Insider dealing

They’ll know what pizza you ordered but what about that illegal activity…

Published on: 03 Dec 2010

If you give investment advice in the UK and your employer provides you with a mobile phone the chances are that from next year all your calls will be monitored and recorded.

Fixed phone line calls involving financial business such as share purchases are already recorded but the UK’s financial watchdog, the Financial Services Authority (FSA), recently announced that the recording of calls would be extended to recording conversations held on company provided mobiles.

In an attempt to crackdown on insider trading activities all calls on fixed line and company issued mobiles will be recorded and kept for 6 months.

Insider trading is the illegal activity of using information which isn’t in the public domain to make a personal gain or avoid a personal loss.

For example, if you’re working with a client that is about to make a takeover bid for another company and you purchase shares in the target company before the takeover attempt becomes public knowledge, the chances are that the share price will increase and you’ll make a nice but illegal profit.

By recording mobile phone calls the FSA feel that that the incidence of insider trading will decrease.

Some of the banks have a number of concerns about the new scheme.

One global investment bank has estimated that it will cost £2.6 million per annum to record all the calls made per year on company issued BlackBerry devices.

The interesting thing is that the recording requirement only refers to company issued mobile phones.

Therefore, if you order a take away pizza from your company mobile your menu chioce will be recorded.

My guess is though that any financial advisor currently considering undertaking illegal insider dealing activities has no doubt worked out that they could buy a personal anonymous pay-as-you-go phone from one of the mobile phone providers for as little as £4.95.

You’ll end up inside if you undertake insider dealing…

Published on: 12 Mar 2010

Imagine the situation. You’re a partner in one of the most prestigious investment banks in the world, you’re well known in the investment world and are no doubt on a great remuneration package. You suddenly obtain access to some price sensitive information which the public is not aware of.

What do you do?

Well, if you are Malcolm Calvert and you were a partner in the investment bank Cazenove, then the answer was to undertake some insider dealing activities which resulted in a significant illegal profit.

Calvert obtained some confidential information concerning some upcoming takeovers and told his friend Bertie Hatcher to buy some shares in the companies. As soon as the takeovers were announced to the public the share price shot up and Hatcher sold them and made a profit of over £100,000. In the spirit of the “shadiness” of this whole saga Calvert’s share of the money was given to him in cash in an envelope that had been left with a bookmaker at a racecourse.

The conclusion of all of this was a successful prosecution by the Financial Services Authority (FSA) which yesterday ended with Calvert being jailed for 21 months (there was a maximum sentence of seven years for his offences).

As every good ACCA F4 student will know insider dealing is the illegal activity of using non-public (ie privileged) information to make a personal gain or avoid a personal loss and as Calvert now knows very clearly can result in jail sentences.

Interestingly though, until the 1950s similar “insider trading” activities were considered legitimate. However, we are not in the 1950s but in 2010 and as a result the act of using price sensitive information to trade in shares and profit out of it is illegal.

Calvert would have known this had he studied for paper F4. I guess though that for the next 21 months he’ll have plenty of time on his hands. Whether or not he’ll use that time to study insider dealing laws though is another matter altogether!

That reminded me.

Published on: 08 Aug 2009

Question 10 in the June ACCA paper F4 (GLO) exam was a 2-parter dealing with the two criminal offences of ‘money laundering’ and ‘insider dealing’. It would appear that the examiner was fairly pleased with the standard of answers on the former, but not the latter.

He commented as follows:

“However, there was some concern as to the insider dealing part of the problem, which raised some concerns and suggests that a full question on that area would have met with much less success (could this be a hint for the future??!!). The essential problem was that candidates seemed to think that insider dealing was just using or revealing information gained from inside a company. That, of course, is completely incorrect and it is not insider dealing unless the purchase or sale of securities is involved.”

Earlier this year the UK financial regulator, the Financial Services Authority brought a successful criminal prosecution against solicitor Christopher McQuoid and his father-in-law James William Melbourne. The facts of the case were that McQuoid discovered that his employer, TTP Communications was about to be taken over by Motorola. Just 2 days before the announcement of the takeover, Melbourne purchased over 150,000 shares in the company.

After the takeover had gone through, Melbourne sold the shares making a profit of around £50,000, half of which he then paid over to McQuoid.

Since this topic was first brought into the syllabus, it has prompted a number of questions in the exam. Will you be well prepared for the next one?

The ExP Group