Speaker 1: Inside the dealing is currently in the Criminal Justice Act 1993. That's not when it first came in. You don't need to know this, this is just by way of historical background, but as a matter of interest, it first came in in Companies Act 1980. I'll often give you little bits of historical background, not because you need to waste your time consigning these things to memory, but there's no harm in knowing it, and it does make it more interesting. It makes it more interesting so that you can actually, you know, it's not simply a blind set of facts you've got to memorise from a page, you know, how does it all fit together, I understand it. It was an initiative brought in simply by the UK then, not with reference to any other government or, you know, European Union stuff or anything like that. There was no directive or anything at that stage. They just chose to bring in inside the dealing legislation, and it was brought in in Companies Act 1980. I was lecturing on company law in the securities industry back in the 1970s. You're not going to believe this, but I was. And I can remember the debates. I can... And there was no law before 1980? Not at all. No law on inside the dealing at all before 1980. You could do an inside deal. It would be the sort of thing that the stock exchange would have disapproved of with regard to the behaviour of members of the stock exchange, but if an ordinary sort of layman, an individual, wanted to do an inside deal on the basis of inside, there was no criminal law you were breaking at all. None. The difficulty, of course, with bringing in legislation on inside the dealing, this is going back, as I was saying, to the 1970s, when they were debating bringing this in, is first of all, how do you define what you're criminalising? How do you define what an inside deal is? And secondly, how do you enforce it? How do you police it? How do you prove that someone was acting on the basis of inside information? Interestingly, ironically, in today's modern electronic world, with texts and records of mobile phone conversations and all the other electronic facilities and records that people have got, it can sometimes now be a little bit more straightforward than it could have been a generation or so ago to find out who said what to whom when. But of course, you can still have the sort of the old-fashioned sort of inside deal. And in order to understand the difficulties that the regulators, the legislators, the enforcers have got, let's just give ourselves a little scenario here. Let's say you've got a private dinner party one evening in a house, fancy house, expensive house in Holland Park. And there are all sorts of people from a sort of city background, banks and accountants and lawyers and captains of industry and people like that, maybe a dozen or so people at this private dinner party in Holland Park, and included amongst the party is someone from a totally different background, but he's the brother of the host and he's a farmer in North Devon. And he's up in London to do a bit of business for three or four days and so staying with brother and included in the dinner party. At a late stage of the evening, the chairman of a large listed company is having a coffee and brandy in the corner of the room chatting to the farmer and the party then breaks up and they all go their separate ways. Now the chairman of this large listed company had been negotiating over the last week with a potential takeover bidder for his company and the bid was agreed and it was about to be announced to the market within the next day or two. The morning after the dinner party, the farmer from North Devon went out and bought a whole sack full of shares in this chairman's company. The takeover bid was then announced a day or so later, the shares doubled in value as they tend to after takeover bids are announced, and the farmer within a week sold out his share purchase for a hundred percent profit. Now any reasonable person having an awareness of that background would say, oh that looks a little bit fishy doesn't it. No doubt the chairman of this company is relaxing over a second brandy with his new found friend the farmer said, look old boy, you might not have much to do with the city, I'll give you a tip. You fill your boots with shares in my company and by the end of the week you'll be pretty pleased you've done it, and no doubt that's what happens. Or did happen. But can you prove it? Can you prove that that was how the farmer got his information? So let's say these two are arrested on the charge that the chairman has put, hang on a second, hang on, what are you talking about arresting people? How in the world are you going to know if this is a private dinner party in a private house to hold a party, even the fact that there was a party, who's going to have the information to arrest them? Oh well yes, but that's the way the systems worked even in the old days, because they do know. You see, one of the most sensitive areas with potential insider deals has been shares bought in companies shortly before a takeover bid is announced. And anyone who's got any involvement with the city knows that when a takeover bid is announced for a target company, an almost inevitable, not entirely inevitable, an almost inevitable reaction is for the share price to rise, and there is a peak in share trading activity shortly before a takeover announcement, which means that there are people who knew about it. So the people involved in the London Stock Exchange and the various regulatory bodies