suit against insiders Civil suits require lower burden of proof

Britain allowed civil suits starting in 2001

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

29

FSA - EU Market Abuse Directive

What is the Market Abuse Directive

The Market Abuse Directive came into force on 1 July 2005 It is a law that aims to fight cross-border market abuse by establishing a common approach among EU member states

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

30

FSA

ldquoThe Government has explained that the purpose of these provisions is to deter abusive behaviour which could undermine confidence in the UK financial markets and which if unchecked would ultimately damage the integrity of those marketsrdquo FSA 1998

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

31

FSA ndash Market Abuse

What is market abuseSeven types of behaviour can amount to market

abuse ndash see below for more detail The examples illustrate the abusive behaviour the Code covers

1 Insider dealing ndash when an insider deals or tries to deal on the basis of inside information Improper disclosure and misuse of information are kinds of insider dealing ndash

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

32

FSA Market Abuse

For example

An employee finds out that his company is about to become the target of a takeover bid

Before the information is made public he buys shares in his company because he knows a takeover bid may be imminent

He then discloses the information to a friend This behaviour creates an unfair market place because the person who sold the shares to the employee might not have done so if he had known of the potential takeover

The employeersquos friend also has this information and could profit unfairly from it

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

33

FSA Market Abuse

2 Improper disclosure ndash where an insider improperly discloses inside information to another person

3 Misuse of information ndash behaviour based on information that is not generally available but would affect an investorrsquos decision about the terms on which to deal

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

34

FSA Market Abuse

For example An employee learns that his company may lose a

significant contract with its main customer The employee then sells his shares based on his

assessment that it is reasonably certain the contract will be lost

This behaviour creates an unfair market place as the person buying the shares from the employee might not have done so had he been aware of the information about the potential loss of the contract

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

35

FSA Market Abuse

4 Manipulating transactions ndash trading or placing orders to trade that gives a false or misleading impression of the supply of or demand for one or more investments raising the price of the investment to an abnormal or artificial level

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

36

FSA Market Abuse

For example A person buys a large number of a particular share near

the end of the day aiming to drive the stock price higher to improve the performance of their investment

The market price is pushed to an artificial level and investors get a false impression of the price of those shares and the value of any portfolio or fund that holds the stock

This could lead to people making the wrong investment decisions

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

37

FSA Market Abuse

5 Manipulating devices ndash trading or placing orders to trade which employs fictitious devices or any other form of deception or contrivance

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

38

FSA Market Abuse

For exampleo Buying shares and then spreading

misleading information with a view to increasing the price

o This could give investors a false impression of the price of a share and lead them to make the wrong investment decisions

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

39

FSA Market Abuse

6 Dissemination ndash giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

40

FSA Market Abuse

For example A person uses an internet bulletin board or chat

room to post information about the takeover of a company

The person knows the information to be false or misleading

This could artificially raise or reduce the price of a share and lead to people making the wrong investment decisions

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

41

FSA Market Abuse

7 Distortion and misleading behaviour ndash behaviour that gives a false or misleading impression of either the supply of or demand for an investment or behaviour that otherwise distorts the market in an investment

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

42

FSA Market Abuse

For example The movement of an empty cargo ship that is

used to transport a particular commodity This could create a false impression of changes

in the supply of or demand for that commodity or the related futures contract

It could also artificially change the price of that commodity or the futures contract and lead to people making the wrong investment decisions

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

43

FSA Market Abuse

What is lsquoinside informationrsquo This is precise information that is not

generally available and that a reasonable investor would use to help them make investment decisions

It is also information that if generally available would be likely to significantly affect the price of an investment

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

44

FSA Market Abuse

Information from research or analysis is deemed to be generally available and is not inside information

For example if a passenger on a train passing a burning factory calls their broker and instructs them to sell shares in the company that owns the factory the passenger would be acting on information that is generally available

This is because they obtained it legitimately by observing a public event

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

45

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

46

The ImClone case the key facts December 21 2001 ImClone GC sends email

announcing a trading blackout until the FDA release on ImClonersquos application for Erbitux cancer drug

December 26 2001 Sam Waksal learns that the FDA will reject ImClonersquos application for review1048708That night Sam advises daughter Aliza and others in his family (father Sam) either that the company would be receiving bad news or to sell their ImClone shares

December 27 2001 Aliza and family accountant begin calling Faneuil at Merrill Lynch Aliza sells $25M of her ImClone shares as price falls Jack sells $7M Merrill Lynch blocks an attempted sale by Sam

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison

47

The ImClone case the key facts

December 27 20011048708 Stewart returns Faneuils call from her

private jet which is en route to Mexico At the end of a two-minute call she instructs him to sell all $228K of her ImClone shares at approximately $58 per share (it opened at $6350) Martha Stewartrsquos earlier sale saves her about $45K on day one (although the stock continues to fall for several days to below $20)

Martha Stewart served five months in prison