Last week saw the conclusion of the re-trial of Walid Choucair, a trader, and Fabiana Abdel-Malek, a former UBS compliance officer. Both were convicted and sentenced to 3 years’ imprisonment.
The trial has brought the consequences of insider dealing to the forefront. This brief article looks at the offences of insider dealing and sets out some preventative tips.
What is insider dealing?
An offence occurs where a person has information as an insider otherwise than in the performance of their occupation and:
- deal (acquiring or disposing) in securities (shares, debt securities, options, futures, contracts for differences etc) that are ‘price-affected’ in relation to that information;
- disclose the information; or
- encourage another to deal in such securities.
Inside information is information which is specific/precise, isn’t publicly available and is likely to have a significant effect on the price of the security. An insider is someone who knows that the information is inside information from an inside source.
Insider dealing is not always direct. It can take place indirectly through a professional intermediary, agent or nominee.
The penalties for insider dealing are:
- On conviction on indictment – an unlimited fine, imprisonment for a term not exceeding 7 years, or both.
- On summary conviction – a fine not exceeding the statutory minimum, imprisonment for a term not exceeding 6 months, or both.
Prosecutions have spanned all positions within firms: from interns doing summer work to the more usual hedge-fund traders, stockbrokers, corporate finance advisers and directors, to third party providers such as management consultants and solicitors.
The FCA is ramping up its investigations and prosecutions of insider dealing. More than 65% of the cases launched by the FCA in the past 5 years have been opened since 2015: in 2016 the FCA opened 70 cases and in 2017 this increased to a record 84 cases. The conviction rate remains low, but that’s due to the time it takes to reach trial and the FCA’s expense to prove its charge. By its very nature, it is an allegation of complex financial fraud and that creates difficulties in prosecuting (the first trial of the Choucair/Abdel-Malek resulted in jury deadlock).
Of the convictions so far obtained by the FCA, most have involved significant fines (usually around the amount procured by the offences) and imprisonment ranging from around 12 months to 9 years. The FCA also frequently obtain confiscation orders against the perpetrator.
In the Choucair/Abdel-Malek trial the presiding judge, Her Honour Judge Korner CMG QC, made no adjustment to the benefit that either Choucair and Abdel-Malek received from their actions (Choucair received most benefit). In sentencing the judge said:
“In these cases there has to be an element of deterrence, it is vital that these kind of offences are deterred by the knowledge that if they are committed and you are convicted, there is an inevitable sentence of imprisonment…”
An alternative for the FCA is imposing an unlimited fine on any person who is engaging or has engaged in market abuse. This includes but is not limited to insider dealing. If the FCA chooses not to apply a fine, it may instead publish a statement stating that a person has engaged in market abuse. Although a less aggressive action, it is arguably as damaging to the individual and the firm.
Insider dealing is bad for everyone. The consequences for a firm of its employees and/or agents being convicted of insider dealing cannot be overstated in an industry which heavily relies on reputation: internally, staff lose respect of the management team; and the firm loses the respect of its investors.
To best avoid insider dealing a firm should:
- Accept that it is not immune to insider dealing – there are numerous ways of undertaking insider dealing at all levels of a firm. Insider dealing is undertaken purposefully with a knowledge that the actions are wrong.
- Develop a culture of openness and challenge. Firms that are closed to internal challenge create black-spots that increase the opportunity of insider dealing.
- Firms should have a personal trading/insider trading policy which should set out -
- Which employees are covered by the policy, and to what securities the policy applies.
- The firm’s pre-clearance procedures – how employees obtain permission prior to placing a trade in a covered security.
- The requirement for submission of periodic (monthly/quarterly) brokerage statements of employees and their family’s securities and (where appropriate) trades.
- How regular testing (including external auditing) will be undertaken of brokerage statements and the trading policy.
- An insider restricted trading list – or, where appropriate, how the firm publicises up to date lists of securities in which employees are prevented from trading.
- Align its suppliers’ policies to the firm’s policy (particularly those of trusted advisers).
- Create an internal ‘watchdog’ group that involves all parts of the firm. It’s helpful to include the firm’s professional suppliers in this group.
- Review the FCA’s prosecutions of insider dealings and the implementation of new preventative measures that come to light. New ways of committing insider dealings will continue to be discovered. Being aware of the prosecutions brought by the FCA puts a firm a step closer to closing down the chances of wrongful activity.
While insider dealing can never be fully eliminated (no one can fully predict the behaviour of all individuals), businesses should ensure they are doing all that they can to mitigate their risks.
Our partners are used to dealing with investigations and prosecutions brought by regulators straddling civil, criminal and regulatory jurisdictions, and can help with investigations and the implementation of policies and procedures to combat insider dealing.
To discuss further, please contact David Martin on 029 2167 1990.
Abdel-Malek dishonestly and surreptitiously acquired confidential and valuable information from her employer and passed it to Choucair who made substantial illegal trading profits. Both defendants were well aware they were committing serious criminal offences and engaged in elaborate schemes and lies to disguise what they were doing. This was not opportunistic, but calculated and organised. It was insider dealing at its most venal. The FCA is determined to attack all forms of insider dealing, from opportunistic insiders to those who devise dishonest schemes to exploit and manipulate sources of inside information.