Articles

Stamp Out Insider Trading With Thorough Employee Training

Knowledge is power. Knowledge that no one else possesses is very powerful indeed.

Broadly speaking, insider trading is the use of that exclusive knowledge to benefit oneself at the expense of others.

And it’s not restricted to corporate high flyers, epitomised by Gordon Gekko in the movie ‘Wall Street’, with his famous line ‘Greed is good’.

Insider trading can be committed by anyone, including any member of your staff, who gains access to privileged information and uses it for financial advantage.

Most countries with a stock market have laws against insider trading. In Australia, it is prohibited by the Corporations Act 2001, and carries a maximum penalty of ten years imprisonment and/or a $450,000 fine.

If you do not have any policies in place to limit the likelihood of insider trading occurring in your organisation, you should look at undertaking compliance training for all relevant staff at the earliest opportunity.

A more comprehensive definition of insider trading is:

‘The buying or selling of a security (stocks, shares etc) by someone who has access to material (significant, price-sensitive) non-public information about the security’

(‘investopedia.com’)

That also includes giving another person the information who then buys or sells that security to gain advantage.

If charged with insider trading, all the prosecution needs to prove is that:

  • you possessed the information
  • you knew (or ought to have known) the information was not generally available
  • you acted upon that information, or told others who acted upon it.

The argument against insider trading is that other market participants are disadvantaged by this behaviour, impacting the credibility of the market.

The following is a typical instance where insider trading could be said to have occurred: an employee becomes aware through their work of a significant opportunity or problem associated with a particular financial product; something that will affect its unit price. They then buy or sell units on the basis of that knowledge, or tell others, who buy or sell units.

The person who receives the information from the ‘tipper’ (person who communicates the information) is not immune from prosecution either. If it can be proved that they were aware that the tipper was breaching a confidence by giving them the information, then they too are committing an offence and are liable for prosecution.

Over the past few years, the Australian government has strengthened its resolve to make the markets fairer for all investors by cracking down on illlegal insider trading.

The laws have been strengthened and are being enforced more actively and suspect trading is being scrutinised more closely than ever.

The key to safeguarding your organisation’s reputation and protecting your employees from potential financial and criminal penalties lies in education.

Undertaking some form of risk management training will ensure that everyone knows the rules. This will hopefully mean that if sensitive information ever crosses their desks or is overheard in passing, they will stop and ask themselves that all important question ‘If I act on this information, is it insider trading?’