Insider Dealing and Money Laundering in the EU: Law and Regulation

R.C.H. Alexander

• Publisher: Routledge
• Year: 2016
• Print ISBN:
  9780754649267
• eBook ISBN:
  9781317116042
• Topic: Law
• Subtopic: International Law
• Index: Law

This work presents a comparative study of the provisions relating to insider dealing under the EC Insider Dealing Directive. The volume begins with a discussion of the rationale for regulating financial services in general and controlling insider dealing and money-laundering in particular. It examines the definition of an insider and of inside information and the various criminal offenses relating to insider dealing. The role of money-laundering is also recognized and the anti-money laundering regime as well as the considerable impact on the financial sector is discussed in detail. The work assesses the efficacy of criminal law in controlling insider dealing and considers the increasing trend to deal with it by means of civil/administrative measures.

Chapter 1

Why Regulate Insider Dealing and Money Laundering?

The question of why one should regulate financial markets at all is not as strange as it may seem. Outright fraud has always attracted disapproval with the ensuing penalties imposed on those caught perpetrating it. Certain other forms of conduct, however, such as insider dealing, which would now generally be considered as market abuse, were long viewed, at least in certain quarters, as normal and legitimate business practices, particularly in Europe. (Money laundering, with which this book also deals, is a separate issue and the arguments for its control are therefore discussed separately towards the end of this chapter.) Even after insider dealing had been criminalised in a number of European jurisdictions, the perception, notably in the United States, was that it was still not viewed particularly seriously there. In 1989, when insider dealing had been a criminal offence for nearly a decade in the UK¹ and nearly two in France,² the Asian Wall Street Journal carried an article by an American journalist, entitled “Insider Trading, Illegal in US, is Customary in Europe”.³ A year later, Judge Owen of the Southern District Court of New York commented that in Hong Kong, at that time still under British administration, a conviction for insider dealing was tantamount to a commendation from the Queen.⁴

Even today, commentators have been known to say, albeit rarely in print, that no one in the commercial world would wish to be considered an “outsider”.

A major factor has been the mentality, not amongst the public at large but amongst the financial services community. Insider dealing, some have argued, is a victimless crime and thus there is nothing intrinsically wrong with it. Robbery, murder, rape – all these offences have clear, identifiable victims. The same can be said of fraud, whether it is perpetrated by the con man who persuades someone to entrust to him their savings or the embezzler who at some later date appropriates funds originally accepted for legitimate investment. The public outcry at the misappropriation of pension funds in the Maxwell affair was as great as at any act of physical violence.

Insider Dealing

A core question, however, is, who are the victims of insider dealing? Traditionally, it has been argued that it is the market that suffers,⁵ but some have considered this to be too vague. To this, in turn, it has been pointed out that the law condemns a number of offences against the community at large: treason has no specific individual victims⁶ but rather the nation as a whole. In other jurisdictions, a variety of attitudes emerge. In a number of Central and Eastern European states, insider dealing was, until recently,⁷ seen simply as one version of corruption. The approach that insider dealing is simply a perk of holding certain positions is widespread, both in developing countries and more established financial centres. In the UK, it was said that “well into [the 20th] century, such insider trading in shares was perceived by many as a perk of the job in a system often regarded as fair game and always in season”.⁸ James Fishman similarly remarked, “Particularly in the context of takeovers, within a relatively closed environment, [insider] dealing was considered a customary way of doing business in the City, a sort of fringe benefit.”⁹

Attitudes in Germany have been said to be even more blatant:

So called ‘fireside chats’, during which German journalists, financial analysts and others heard inside information prior to its public announcement, were a common phenomena. One foreign banker based in Frankfurt noted that it became a real ‘joke’ to watch prices move first and then data being issued.¹⁰

A similar anecdote is told of a conference delegate in Hong Kong, who asked with incredulity, “But what kind of idiot would invest on the stock market if he did not have inside information?” Perhaps when Craig Forman wrote his article, he should have looked a little closer at hand.

Economic Arguments for Permitting Insider Dealing

Indeed some have gone further, perhaps no one more so than Professor Henry Manne. He has argued, in not only in an article appropriately titled “In Defense of Insider Trading”¹¹ but also in an entire book, Insider Trading and the Stock Market,¹² that not only is there nothing wrong with insider dealing, it is positively beneficial in a number of respects. It should be noted that all Manne’s arguments are put forward from an economic, rather than legal, perspective, perhaps one too often overlooked.¹³

Manne begins by arguing that insider dealing encourages persons to engage in the securities markets. In particular, he focuses on corporate managers. Few do anything out of pure altruism, he says: they require the incentive of a reward. Those involved in trading in securities, therefore, require the perk of a nice profit ahead of the game now and again in order to make what they do worthwhile. While, he argues, the old-style entrepreneur who founded his own business was rewarded by receiving directly the profits ensuing from his skill, the modern entrepreneur who is a corporate officer, and hence an employee, does not. There are a number of responses to this. The first and most obvious is that the rewards of insider dealing do not make it desirable to society. One could equally well say that the smuggling of tobacco and of controlled drugs is a good thing because it encourages people to be international truck drivers.¹⁴

