ABSTRACT
Insider trading has been understood to the act of dealing in
unpublished price sensitive information and it is seen to go against the
principle of equal access to information. This work made an unfair appraisal of
the concept of insider trading in Nigeria in the course of the work. The origin
of inside trading regulation was examined and a cursory literature review of
the concept of insider trading was made. In the courses of examine the overview
of this concept, the argument both for and against the prohibition of insider
trading was made. This study paid primary attention to the prohibition of
regulation of this concept in Nigeria from its conception to date. A look was
taken at the regulation of the concept in some other jurisdiction and finally
some recommendations were made.
TABLE OF CONTENT
Tittle
Page
Certification
Approval Page
Dedication
Acknowledgements
Abstract
Table
Of Content
Table
Of Cases
Table
Of Statutes
CHAPTER ONE
1.0 Introduction
1.1 Background
1.2 Statement Of The Problem
1.3 Research Question
1.4 Aims And Objectives Of The Study
1.5 Research Method
1.6 Significant Of The Study
1.7 Limitation And Scope Of The Study
1.8 Definition Of Terms
1.9 Literature Review
CHAPTER TWO
AN OVERVIEW OF INSIDER TRADING
2.0
`Introduction
2.1
Fairness And Equality Of Information
2.2
Insider Trading As A Means Of
Compensation
2.3
Optimal Or Timely Disclosure
2.4
`Market Efficiency
2.5
Protection Of Investor Confidence
2.6
Fiduciary Relationship
2.7 Misappropriation Theory
CHAPTER THREE
THE REGULATION OF INSIDER TRADING IN
NIGERIA
3.1
Other Institutions Regulating
Insider Trading
3.2
Companies And Allied Matters Act
3.3
The Investiment And Security Act
2007
CHAPTER
FOUR
A COMPARATIVE ANALYSIS OF THE CONCEPT OF
INSIDER TRADING IN NIGERIA WITH SOME OTHER JURISDICTIONS
4.1 United States Insider Trading Law
4.2
United Kingdom Insider Trading Law[1]
4.3
A Comparison Of Insider Trading
Regulation In Us, Uk And Nigeria
CHAPTER
FIVE
CONCLUSION
AND RECOMMENDATION
5.1 Conclusion
5.2 Recommendation
References
CHAPTER
ONE
1.0 INTRODUCTION
As the business world
continues to expand in global markets, trading of shares, bonds, derivatives
and other instruments continue to increase. One corm of trading that has
received considerable interest in recent years is insider trading.[1]
Insider trading occurs when individuals with potential access to non-public
information about a corporation buy or sell stock of that corporation. When the
information is material and non-public, such trading is illegal. In these
cases, individuals are aware non-public information gained through the
performance of their duties and thereby are in breach of a fiduciary or other
position of trust.[2]
However, if the trading is done in a manner that does not take advantage of
non-public information, it is often permissible. For example, if a director of
a company knows that the company is crashing due to some unsuccessful business
risks, and then sells his shares knowing that the board has decided to cut the
dividend and that this will be announced in a few days, he is guilty of insider
trading.[3] In
a similar vein, where a director knowing that diamond or has been discovered on
the company’s land, without the fat being known to the public, buys more shares
in anticipation of a considerably high rise in the value of shares, he is also
guilty of insider trading. It is clear that the use of such “insider”
information by an insider to benefit himself at the expense of others, not so
well places, is unfair.[4] The director, as we have seen earlier, owes a
fiduciary duty to the company, and so if he is allowed to use his inside
knowledge of the affairs of his company for his personal benefit then a
conflict of interest is inevitable. This is apart from the unfairness to the
individual shareholders.
Regulation and
enforcement of insider trading laws is important to investors for a number of
reasons.[5]
The first reason is that investors are likely to be more confident in the
financial statements of companies that operate in countries with strong insider
trading laws if such laws are enforced consistently. In addition, investments
within such countries may be viewed as less risky as the informant is
considered to be more reliable. Finally, as risk and the return investors
require on an investment are positively correlated investments may have a lower
required rate of return.[6]
1.1 BACKGROUND
Insider trading is one
of the corporate ills that have existed since the emergence of the abstract
entity known as company.[7]
Incidentally, this corporate evil has existed unchecked for over a century of
the development of company law. As noted by Orojo[8],
at common law no clear prohibition was imposed on the use of insider
information except only in the case of industrial and trade secrets.[9] In
other respects, the directors or other officers were free to hold and deal in
the shares of the companies.[10]
The lack of legislative check on the ills of insider trading was feature of
company law in most jurisdictions including Nigeria until recently.[11]
In the United Kingdom
it was not until the mid-80, whens Ivan Boesky, an American admitted to large
scale dealings on the basis of insider information, and handed over some 100
million USW Dollars of alleged profit to the security and Exchange Commission
and other instances of the practice involving ring of bankers, lawyers and
others that issues of insider trading came to the Iront burner of company
legislation in England, ultimately resulting in the passing of the Company Securities (Insider Dealing) Act
1985.