will examine the deals that were done in a target company within the day or two, the week or two, before a takeover bid is announced. Who are these individuals? Who are they married to? Who are their husbands? Who are their wives? Who are their boyfriends? Who are their girlfriends? Who are their flatmates? Who was doing the share buying and selling? And you can find out. So that if the investigators are investigating transactions in shares in that chairman's company shortly before the bid is announced, they would be able to uncover the fact of the dinner party, the fact that the farmer who bought the shares was there, they would have information available to arrest them, and have them in court. Where they stand facing the judge and say, but my lad, there's been an awful misunderstanding here. The allegation is that I, the chairman, passed on the information to my newfound friend, the farmer, and he then went off greedily and bought shares based on that inside information. No, no, no, it wasn't like that at all. Yeah, sure, we were at the party, and no one denies that. Yes, we were discussing things over coffee, normal chit-chat, you know, it was the World Cup coming up, rugby and so on. We were talking about politics, we were talking about the Syrian refugees, we were talking about Donald Trump and the American elections, you know, normal social dinner party chit-chat, talking about takeout, but good heavens no, we didn't do that. And if the judge were to say, oh come on, pull the other one, you know, there are you, the chairman of this company, fully aware that a takeout bid is going to be announced in a day or two, there is a farmer who's never bought a share in his life, he's a farmer in North Devon buying shares, you give me a plausible explanation for that share transaction if it's not that the chairman passed on information to the farmer. And the farmer says, well, my lad, I'll have a go. No, I haven't bought a share in my life, but I'm not a poor man, I've got reserves and money on deposit and so on, and I went to this party and I met this chairman, who hadn't known him before, but he struck me as being a really impressive individual, and sort of on top of his brief and seemed an efficient chap to be running a company, and I thought to myself, well, if I wanted to buy shares in the company, I really think that this individual is a really good and effective chairman, and he would make a company work really well, so simply because I was impressed by the calibre of the individual, and thought that any company run by him would do well in the long term, I bought some shares in the company, in the event wasn't my purchase fortunately timed. You see, there are all sorts of things that you can say to make it look plausible, to make it look okay-ish, to make it look difficult to prove, and that was the problem that people had for decades, for decades and decades, because from, it was the 1st of May 1980, you don't need to remember that date, but the 1st of May 1980, for the very first time ever, insider dealing came in, and through the 1980s, through the 1990s, right up until within the last few years, very little was done with regard to the successful prosecution of insiders, because it was so difficult. Almost no, almost no successful prosecutions were launched in the first 20 or 30 years. It has changed a bit now, with first of all the FSA, and now the FCA, with a much tighter, more rigid enforcement. There was a woman called Margaret Cole, who was a city lawyer, who went into the FSA, and she headed up the enforcement division, and she's now had various successors who have taken over from her in the FSA and the FCA, and of course you're aware that this area is much tighter now than it used to be, but going back 20 or 30 years, the law was there, but it was very difficult to police and enforce. It wasn't policed, you see, by the city regulator in the old days, it was policed by the government. It was policed by the Department of Trade and Industry, and they weren't very good at prosecuting insider dealers, or getting a case together. Why do we have different legislation now? Well, it's not really different, it's just a development, because although bringing in the legislation in Companies Act 1980 was a UK initiative, like so much that's happened in the securities world, Europe says, oh, they're doing that in the UK, which is a sophisticated developed capital market, maybe we ought to impose that around all European countries. And so that's where an insider dealing directive comes along, and so they will then introduce a requirement for the entirety of Europe, in other words for Greece and Italy and Germany and Spain and France and Belgium, Holland and so on and so forth, also to have insider dealing legislation. And inevitably the European directive covered a slightly different range of possibilities from the UK legislation in Companies Act 1980, and so we had to modify our pre-existing law to meet the European standard. And that's what happened in the Criminal Justice Act 1993. That was simply us modifying our pre-existing legislation to meet the European directive requirements. And we've had that pretty well unchanged ever since then. The provisions in your manual, Chapter 3, Section 3. So most of the provisions we're looking at today are going to be in Chapter 3, this is not something I have difficulty in finding, Chapter 3, Section 3. There is not a single offence of insider dealing, please note that there are three. What are the statutory offences of