Editorial: All you need to know about insider trading

Illegal. We could stop there and tell you “that is the definition’, and since we are an authority in such matters, you may want to employ the concept of acceptability instead of denial. But, we won’t do that. That would also be illegal. So, go on this ride with us.

In simple terms, insider trading happens when the trade of a company’s securities is undertaken by persons who, by their office, have access to non-public information crucial for making investment decisions.

In simpler terms, insider trading (or insider dealing) is the practice of using strategic information for trading in a company’s stocks or securities. This is usually undertaken by key employees or executives.

For instance, an executive who works at a company knows the company has plans to make an acquisition but, it is not public knowledge. That would count as inside information. It becomes a crime if that executive either tells someone about it – and that person then buys or sells a financial asset using that information – or if the executive makes a trade yourself. 

For insider trading, stockholders are at a great disadvantage because there is a lack of important insider non-public information. However, in certain cases, if the information has been made public, in a way that all concerned investors have access to it, that will not be a case of illegal insider trading. 

Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information.

US SEC

Insider trading usually involves trading stocks of individual companies on information about them. It can also involve any kind of information that can move markets – most likely information about the economy.

Read also: Can we solve workplace improprieties in the Nigerian tech industry?

For instance, the National Bureau of Statistics collects data about consumer price index which can have an impact on financial markets because of concerns about inflation. That data will eventually be public knowledge, but statisticians use that data, before its official release, to enrich themselves; because it is valuable.

Research has shown that insider trading is common and profitable, yet notoriously hard to prove and prevent. 

Insider trading is not a new concept because taking advantage of information for personal gain is as old as the beginning of time, or more realistically, civilisation. In fact, personal interests usually come before others’ interests because it is natural. So, abuse of information obtained by virtue of a special relationship with an insider is not new.

Who are insiders?

There are four categories of insiders:

• Every director or executive of a public company.
• Any person who beneficially owns, directly or indirectly, more than 10% of the voting rights of the public company, or exercises control or direction over more than 10% of the voting rights of the public company or a combination of both.
• A subsidiary of the public company is considered an insider of the public company.
• If a company is considered an insider of the public company, the directors and senior officers of the insider company are also considered insiders of the public company.

Meanwhile, there is legal insider trading.

Legal insider trading is when insiders trade the company’s securities (stock, bonds, etc.) and report the trades to the authorities such as the Securities Exchange Commission (SEC). 

SpringerLink

Insider trading can be legal as long as it conforms to the rules set forth by the SEC.

Insider trading is legal when it involves “corporate insiders” — directors, managers, employees, beneficial owners, and people affiliated with the firm in other significant ways — who are not in possession of material, non-public information.

Insider trading in Nigeria

The Investment & Securities Act (ISA 2007) prohibits insider trading.

In Section 111(I), the Act states that:

A person who is an insider of a public company shall not buy or sell, or deal in the securities of the company which is offered to the public for sale or subscription if he has information which he knows is unpublished material, price-sensitive information in relation to those securities.

An article in the Vanguard Newspapers says that “insiders are not just limited to corporate officials, major shareholders, public officers, professional advisers and related parties, where insider trading is concerned. They include anyone who trades securities based on material, non-public price-sensitive information in violation of some duty of trust. This duty may be imputed.”

Several economists and financial analysts have called the harmful effects of insider trading, arguing that it is prejudicial and weakens foreign and local investors’ confidence in the capital markets.

Case studies

Herbert Wigwe of Access Bank Plc, caused a raucous in January 2020 when he sold an additional 2.33 per cent of his shareholding in the bank by selling shares worth ₦297 million.

The bank, in a notice filed at the Nigerian Stock Exchange, said its CEO, through Trust Capital Limited, sold 28.86 million shares worth ₦297.82 million.

Wigwe had sold 4.48 per cent of his stake in the bank.

The bank said in a notification of insider dealing, which was filed at the NSE, that its CEO sold 55.6 million shares ordinary shares, which he held indirectly.

Access Bank said Wigwe held a total of 1.24 billion indirect shares, and directly owned 201.23 million shares as of April 2019.

The indirect shares were made up of 537.73 million shares owned by United Alliance Company of Nigeria Limited and 702.56 million shares owned by Trust and Capital Limited.

It said the number of shares sold was an aggregation of sales made in four different instances ― 3.61 million shares on January 10, 20.14 million shares on January 13, 9.24 million shares on January 14 and 22.63 million shares on January 15.

Wigwe sold the shares at a price of ₦10.80 on January 10, ₦10.70 on January 13, ₦10.56 on January 14 and ₦10.22 on January 15.

The problem was that the shares were pawned at a time the bank had declared a closed period for trading in the bank’s shares on December 30, 2019, when the bank’s share price closed at ₦9.75 – also the time between preparing the bank’s balance sheet and announcing to the public.

In 2021, the Group Managing Director and Chief Executive of Zenith Bank, Ebenezer Onyeagwu, increased his shareholding in the lender, six months after the previous acquisitions.

Onyeagwu engaged in insider trading on November 22, 2021, according to a NGX company document. He paid ₦41.03 million to acquire 1.70 million shares at an average price of ₦24.10kobo per share.

The investment banker acquired the shares in two tranches; 1.30 million shares at a cost of ₦24 per share, while the second was 402,762 shares worth ₦24.20 kobo per share.

Of Flutterwave

In 2022, per freelance journalist, David Hundeyin, employees of Flutterwave were ‘pushed’ to sell their shares at ridiculously lower rates than a predicted valuation of $20.

They were offered an option to sell at $3.4999, which they round off to $3.5 and accepted.

The problem with the instance in view is that Flutterwave began raising its Series C and filed its first sale on February 26, 2021, two days before the employee sold their shares at $3.5. Flutterwave closed Series C and filed with SEC on March 12, 2021, and share prices supposedly increased.

Ogheneruemu Oneyibo does a good job of explaining if there’s a big fault there or not.

There are many other case studies, especially with stories of company directors frequenting the NSE. In August 2021, the Exchange recorded an average of two directors’ dealings per business day in a one month period.

The Flutterwave story drew out this again, and it is important we know what it is.

So, while illegal insider trading hurts shareholders and should be cancelled, legal insider trading may actually reveal valuable information to investors and analysts.

You only have to examine the details of the insider trading reported before conclusions are made.