The United States of
America has historically been the world leader in insider trading law. In 1909,
the US. Supreme Court ruled in Strong v
Repids[12]
that because a company director could affect the value of his company’s
shares, keeping buyers ignorant of his expected actions while selling his own
shares would be deceitful and therefore fraudulent. This case was the first
major step in the foundation for insider trading in which an insider was
obliged to disgorge his ill-gotten gains to the company or to the persons with
whom he dealt.[13]
Insider trading was not
treated as a statutory offence in Nigeria until 1990. The move towards a prohibition and the
regulation of insider trading in Nigeria was orchestrated by the Nigerian Law
Reform Commission. The acknowledge that insider trading was a serious
malpractice.[14]
The recommendation of eh commission led to the enactment of provisions on
insider trading prohibition in Section
614 – 620 cof the companies and Allied Matters Act 1990.[15]
The provisions were copied from the English
Company Securities (Insider Dealing) Act 1985. However, the above
provisions of CAMA turned out to be
inadequate and ineffective for purpose of combating insider trading, because
for almost ten years after its inception, no person was successfully prosecuted
under the sections. Consequently, the provisions under CAMA were repealed and replaced by the Investment and securities Act 1999. The 1999 Act has been repealed and replaced by the Investment and Securities Act 2007.[16]
The new provisions like its predecessors have its own flaws as not person
is also yet to be reported to have been convicted of insider trading.
1.2 STATEMENT OF THE PROBLEM
One of the major
challenges which various jurisdictions across the globe is facing in respect of
companies is the control of insider trading. There are some countries that are
at eh forefronts in the fight against insider trading and they include the
United States of America, the Greek, British, etc.
Insider trading being a
global issue is also being tackled in Nigeria. Nigeria woke up to the fact that
insider trading is a serious malpractice in 1988 following the report of the
Nigerian Law Reform Commission. In accordance with the recommendation of the
commission several laws have been made to control this corporate. Regrettably,
unlike what the position is in the United State, British and some other
jurisdictions, no successful conviction has been recorded for insider trading
in Nigeria in spite of the metamorphosis we have had in the laws regulating
insider trading in Nigeria that has made it difficult for the law to
successfully catch at least one person.
1.3 RESEARCH QUESTION
Against the background
of the research objectives, the following are the research question for
investigation.
i.
What is insider trading?
ii.
What is an insider?
iii.
Who is a connected person?
iv.
What is unpublished price sensitive
information?
v.
To what extent has the Investment and
Securities Act 2007 assisted in the light against trading in Nigeria?
vi.
Is there the need for amendment?
1.4 AIMS AND OBJECTIVES OF THE STUDY
The
broad aim of this work is to do a critical appraisal of the concept of insider
trading under Nigerian company law. To this end, the specific objectives of the
work include:
i.
To give a general overviews of the
concept of insider trading
ii.
To assess the effect of insider trading
on the development of Nigeria.
iii.
To analyze the approaches to insider
trading
iv.
To appraise the role of the Security and
Exchange Commission in the Securities Act relating to insider trading have
succeeded or failed in its quest to control insider trading in Nigeria.
1.5 RESEARCH
METHOD
In
the course of doing a critical appraisal of the concept of insider trading
under Nigerian company law, the researcher adopted hermeneutical of the various
materials studied.
1.6 SIGNIFICANT OF THE STUDY
The important of this work stems from the huge benefit it
will bring to everyone that may develop an interest in the elimination of
insider trading in Nigeria. A remarkable and interesting contribution of the
study is the boost that the findings from the investigation will give to
everyone interested in the fight against the menace called insider trading.
In addition to the aforementioned significance of the
study is the fact that it will add to the studies previously carried out in
respect of insider trading which will at the same time reinforce the prevailing
opinion among scholars.
1.7 LIMITATION AND SCOPE OF THE STUDY
To complete this work without an expression of the
imitation encountered may amount to an unhealthy presumption. To this end, the
work set out to critically appraise the concept of insider trading under
Nigerian company law. Though this work may appear to be comprehensive, it
cannot be said to be an exclusive appraised of the concept of insider trading
under Nigeria company law.
Another limitation
encountered in the course of this study is scarcity of local material dealing
on insider trading despite the fact that insider trading is not a new concept.
There is also a limitation in respect of time. Since this study has to be
concluded within a few months, the line needed to thoroughly investigate is
short.
1.8 DEFINITION OF TERMS
1.8.1 INSIDER
The black’s law
dictionary[17]
simply defined insider thus:
1. A person who has
knowledge of fails not available to the general public; 2. One who takes part
in the controls of a corporation, such as an officer or director is one who
owns 10% of more of the corporation stock .
