INSIDER TRADING

UNLAWFUL ACTS:

General Rule:
It shall be unlawful for an insider to sell or buy a security of the issuer, while in
possession of material information with respect to the issuer or the security that
is not generally available to the public.

Elements
1. sells or buys a security of the issuer
2. while in possession of material information
3. not generally available to the public

Exception:
The insider proves that the information was not gained from such relationship
OR
If the other party selling to or buying from the insider (or his agent) is identified,
the insider proves:
- that he disclosed the information to the other party, or
- that he had reason to believe that the other party otherwise is also in
possession of the information

When the purchase or sale was made by (1st element):

- insider
- insider’s spouse
- insider’s relatives by affinity or consanguinity within the 2nd degree,
legitimate or common law
AND
It was transacted after such information came into existence but prior to
dissemination of such information to the public and the lapse of a reasonable
time for the market to absorb such information (2nd element),
THERE WILL BE A PRESUMPTION THAT THE PURCHASE OR SALE WAS
EFFECTED WHILE IN POSSESSION OF MATERIAL NON-PUBLIC
INFORMATION (3rd element is presumed)

Information is material non-public if:

- it has not been generally disclosed to the public and would likely affect the
market price of the security after being disseminated to the public and the
lapse of a reasonable time for the market to absorb the information
OR
- would be considered by a reasonable person important under the
circumstances in determining his course of action whether to buy, sell or
hold a security
It shall be unlawful for any insider to communicate material non-public
information about the issuer or the security to any person who, by virtue of the
communication, becomes an insider, where the insider communicating the
information knows or has reason to believe that such person will likely buy or sell
a security of the issuer while in possession of such information.

MANIPULATIVE DEVICES

Marking the close – is a technique of purchasing a security at the very end of the
trading day often within minutes of the close of trading at a significantly higher
price than the security’s current traded price. The purpose is to raise the
security’s closing price, thus making it appear to be of higher value than it
actually is. Illegal because it gives a false, misleading or artificial appearance of
activity that improperly influences the market price.

Painting the tape – let’s say traders A and B want more people to buy the stock
of Company XYZ. They decide to paint the tape by buying big blocks of
Company XYZ shares from each other so that the ticker shows a huge jump in
trading volume for the stock. The idea is that unsuspecting investors will see the
spike in activity, think something is brewing, and buy the stock. This is turn
drives up the price of Company XYZ which is what traders A and B want. They
sell their shares for a profit.

Squeezing the float - taking advantage of a shortage in securities in the market

by controlling the demand side and exploiting the market congestion during such
shortages to create artificial prices.

Hype and dump – Engaging in buying activities at increasingly higher prices and
then selling securities in the market at much higher prices.

Wash sales – Engaging in transactions where there are no genuine changes in

the actual ownership of a security

Improper match orders - Engaging in transactions with both buy and sell orders
at the same time with the same price and quantity by different but colluding
parties

Boiler room operations – refers to the use of high pressure sales tactics to sell
stocks to clients who are called randomly, most likely after being picked out of a
phone directory. Use of telemarketers. While the stock they sell may be real, the
information used to hype their product could be false or misleading because of
their overwhelming desire to sell stock and claim commissions.