Secondly, securities traders, corporate executives and the professionals with whom they work are already rewarded with some of the highest salaries in the economy. In addition, many of them receive a handsome annual bonus that may equal or even exceed the salary itself. One could suggest that it is this, rather than the opportunities to engage in insider dealing (which inevitably will be unpredictable) that leads people to go into this sector of work. Professor Barry Rider and Leigh Ffrench, although they roundly refute Professor Manne’s theories, suggest that, in times of recession, the salaries received by corporate executives no longer prove a sufficient incentive.¹⁵ But this must be questioned: even in a downturn in the economy, corporate salaries remain distinctly attractive in comparison to those of other positions. Manne explicitly says that salaries and bonuses are not, in fact, adequate recompense for corporate entrepreneurs but only for those merely exercising management functions, and he cites J.A. Schumpeter in support of this view.¹⁶ This, he says, is because they are not directly linked to the profits that the officer has achieved: they cannot be because they are by definition fixed in advance. Even though bonuses are linked to the profits of the company, they are linked to the overall profits, of which each officer receives a share: the individual officer does not receive a bonus directly linked to the profits that he brought in. This may be true in principle. On the other hand, a corporate officer who delivers, who through his own efforts and initiative brings in profits to his company, is far more likely to retain his job and thus his large salary. This will perhaps never be more true than in the times of recession to which Rider and Ffrench refer: in the rounds of lay-offs and redundancies, it will be the least productive who go first and those who most visibly bring in profits whom the company will take most pains to keep in order to ensure that some profits continue to come in and the company survives.

Thirdly, as Manne himself acknowledges, insider dealing comprises a very small percentage of the total number of securities transactions. If it is an incentive, therefore, it cannot be a great one.

Before moving on to Manne’s second argument, two more points need to be made in relation to his first. Since, as is seen below, the basic theory of Manne and others that insider dealing is beneficial has now largely been dismissed, these points may be of academic interest only, but they are still worth making. Manne focuses on corporate executives, who he feels are rightly rewarded through insider dealing for their entrepreneurism. He overlooks the fact, however, that such executives are only one category of insider dealer. The executive’s lawyer and accountant are also insiders. So are, in many cases, some of his junior employees.¹⁷ The first persons in a pharmaceutical company, for example, to learn that the tests of a new drug or vaccine have been successful will not be the CEO, but the rather more junior employees in the Research and Development department. More common still are the cases of junior insiders buying stock in the target of a takeover bid: executives will generally be barred, not just by legislation but by their own companies, from buying such stock.¹⁸ These players are not entrepreneurs: although their fortunes are linked to those of their client or employer, as the case may be, they do not take the same risks for it. Yet Manne would offer them the same reward.

To this, it could be argued that researchers should similarly be provided with an incentive, since many companies rely on them to develop their products. Further, in some cases, such as the pharmaceutical industry, the results of the researchers’ labours may benefit not only their company but society at large: this would, at least in principle, be true of new drugs.¹⁹ Such researchers already, however, receive a substantial incentive: the continued success of their employer. This is not an idealistic argument; it is a highly pragmatic one. It is through developing new products, often in a highly competitive industry, that companies remain profitable and hence in business. The labours of the researcher are therefore rewarded directly by the security of his job. Less starkly, the successful researcher (or other more junior employee) may well be rewarded with greater prospects in the job market, either through internal promotion or a move to another employer in the industry. The bar to insider dealing does not deprive them of an incentive to work well any more than it does the entrepreneur.

It is also to be noted that Manne’s argument focuses on executives who make a profit from insider dealing. Attention should also be paid to the other side: those who obtain information indicating that securities are about to fall in price, rather than rise. A lack of prohibition on insider dealing would mean that executives could, if their company suffered a major setback, minimise their personal loss by selling out ahead of the rest of the market, i.e. dump much of their losses on other investors. To an extent, corporate structures, particularly those of limited liability, enable entrepreneurs to do this in any event: when a company becomes insolvent, the losses generally fall on its creditors, not its directors. Just as the principles of company law allow this, since, if they did not, few would take the risk of setting up a new business in the first place, so, one could perhaps argue, should the law regarding dealing by entrepreneurs. James Fishman has, albeit disapprovingly, said that this has been an argument supporting insider dealing: “Insider trading was tolerated because it helped maintain an ‘orderly market’, that is, one in which professionals did not lose money.”²⁰ In response, however, one should point out the disquiet already prevalent amongst the public regarding those who set up a business, watch it fail and then walk away leaving others to “carry the can”. The public are hardly likely to be mollified by such persons not only being able to walk away from the company’s debts but also recoup their personal investment before the final day of reckoning.²¹

Manne’s second argument is linked to the first: he suggests that the opportunity to engage in insider dealing is a just reward for corporate entrepreneurism. That executives ar...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Table of Cases
• Table of Legislation
• Preface
• Chapter 1 Why Regulate Insider Dealing and Money Laundering?
• Chapter 2 Who is an Insider?
• Chapter 3 Inside Information
• Chapter 4 Criminal Offences of Insider Dealing
• Chapter 5 Money Laundering: The EU Directive and the UK Statutory Response
• Chapter 6 Impact on the Financial Services Industry
• Chapter 7 Civil and Administrative Offences
• Chapter 8 Conclusion: A Model for Enforcement
• Bibliography
• Index