The term insider is,
however, comprehensively defined under Section 315 of the investment and
securities Act thus
“Insider” means:
(a)
Any person who is connected with the
company in one or more of the following capacities
i.
A director of the company or a related
company;
ii.
An officer of the company or a related
company;
iii.
An employer of the company or a related
company;
iv.
An employee of the company involved in a
professional or business relationship to the company.
v.
Any shareholder of the company who owes
5 percent or more of any class of securities or any person who is or can be
deemed to have any relationship with the company or member;
vi.
Member of audit committee of a company;
and
(b)
Any of the person listed in paragraph
(a), who by virtue of having been connected with any other way, possesses
unpublished price sensitive information in relation to the securities of the
company is reference to information which:
i.
Relates to specific matters relating or
of concern (directly or indirectly) to that company that is, is not of a
general nature relating or of concern to that company; and
ii.
Is not generally known to those who are
accustomed to or would be likely to deal in those securities but which would,
if were generally known to them be likely material to affect the price of those
securities.
1.8.2 TRADING
The Black’s Law Dictionary[18]
simply defined the term “trading’ thus
The business of buying
and selling, especially, of commodities and securities.
1.8.3 INSIDER TRADING
It has been explained
that insider trading occurs where an individual or organization buys or sells
securities while knowingly in possession if some piece of confidential
information which is not generally available and which is likely if made
available to the general public, to materially affect the price of these
securities.
Under the Investment
and securities Act 2007 insider trading was termed “insider dealing” and
defined thus
Insider dealing includes insider trading and occurs when
a group of persons who being in possession of some confidential and price
sensitive information not generally available to the public, utilizes such
information to buy or sell securities for the benefit of himself, itself or any
person.
The Black’s Law
Dictionary define trading as the use of material, nonpublic information in
trading the share of a company by
corporate insider or other person who owes fiduciary duty to the company. This
is the classic definition. The Supreme Court has also approved a broader
definition known as the “misappropriation theory” the deceitful acquisition and
misuse of information that properly belongs to persons to whom one owes a duty.
1.8.4 SECURITIES
The Black’s Law Dictionary[19]
defines security as collateral given or pledged to guarantee the fulfillment of
an obligation; especially the assurance that a creditor will be repaid (usually
with interest) any money or credit entered to a debtor. An instrument that
evidences the holder’s ownership rights in a firm (e.g a stock), the holder’s
creditor relationship with a firm or government (e.g; a bond), or the holder’s
other rights (e.g. an option)
Under the Act the term
securities was elaborately defined thus
Securities means
(a)
Debentures, stocks or bonds issued or
proposed to be issued by a government;
(b)
Debentures, stocks, share, bonds or
notes issued or proposed to be issued by a body corporate;
(c)
Any right or option in respect of any
such debentures, stocks, shares, bonds or notes; or
(d)
Commodities futures, contracts, options
and other derivatives and the term securities in this Act includes those
securities in the category of securities listed in (a) – (d0 above which may be
transferred by means of any electronic modes approved by the commission and
which may be deposited, kept or stored with any licensed depository or
custodian company as provided under this Act.
1.8.5 TIPPEE
According to the Black’s
Law Dictionary a tippee is a person who acquires material nonpublic information
from someone in a fiduciary relationship with the company to which the
information pertains[20].
1.8.6 TIPPER
The Black’s Law Dictionary defines a tipper as a person
who is a fiduciary relationship with a company that the person possess material
inside information about, and who selectively discloses that information for
trading or other personal purposes[21].
1.9 LITERATURE REVIEW
Insider trading
literature review will focus on issues with its regulation from the view point
of law and economics. Law and economic literature categorize insider trading
studies into two categories – the agency theory and the market theory of
insider trading[22].
The agency theory of insider trading deals with the impact of insider trading
on firm-level efficiency and corporate value (Jensen and Mecking, 1976). On the
other hand, the market theory of insider trading analyzes the implication of
insider trading on market performance, (Bhattacharya and Daouk (2000) for
instance, the cost of capital, this liquidity and the market efficiency etc.
For example, Manna (1966) suggests that insider trading allows stock markets to
be more efficient. Surprisingly, most of the debates on insider trading are
concentrated on the U.S stock markets. Whereas, La Posta et al claim that laws
and their level of enforcement vary according to countries infrastructures.
Moreover, differences in laws and their enforcement may explain variations in
market structures and stock market practices among different countries. Maug
present a mathematical model in which a dominant owner has information
advantage over small shareholders where insider trading regulations are
properly enclosed. Besides, Leland argues that if insider trading is allowed,
stock prices reflect information at the cost of loss liquidity and the
magnitude of liquidity decreased varies with the economic environment of a
country.
