By Chun Bin Soh; Swee Yong Lim
In a High Court decision recently upheld by the Court of Appeal, Kevin Lew Chee Fai was ordered to pay a civil penalty of S$67,500 under the Securities and Futures Act (SFA) for insider trading. A landmark case, this is the first time that the MAS has commenced civil penalty proceedings in court since the civil penalty regime under the SFA took effect in 2004.
Lew, formerly the CFO of WBL Corporation Limited, sold 90,000 WBL shares in 2007 after attending a WBL management meeting where he obtained price-sensitive information, comprising of a loss forecast and a possible impairment charge over a loss-making WBL subsidiary. Despite being cautioned at the meeting that such information was price-sensitive, Lew subsequently sold some of his WBL shares.
What constitutes "insider trading" under the SFA
Under Section 218(1) of the SFA, the elements of insider trading comprise the following:
- a person who is connected to a corporation;
- possesses information concerning that corporation;
- that information is not generally available;
- if that information were generally available, a reasonable person would expect it to have a material effect on the price or value of securities of that corporation;
- the connected person knows or ought reasonably to know that the information is not generally available; and
- the connected person knows or ought reasonably to know that if the information is generally available, it might have a material effect on the price or value of those securities.
Generally, all forms of trade by a connected person in possession of such information are prohibited, whether as principal or agent. A connected person must not communicate the information in any way to another person if he knows, or ought reasonably to know, that the other person would or would be likely to trade in shares of the corporation in question.
Who is a "connected person"
A person is connected to a corporation if:
- he is an officer of that corporation or of a related corporation;
- he is a substantial shareholder of the corporation or of a related corporation; or
- he occupies a position that may reasonably be expected to give him access to price-sensitive information by virtue of any professional or business relationship, or being an officer of a substantial shareholder.
An "officer" includes:
- a director, secretary or employee of the corporation;
- a receiver, or receiver and manager, of property of the corporation;
- a judicial manager of the corporation;
- a liquidator of the corporation; and
- a trustee or other person administering a compromise or arrangement made by the corporation.
What comprises "inside information"
The Court of Appeal held that information may include rumours circulating in the market, and that its reliability is irrelevant. However, to be considered inside information, the information must be generally unavailable and materially price-sensitive.
Section 215 of the SFA provides that information is generally available if:
- it is readily observable;
- it is made known in a manner that would, or is likely to, bring it to the attention of persons who commonly invest, and reasonable time was given for dissemination; or
- it consists of deductions, conclusions or inferences made or drawn from either or both of the above.
If the information were not generally available, the next question was whether a reasonable person would expect such information to have had a "material effect" on the price or value of the shares if the information had been generally available. In determining materiality, there must be "a substantial likelihood" that the information will influence the investor, in that such information has significantly altered the "total mix" of the information available to him, and will be assessed at the time of the alleged insider trade.
Presumption of knowledge
The SFA imposes a presumption of knowledge on a connected person in possession of information concerning the corporation to which he was connected and which is not generally available. The connected person is presumed to know that such information might have a material effect on the price or value of securities of that corporation. Significantly, an intention to use the information in conducting the trade is not necessary.
The present decision by the Court of Appeal merits closer examination, particularly by senior executives who are exposed to company information that are confidential and price-sensitive, especially since the Court of Appeal has commented that the elements of insider trading set out in the present case apply to both civil and criminal charges of insider trading.