dealing, encouraging, disclosing? If you know shares are going to go up and buy them, it's a crime. If you hold shares that you know are going to go down and you've got inside information they're about to collapse and you sell them, it's a crime. If you encourage someone to buy shares or you disclose the information to enable them to make up their own mind. It may well be, of course, that crime 2, encouraging, and crime 3, disclosing, go hand in hand. I'm a director of a company, I go home in the evening, I say to my wife, look my dear, buy some shares, they're, you know, they're about to announce a takeover bid, so you're encouraging her to buy and also explaining why. But of course there can be some times when you encourage someone to do a deal without explaining why, or you could simply say there's going to be a takeover bid for Box OPLC, and you don't tell people what to do, they can make up their own mind. So they could, item 2 and 3 could be separate. What you have to understand is that a deal does not need to be done for an offence to be committed. Of course, if I've got inside information and I buy the shares, there is a deal being done. If I've got information and simply disclosed that to my wife and she doesn't do anything about it, then no deal has been done, but an offence has still been committed. I've committed the offence of disclosing inside information, which of course I'd never be prosecuted for because nobody would ever know unless my wife goes and sneaks to the authorities. A better way to describe what the offence is, though, is the abuse, or the misuse, if you prefer, of inside information. That's a much more laborious phrase, and that's not the phrase that we routinely use, but that actually is a better description of what's going on. Because you can abuse inside information by doing a deal yourself, you can abuse inside information by encouraging someone else to do a deal, or of course you can abuse inside information by disclosing it so that someone else can make up their mind. Can companies know things? The reason for that question will become clear in a minute. I know that China has just declared war on Japan, but does Marks & Spencer know that China has just declared war on Japan? In other words, is it possible to attribute knowledge to a company? You can say that individuals know something, but can you say that a company knows something? The answer to that question is, yes, you can say that a company knows something, but it is a problematic exercise, it's difficult. It is easy to prove that an individual knows something, it is a very difficult and legalistic thing to do to prove that a company knows something, and you'd rather not have to go through that exercise if you didn't need to. In the context of inside dealing, companies can't do inside deals, because it is difficult to prove that companies have got inside information. So we avoid the problem. Please note, who may commit the statutory offences, it's only an individual, a living, breathing person like you and me, not a company. An individual who's got inside information as an insider. You see, what I'm doing with you this morning, with these slides on insider dealing, is posing and then answering a series of questions. We start off with, what is the relevant legislation? Criminal Justice Act, 1993. What are the statutory offences? Dealing, carrying, disclosing. Who may commit the statutory offences? An individual with inside information as an insider. So what we're now going to do, and this will take us up to our second break this morning, what we're now going to do for our last little exercise is to say, OK, what is inside information and who is an insider? And so here we have it on the next slide, what is inside information? The way that lawyers talk, they talk about limbs to a definition. And inside information has got four limbs to the definition. First of all, it relates to a particular issuer. We'll worry about the others in a minute. It relates to a particular issuer, which is just basically a company issuing shares. Secondly, it's specific or precise. Thirdly, it's not being made public. Fourthly, it's price sensitive. Please note, all of those have got to be present simultaneously. It's got to relate to a particular issuer. It's got to be specific or precise. It's got to be not made public. It's got to be price sensitive. By an issuer, we're talking about companies issuing shares. But it could also be companies issuing bonds as well, because bonds are covered by the insider dealing legislation. If Marks & Spencers is going to go bust, not only will its shares become worthless, but also this unsecured debt that Marks & Spencers has got where there's no security for the loan creditors, that'll become worthless as well. So issuer of securities that are traded in the market. Note also, though, the inside information relates to particular issuers as well. That could be all gold mining companies. It could be all banks. It could be all hotels. There could be information that you've got about the Chancellor of the Exchequer imposing in his spring budget an unexpected tax on every hotel guest. Gosh, this is going to have a devastating effect. Not on supermarket shares, or on air travel shares, or on brewery shares, but on hotels which have got this tax. Any hotel group is going to be devastated. So we know that this tax is going to be imposed on the hotels. It hasn't been announced yet publicly. You could ring around your friends who own hotel shares saying get rid of them. So it relates to