Baiman and Verrocchio (1996) argue that the level of
insider trading varies with level of financial disclosures, the culture, and
the economics of difficult countries. Therefore, it can be expected that the
impact of insider trading archives on the on the stock market varies country to
country. Bhattacharya and Daouk (2002) address the effect of insider trading
regulation and its enforcement on the cost of capital in 51 countries over more
than 20 yours. They hind that insiders trading regulation and its enforcement
help in reducing the cost of capital of the firm. However, the magnitude of effect
varies with the level of enforcement of a country. Moreover, Beny (2005) does
attempt to find whether insider trading law matters his the ownership
dispersion, the stock price informativeness and the stock liquidity. In
empirical results, he finds that ownership dispersion, stock price
informativeness and stock liquidity are greater where insider trading law and
its enforcement are strict. Moreover, most important aspects of the formal law
are penalties and criminal sanctions that are imposed on who violate insider
trading law.
Fernandez and Ferreira
(2009) argue that insider trading regulation and its enforcement improve the
informativeness of stock prices, but this improvement is concentrated in
developed markets. For these results, they suggest that borrowing insider
trading regulation from a developed market may not be effective if an emerging
market’s infrastructure is not complementary to a developed markets
infrastructure. In addition, Kerner and Kucik (2010) argue that not only a
country’s specific factors influence the tightness if insider trading
regulation and its enforcement but also the investment factors of international
competitiveness, explained by pressures to attract more foreign investors.
Because in order to attract more foreign investors, a country has to establish
an investor-friendly regulations and its enforcement. Recently, Chauhan et al.
(2012) examine the effectiveness of insider trading regulation while the
production of private information via insider trading. They also interact this
natural experiment with product market imperfection. For this they argue that
in the absence of effective coordination between product market and stock
market to frame regulation, the outcome of regulation intervention will not be
homogeneous among heterogeneous firms. In the empirical findings, they find
that regulation interventions improve the information content of insider
trading. However, the magnitude if improvement varies along with the category
of insiders, the position of a firm in product market competition, firm
officers’ trades and insider trades in lows product market firms produce higher
information content compared to other group of firms.
Ebrahim and Black (2013)
investigate the impact of corporate governance mechanisms, particularly board
independence, on profitability of insider trades before and after the 2002
enactment of Sarbanes- Olney (SOX). They
show that corporate governance mechanisms can be used to reduce the
shortcomings of existing regulations or their enforcement mechanisms in
reducing the incidents of information-driven trades.
[1] J.
H. Thompson, ‘A Global Comparison of Insider Trading Regulations’ (2014=30
IJAFR. V 311 1
[2] Ibid
[3] J.
O. Orojo, Company Law and practice in Nigeria (5th Edu, Durban:
Lexis Nexis, 2008) P. 390
[4] Ibid
[5] J.
H> Thompson, ‘A Global Comparison of Insider Trading Regulations’ (2013)
IJAFR. V3:1 1
[6] Ibid
[7] A
Garba, ‘Impediments to Effective Enforcement of Insider Trading Regulations in
Nigeria’ (2013) IJM 13
[8] J.
O. Orojo, Company Law and Practice in Nigeria (3rd edn, Lagos: Mbeyi
and Associate, ) p.447
[9]
See British Industrial Phastic v Ferguson 9(1938)4 ALL ER. 504
[10]
Percial v Wright (1902)2 Ch. 421
[11]
I. J. Essien, ‘A Gritical Examination of the statutory Bottleneck Against
Insider Dealing’ (2007) NSLJ vol 2 145.
[12]
213 US 419 (1909
[13]
See Security Exchange Act 1934 (USA) S. 166 and Rules 106 -5 made by US SEC.
[14]
See report on the reform of Nigerian Company Law (1988/vol. 1 p.30
[15]
Hereinafter referred to as the CAMA, the regulation of insider trading dates
back to the enactment of CAMA. Section 614 – 620 was the pioneering provision
which contained a prohibition on insider trading in Nigeria
[16]
Regrettably even under Investment and Securities Act 2007 Hereinafter referred
as the 2007 ISA no successful conviction has been recorded for insider trading,
the reason could be that most of eh flaws of the CAMA and ISA 1999 were simply
carried over to the 2007. ISA.
[17]
Black’s Law Dictionary 9th edn p. 866
[18] Ibid p.1634
[19] Ibid p.1476
[20] Ibid p. 1621
[21] Ibid
[22]
See generally V Chauhen et al ‘Insider Trading, market Efficiency, and
Regulation. A Literature Review’ RFB vol 06 Issue 1 2014.
[1] See
generally Regulation of Insider Trading/Law Teacher http://www.lawteacher.net/free-law-essays/trading-law/regulation-of-insider-trading-law-essays.php
accessed on 10 April, 2010
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