Taking insider dealing seriously!
Article Type: Editorial From: Journal of Financial Crime, Volume 17, Issue 3
While insider dealing is considered a financial crime is it really a fraud?The Court of Appeal in McQuoid (2009) EWCA Crim 1301 stated that “we […]emphasise that this kind of conduct does not merely contravene regulatory mechanisms […] when it is done deliberately, insider dealing is a species of fraud: it is cheating”. The present author while arguing, in an article in the Journal of Business Law (“The crime of insider trading”)in 1977, that in certain circumstances insider dealing may constitute fraud– acknowledges that even in face to face transactions, let alone indirect and impersonal market transactions it has not been easy to conceive a charge. The Fraud Act 2006 may now assist, in limited circumstances (see Rider et al. (2009), Market Abuse and Insider Dealing, Tottel at 111 et seq) but in reality the fraud is committed against the market as a whole and not individual investors.
Not with standing, however, the condemnation of insider dealing as a species of fraud by many, prosecutors in most countries, including the USA, have fought shy of utilising the conventional criminal law. It is only relatively recently that insider dealing cases have been pursued by Federal US prosecutors in any numbers. The general view in the USA was that most instances were more amenable to the essentially civil enforcement powers of the Securities and Exchange Commission. Indeed, when the criminal law intervened it often did so through money laundering charges and asset forfeiture (which itself is more often a civil process). In Britain, albeit insider dealing was made a specific criminal offence in 1980 there has been little appetite for prosecutions. The Serious Fraud Office (SFO), albeit many years ago, went on record as observing that insider trading was a regulatory and technical offence and, therefore, outside its statutory mandate – serious or complex fraud. Several former Directors of the SFO questioned whether it was appropriate to utilise the criminal law in cases of insider abuse and advocated the US approach of civil enforcement.
The market abuse regime introduced by the Financial Services and Markets Act 2000 was in many ways half baked! While conceived with good intentions, the compromises that were required, particularly under human rights law, resulted in a set of civil offences which were almost as difficult to establish as the criminal offences of insider dealing under the 1993 Criminal Justice Act. The tradition within successive city regulators that policing insider dealing– particularly through the criminal law was too difficult and perhaps even just too divisive, manifested itself in the Financial Services Authority and persisted until the advent of Margaret Cole as head of Enforcement. The city has always had a mixed take on insider abuse. Of course, since the mid 1970s it has been officially condemned, but too often those who speak for the City have tended to minimise its incident and impact. Now, it has all changed. Almost every day we read in the press of more raids by the FSA invariably accompanied by police officers and even Serious Organised Crime Agency agents. The FSA under its statutory powers to prosecute insider dealing cases now has an appetite probably somewhat beyond its digestive system to bring insider dealers and their cronies to book. All this is most welcome and in view of the criticism of the FSA’s lack of diligence in regard to certain aspects of the financial crisis, most timely. Albeit possibly (depending upon what happens on 6 May 2010)too late as the conservatives have already announced that if they are in government the FSA will be restructured and perhaps loose its enforcement mandate.
What ever happens in the forthcoming general election, it is to be hoped that the policing of insider dealing will remain a priority with those responsible for promoting integrity and maintaining confidence in the markets. While it may as a matter of jurisprudence it may be difficult to justify treating insider dealing as a serious crime in terms of the harm caused to individual investors,it is a serious abuse in terms of the market and, therefore, directly undermines public confidence. As Sir Robert Malins VC observed, albeit in a market abuse case in 1871 such conduct “is one of the most dishonest practices to which men can possibly resort […] a more abominable fraud, and one more difficult of detection, cannot be found”.
Barry A.K. Rider