a particular issuer of shares, a company, a particular issuer of shares like all gold mining companies, all banks, all hotel companies, or a particular issue of shares. Now that's a bit problematic. We're talking there about something that would affect the price of a particular share without affecting the price of the company. The only really valid, routinely encountered example of that that I can think of, that I've been able to think of, is A shares that don't have a vote. And they've always been unpopular, but they haven't been prohibited. And there have historically been a number of companies that issue A shares, non-voting shares. Very often the company has been persuaded to give the vote, to give enfranchisement, voting rights, to the non-voting shares, which inevitably has the effect of improving their share price. Doesn't make the company more or less valuable, but it does make the shares in the company a little bit more valuable. And so that would be the sort of thing we're talking about there, knowing in advance of an announcement that the company is about to give voting rights to non-voting shares. So that is, relate to a particular issuer, or to particular issuers, or to a particular issue. So those are alternatives there. It's specific or precise. Okay, well, how do we define specific or precise? You look through the legislation, there is no definition given anywhere. So how do we know whether something is specific or precise or not? And the answer, quite simply, is this. With a given bit of information, it is either blindingly obvious to everybody involved that that is specific and precise information, or if it is not clear to everyone involved whether it's specific or precise, the only way to establish it is to have a trial of the point in a court of law, and the judge will tell you whether it's specific or precise. That's all you can do. If legislation says something and it is not clear what the legislation means, it can only be interpreted in a court of law. But things like knowing that Marks and Spencers is going to be subject to a takeover bid would, of course, be exactly the sort of specific and precise information we're talking about here. Knowing that the company is about to announce disastrous losses in its main subsidiary in Venezuela would be the sort of specific or precise information that we're talking about here. Has not been made public? Well, going back to the 1980s, the 1990s, with the very few cases of alleged insider dealing that came before the courts, almost invariably the sort of city slicker type individual who was the subject to one of these insider dealing accusations, in other words, they're accused of doing an inside deal, would look the judge innocent in the eye and say, but I thought everybody knew. You know, I thought it was general knowledge. I didn't think I was getting an advantage on the market. I thought the information had been widely disseminated. Well, again, it's up to the court to decide whether that is a reasonable thing to say in the circumstances or not. Not being made public doesn't need to mean headlines in the newspapers. It could be the information is available somewhere, could be in a company-sized record. So long as it's potentially available to people who might deal in the shares, they might have to do a bit of work to get the information, but it's there, it's out in the public forum. Not being made public, and fourthly, it's price sensitive. In other words, the share price would actually move. I can give you an example of a bit of information which would meet three of those four limbs to the definition, but not the last one, and which therefore would not be relevant for the purpose of any insider dealing action. Let us say that I am a shareholder in Marks and Spencers, and I have a pal who is a, I don't even need to be a shareholder myself, but I've got a pal who's the company secretary of Marks and Spencers, and I'm having a drink with him after work one evening, and he's just telling me about the board meeting, you know, sort of chatting over a pint, and me being cautiously, he says, you know, the last item on the agenda is a fairly non-controversial one, this, is that Marks and Spencers have decided to close up their head office in Baker Street and transfer to Canary Wharf. Now, at the moment, on the Friday evening, this is going to be announced the next week, on that Friday evening in the pub, the only people who know about this are the board of directors of Marks and Spencers, who have made the decision an hour or two previously, and the company secretary and me. What we've got there is specific information about an intended move in a month or two's time from Baker Street to Canary Wharf. That information relates to a particular issue of Marks and Spencers, it's very specific or precise, the change of location of the head office address, it's not being made public, only a small group of individuals know about it, but fourthly, who cares? Is it going to actually change the Marks and Spencers share price answer? No, it's not, not price sensitive, so it wouldn't be relevant for the purpose of an insider dealing prosecution. Again, you might think I'm labouring the detail, but it's because it's important. In this exam, we need to memorise this stuff, because there could be two marks on that. Define precisely, for two marks in part A of the exam, what is meant by inside information for the purpose of the insider dealing legislation. For half a mark each, you would need to identify those four points there.