Insider Trading And Its Impact On Directors
As insider trading is a serious offence under the Capital Markets and Services Act 2007 (CMSA), it is important that directors of listed companies should be aware of the potential penalties if they break the law. Section 188 of the CMSA prohibits the use of inside information to trade in securities or to communicate such information to others for the purpose of trading in securities.
A person who contravenes Section 188 commits a criminal offence and could be punished on conviction to imprisonment for a term not exceeding ten years and to a fine of not less than RM1 million. A civil action may also be initiated by the Securities Commission for insider trading breaches. The court could also impose a civil penalty of up to RM1 million depending on the seriousness of the contravention under the Capital Markets and Services (Amendment) Act 2015.
In Suruhanjaya Sekuriti Malaysia v Yap Wee Hin [2022] 1 LNS 1879, the High Court imposed the maximum civil penalty of RM1 million on the defendant.
Facts
The plaintiff is the Securities Commission of Malaysia. The defendant, was the co-founder, former managing director, deputy chairman and non-independent executive director of Patimas Computers Berhad (PCB), a company previously listed on the Main Market of Bursa Malaysia Berhad. The plaintiff commenced an action against the defendant claiming that the defendant had breached the law by procuring directly or indirectly the disposal of 43,823,600 PCB shares (Shares) held by the managing director of PCB, Law Siew Ngoh (Law) while in possession of inside information of PCB.
PCB’s auditors conducted a statutory audit of PCB’s financial statements and discovered that there were several suspicious transactions between PCB and its top debtors (Inside Information). On 29 June 2012, Law had provided explanations to PCB’s auditors on the issues raised but the auditors deemed the explanations to be unsatisfactory and took the view that the transactions were not genuine. The auditors could not form an opinion of PCB’s annual audited financial statements due to the suspicious transactions.
On 31 July 2012, PCB released an announcement to Bursa Malaysia Berhad stating that it would not be able to issue its annual audited financial statements for the period of 1 January 2011 to 31 March 2012 (Announcement) due to unresolved significant accounting and audit findings in the accounts of PCB.
The plaintiff claimed that the defendant was in possession of the Inside Information and had disposed or procured the disposal of the Shares held by Law before the Announcement was made. Each disposal was preceded by calls made on the same day by the defendant to Law’s remisiers. The proceeds from the disposal of the Shares were then transferred by Law to the bank account of several companies controlled by the defendant. The defendant directly or indirectly benefited whether as the beneficial owner of the Shares or as the direct or indirect recipient of the proceeds.
By disposing the Shares, the defendant avoided losses of RM1,095,590, being the difference between the price at which the Shares were disposed and the price at which the Shares would have been likely to be disposed of if the Inside Information had been generally available as the share price had dropped by 55% after the Announcement was made.
Section 188 Of The CMSA – Prohibited Conduct Of Person In Possession Of Inside Information
(1)A person is an “insider” if that person –
(a)Possesses information that is not generally available which on becoming generally available a reasonable person would expect it to have a material effect on the price or the value of securities.
(b)Knows or ought reasonably to know that the information is not generally available.
(2)An insider shall not, whether as principal or agent, in respect of any securities to which information in subsection (1) relates –
(a)Acquire or dispose of, or enter into an agreement for or with a view to the acquisition or disposal of such securities.
(b)Procure, directly or indirectly, an acquisition or disposal of, or the entering into an agreement for or with a view to the acquisition or disposal of such securities.
High Court’s Decision
The High Court applied the test in the case of Suruhanjaya Sekuriti Malaysia v Sreesanthan Eliathamby [2021] 7 CLJ 913 and found that the following elements of insider trading were established:
(a)The defendant was in possession of the Inside Information.
(b)The Inside Information was not generally available.
(c)The defendant knew or ought to have known that the Inside Information was not generally available.
(d)If the Inside Information was generally available, a reasonable person would expect it to have a material effect on the price of the shares of PCB.
(e)The defendant disposed or procured the disposal of the Shares whilst in the possession of the Inside Information.
The court decided that the defendant was indeed considered an insider within the meaning of Section 188(1) of the CMSA since he was the deputy chairman and director of PCB at the time the auditors raised concerns over the suspicious transactions, he would have had access to the Inside Information. The court found on a balance of probabilities that the defendant was in possession of the Inside Information.
The court also decided that the Inside Information was not generally available when the Shares were disposed as the queries raised by the auditors were conveyed in a private meeting with the management of PCB and were only generally available to the public after the Announcement was made. It was also apparent that the Inside Information would have a material impact on PCB’s shares since it would influence whether a reasonable investor would invest in PCB.
The court imposed the maximum civil penalty of RM1 million pursuant to Section 201(6)(b) of the CMSA (prior to the amendments made by the Capital Markets and Services (Amendment) Act 2015) on the defendant. He was also ordered to pay a sum of RM3.29 million to the plaintiff, an amount equal to three times the losses avoided by him as a result of the insider trading. The defendant was also barred from being a director of any public listed company for a period of five years. The underlying reason for the court’s decision to impose the maximum penalty depicts the seriousness of insider trading and the responsibilities of the defendant as the founder, executive director, former managing director and deputy chairman of PCB.
Commentary
Directors of listed companies have a responsibility to act in the best interests of their shareholders and to comply with the laws governing securities trading. Directors should take appropriate measures to prevent insider trading within their companies. By doing so, they will be able to maintain the integrity of the financial markets and avoid legal and reputational risks associated with insider trading.
19 May 2023