INSIDER TRADING

Persons who are connected to a company enjoy the privileges of having access to information
which may not be known to the investing public. When such persons use such privileged
information to deal in the securities of a company, they enjoy undue advantage not available to
other investors, such a practice lowers public confidence in the market and is referred to as “Insider
Trading”.

According to Robert Clark,

Insider trading is said to occur when a person buys or sells securities of a
corporation on the basis of material inside information. Usually the information
is “inside” in the sense that it concerns a new development in the corporation’s
business but is not yet widely known by the general investing public in
particular, the corporation’s public security holders and those investors who are
interested in buying its securities. The information is “material” or important
in that, if it were publicity available, it would influence the market value of the
corporation’s securities or, at the least, would globally be considered an
important factor by investors considering whether to buy or sell the
corporation’s securities.
(See Clark, R, Corporate Law, 1986).

Acting on the basis of undisclosed good or bad news is unethical and constitutes a fraud on other
investors. If on March 10, for example, the Managing Director of Life Forte Drug Co. Ltd was
informed by the company’s researcher that they have discovered a cure for HIV/AIDS or Covid-
19, and the Managing Director kept the information secret but went ahead to purchase substantial
shares of the company. He eventually made the news public on April 30, and the company’s shares
skyrocketed from N5.00 per share to N12.00 per share. The Managing Director now sells his shares
at the price of N12.00 per share thus making huge profit.

On the other hand, if the news was bad news, and the Managing Direct refused to disclose it but
instead sold his shares and thereafter the price of the shares fall upon disclosures of the news, the
Managing Director would have avoided a loss.

Insider trading is regulated by the Investments and Securities Act (ISA) 2007. Prior to the ISA,
insider trading was regulated by the Companies and Allied matters Act 1990 which contained far-
reaching provisions on insider trading.
The reasons for the regulations on insider trading include:
(a) insider trading harms the company involved;
(b) it misleads and cheats some people trading in the company’s securities during the period
of non-disclosure. This leads to erosion of investor confidence in the securities market.
(c) Insider trading harms the market due to a violation of timely disclosure of ripe corporate
information.
(d) It harms economic efficiency because it amounts to the taking of secret profits by corporate
fiduciaries
(e) It may lead to conflicts of interest on the part of directors who may place their personal
interests above those of the government.
Professor Cary opined that

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 a manager should receive corporate information not for his own personal emolument,
but to assist the corporation in its operations. The use of inside information by a
director or other manager to trade in the shares is the securing of additional
compensation in covert fashion and should be condemned (see William L. Cary,
“Corporate Standards and Legal Rule” (1962) 50 California Law Review 408).

On the other hand, it has been contended that insider trading has some merits (see Henry Manne,
Insider Trading and Stock Market, 1966). Firstly, insider trading can provide more accurate stock
and security services. Secondly, insider trading indirectly rewards managers for making decisions
and securing information which would otherwise go uncompensated. (see Curtis Lee, “why Insider
Training is Good striving for Equality or impeding Economic Efficiency”, p.1). This is an effective
compensation scheme for managers who generate and seek out information for their firm. Through
insider trading, managers will be repaid for their innovations through the change in price of the
involved stock or securities. In turn, it is an incentive for managers and entrepreneurs to seek out
and develop innovations and ideas. He also argued that insider training can foster corporate ideas
and growth. Further, Andrew Berhstein, (Andre Bernstein, “The Injustice of the Insider Trading
Laws”, July 12, 2005) posits that laws against insider trading violate the right of shareholders-
owners to decide the manner in which their company will be run, a company’s owners decide what
practices the executives will be permitted to engage in regarding that proprietary information that
belongs to them.

However, these arguments in support of insider trading have been criticized as not being true by
authors and researchers. For instance, it has been argued that explicit executive compensation
schemes are inadequate to induce managers to work vigorously for corporations. In other words,
the hope of insider trading profits may lead insiders to delay the release of information even when
doing so would be harmful to the corporation and that the energy diverted into pursuit of individual
profit-making through insider trading activities may deprive the company of the benefits of more
constructive conduct (see Lucian Bebchuk and Chaim Fershtman, “Insider Trading and the
Managerial Choice Among Risky Projects” (1994) 29 J. Fin. & Quant. Analysis 1; Harry McVea,
“What's wrong with insider dealing?” (1995) 15(3) Journal of Legal Studies 390).

DEFINITION OF TERMS
Definition of Insider: an ‘insider’ can be defined as a person who buys or sells securities on the
basis of material non-public information. This includes a director, officer, or controlling
shareholder of the company or a person who has received the insider information from the (a tippee
– a person who tips others or inform others of the inside sensitive information).

