Categories of Insider Trading: Be in The Know

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Although every investor probably knows about insider trading, when it comes to pursuing issues of insider trading it differs from the country. Therefore you’d need to be aware of what might constitute an offence. 

In South Africa the Insider Trading Act spells out a number of instances where you’ll become an insider, in particular: 

  • If you’ve knowledge of price sensitive information that’s not public and you use that information to deal for own account, then you’re guilty of insider trading. 
  • If you’re an insider and you know that you’ve price sensitive information and you deal for another person, then you’re still guilty. 
  • Any person who deals for an insider knowing that such person is an insider, also commits an offence. 
  • If you’ve inside information and you disclose that information to another person, that disclosure is an offence. 
  • If you’re an insider and you encourage or cause another to deal or not to deal based on your knowledge, then you’re committing an offence. 

In the United States, the insider trading rule has been applied either for disclosure or non-disclosure purposes in cases where a fiduciary duty was breached. This situation takes into account occasions where that breach refers to the source of the information or to the investors negotiating on the other side. 

Overall, the concept of insider trading liability in the United States has been influenced by three general theories which have set the path for clear identification of this concept.  

  • The misappropriation theory – It has been argued that liability can be accounted when the duty of trust is violated in cases where information is traded to the detriment of the source of the information.  
  • The common theory – When private information is traded by corporate insiders. Violating their fiduciary duty to the detriment of the corporation’s shareholders and to the corporation itself, the trade establishes the liability for the insiders.  

Moreover, along with the primary insiders, such as the executives or directors of the corporation, there are also other entities that’ve a fiduciary duty to the issuer, the lawyers or underwriters.  

  • Lastly, tippees can be also considered liable for trading. However, that would be the case only if a fiduciary duty is violated by the tipper who’d disclose the information pursuing personal gain, and the tippee is fully informed about that.
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