Insider trading is famously prohibited but prosecution is uncommon. The judgment in Zietsman and Another v Financial Services Board and Another has shown that this form of market abuse can be easy to detect and prove and the financial sanctions imposed are a strong deterrent besides the risk of criminal prosecution.
This case was an appeal from the Financial Services Board (FSB) enforcement committee’s finding that Zietsman, when trading shares in African Cellular Towers on behalf of Harrison and White Investments was guilty of insider trading on the basis that they had information that African Cellular Towers would be getting a loan from the Industrial Development Corporation – information not yet known to the public. The court dismissed the appeal against the conviction and the administrative penalty.
The appellants were convicted and punished for the offence in terms of the FSB’s administrative process regulated by the Financial Services Board Act 1990. This process utilises a lesser burden of proof – the balance of probabilities as opposed to beyond a reasonable doubt. It is much easier to prosecute insider trading by utilising this process and seek administrative penalties rather than criminal sanctions.
The Zietsman judgment has several other important consequences:
- A person will be regarded as possessing inside information even if they genuinely believed that the information was not inside information – belief that such behaviour is not market abuse will not itself be a defence.
- It is insufficient to use as a defence to insider trading that one was ‘acting in the pursuit of the completion of an affected transaction’ (such as any transaction which involves the acquisition by a person in control of the company). Lack of liability will only be found if all the parties engaging in the specific trade were acting in pursuit of the transaction while possessing the same inside information.
- Proving that the transaction was not aimed at securing a benefit from exposure to movement in the price of the security or a related security resulting from the inside information can be a defence.
- The subsequent losses that a party has suffered from the trade are irrelevant in the finding or conviction of insider trading (for example if the share price drops). The relevant monetary amount is the profit gained by the insider when the information is made public.
This case demonstrates how seriously insider trading can be taken and reinforces the FSB enforcement committee’s powers. The consequences of being detected and convicted of insider trading should cause potential insider traders to carefully consider engaging in such activity and lead to a decline of insider trading in South Africa.