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Who the laws apply to and what they mean.
Trading to avoid a loss: the case of Martha Stewart
You may know Martha Stewart as a successful businesswoman, writer and television personality.
But an explosive event in the early noughties saw her hit the headlines for something else altogether.
On 27 December 2001 Stewart placed a sell trade in ImClone, a biopharmaceutical company dedicated to developing biologic medicines in the area of oncology.
Then on 28 December 2001 ImClone dropped 16% after the Food and Drug Administration (FDA) announced that it would not approve ImClone’s new cancer drug, Erbitux.
Sounds like Stewart got lucky by placing her sell trade right before the FDA’s announcement. But in fact she had become privy to material nonpublic information and traded ahead of the announcement to avoid a loss.
While all other investors, who were not privy to the material nonpublic information, suffered large losses on this date, Stewart and many others with insider knowledge in ImClone saved themselves hundreds and thousands of dollars.
What is Insider Trading?
Insider trading takes place when an investor:
This activity usually allows the investor to make a gain or avoid a loss in the market. It ultimately gives that investor an edge over the rest of the market.
What is Material Nonpublic Information (MNPI)?
Material nonpublic information is:
It does not matter if you are employed by the company or not, or how you receive MNPI, if you trade using this information you are participating in insider trading.
The law relating to making a buy or a sell based on material nonpublic information is in section 52 of the Criminal Justice Act 1993.
Who does insider trading laws apply to?
Everyone who invests needs to be aware of the rules around insider trading and that trading based on MNPI applies to them.
If you trade due to having access to MNPI, no matter how big or small your trade is, then you are participating in insider trading.
Trading to make a profit: the case of an ex-UBS compliance officer
Fabiana Abdel-Malek was employed as a senior compliance officer by the investment bank UBS in their London office.
Using her position in the company Abdel-Malek was able to gather information involving proposed merger and acquisition transactions that UBS was either pitching for or working on. Abdel-Malek used this inside information and passed it to a friend, Walid Choucair.
Choucair would then use this inside information to place a number of buy trades in companies in anticipation of their announcements regarding mergers and acquisitions. Following these announcements the share price of the companies would rise significantly and Choucair would then place sell trades in order to realise his profit.
Choucair ultimately made a profit of approximately £1.4 million. Read on for what happened next.
Examples of Material Nonpublic Information (MNPI)
Below are some examples of MNPI. Though be aware that this is just for example purposes and many other examples of MNPI lie outside the scope of the below:
What are the consequences of insider trading?
In Martha Stewart's case, she spent 5 months in prison and was fined $30,000. The CEO of ImClone attempted to sell his own stock in this same case and spread the insider information to family and friends. He was fined $4.3 million and sentenced to seven years in prison.
In the case of the UBS compliance officer, the courts convicted both Fabiana Abdel-Malek and Walid Choucair for insider dealing offences. Both were sentenced to 3 years’ imprisonment in 2019.
The FCA states that for breaches of UK market abuse regulations they can “impose unlimited fines, order injunctions, or prohibit regulated firms or approved persons. Criminal sanctions for insider dealing and market manipulation can incur custodial sentences of up to 10 years and unlimited fines.”
Further Information
We have created a new Fraud and Security Centre. Here you’ll find a series of articles and tips on how to stay safe that we will keep adding to over time. Please take a look and contact us if you have any questions.
The views expressed above are those of community members and do not reflect the views of Freetrade. It is not investment advice and we always encourage you to do your own research.