Section 111 (1-2) ISA 2007 defines an “insider” as an individual who is or at any time in the
preceding six months has been knowingly connected with the company.1 It provides further that
an individual is connected with a company if,

1 Section 315 ISA provides that an insider means (a) any person who is or is connected with the company in one or
more of the following
capacities-
(i) a director of the company or a related company;
(ii) an officer of the company or a related company;

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 (i) He is a director of that company or a related company, or
(ii) He occupies a position as an officer (other than a director) or employee of that company
or a related company, or a position involving a professional or business relationship
between himself (or his employer or a company of which he is a director) and the first
company or a related company which he expected to give him access to price sensitive
information in relation to securities.
1) Subject to section 104 of this Act, a person who is an insider of a
company shall not buy or sell, or otherwise deal in the securities of the
company which are offered to the public for sale or subscription if he has
information which he knows is unpublished price sensitive information in
relation to those securities Commented [S1]: What is the scope of this section 111(1)
(2) The provisions of subsection (1) of this section applies where — ISA?
(a) a person has information which he knowingly obtains (directly or
indirectly) from another person who-
(i) is connected with a particular company, or was at any time within the
six months preceding the obtaining of the information, so connected,
(ii) the former person knows about, or has reasonable cause to know that
the latter individual holds, the information by virtue of being so connected;
and
(b) the former person knows or has reasonable cause to believe that,
because of the latter's connection and position, it would be reasonable to
expect him not to disclose the information except for the proper
performance of the functions attached to that position.
(3) The former person mentioned in subsection (2) of this section-
(a) shall not himself deal in securities of that company if he knows that the
information is unpublished price sensitive information in relation to those
securities; and
(b) shall not himself deal in securities of any other company if he knows
that the information is unpublished price sensitive information in relation
to those securities and it relates to any transaction (actual or contemplated)
involving the first company and the other company, or involving one of
them and securities of the other, or to the fact that any such transaction is
no longer contemplated. See section 111-1-3 ISA.

From the above, one can identify diverse nature of insiders namely, directors and any other
person related to the company in professional position or employment which enables the
person to have access to price sensitive information such as auditors, solicitors, accountants,
secretary and others.
This information -
(a) Should relate to specific matters or of concern (directly or indirectly) to that company, i.e.
not of a general nature relating or of concern to that company; and
(b) Should not be generally known to those persons who are accustomed to or would be likely
to deal in those securities but which would if it were generally known to them be likely
materially to affect the price of those securities – 315 ISA.

(iii) an employer of the company or a related company;

(iv) an employee of the company, involved in a professional or business relationship to the company;
(v) any shareholder of the company who owns 5 per cent or more of any class of securities or any person who is or
can be deemed to have any relationship with the company or member;
(vi) members of audit committee of a company; and any other person having access to price sensitive information.

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Section 315 ISA states that “insider dealing" includes insider trading and occurs when a person
or group of persons who being in possession of some confidential and price sensitive information
not generally available to the public, utilizes such information to buy or sell securities for the
benefit of himself, itself or any person.
It follows that such information must be specific or precise; has not been made public; and
is capable of significantly affecting the prices of the securities to which it relates.
“Related company” in relation to a company, means any body corporate which is that
company's subsidiary or holding company or a subsidiary of that company's holding company.
Section 315 ISA.
“Dealing in Security” - this means (whether as principal or agent) making or offering to make
with any person or attempting to induce any person to enter into or to offer to enter into -
(i) any agreement for or with a view to acquiring, disposing or subscribing, for or
underwriting of securities, or
(ii) any agreement with the purpose of securing a profit to any of the parties from the
proceeds of the securities. Section 315 ISA.

PROHIBITION OF INSIDER TRADING

Despite the argument for or against the regulation of insider trading, the law is that insider trading
is prohibited in many jurisdictions from the US, UK, EU, Nigeria and other jurisdictions. In
Nigeria, ISA prohibits the following types of insider trading:
1. An insider of one company dealing in securities of that company – s.111(1) ISA. An
insider of a company is prohibited from dealing in the securities of that company which
are offered to the public for sales or subscription if he has information which he knows is
unpublished price sensitive information in relation to those securities; he holds same by
virtue of being connected with the company; and it would be reasonable to expect him not
to disclose the information except for the proper performance of those functions.
Note: The securities in question must be those which are offered to the public. The reference to
“offered to the public for sale or subscription” has been construed not to be limited to dealings at
a recognized stock exchange.
The Nigerian Law Reform commission while considering the relevant UK’s Insider
Dealing Act 1985 observed as follows:

Furthermore, the criminal sanctions affect only companies quoted at the stock Exchange and
recognized dealers, as in the case of U. K’s Act. This resection can hardly be suitable for use
as most of our companies cannot meet the Stock Exchange listing requirements, and do not
normally want to be quoted. All public dealings with securities ought to be covered.

The statement: “An insider of one company trading in securities of any other company” was
previously provided for in s. 615(3) CAMA but there appears to be no corresponding provision in
ISA. This is a very grievous omission. If a tippee is prohibited from such a transaction (see s.
111(3)(b) ISA), it is inexplicable why an insider of one company should not be prevented from
dealing in the securities of another company if he has price sensitive information of the securities
of that other company obtained by virtue of his connection with the company of which he is an
insider.
2. An outsider/tippee trading with information obtained from an insider s.111(2) and (3) ISA.
An individual (tippee) who has information which he knowingly obtained from another individual
who,

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 (i) is connected with a particular company, or was at any time within the 6 months
preceding the obtaining of the information so connected (i.e. an insider),
(ii) the tippee knows or has reasonable cause to believe that the insider held the information
by virtue of his connection with the company; and
(iii) the tippee knows or has reasonable causes to believe that because of the insider’s
connection and position, it would be reasonable to expect him not to disclose the
information except for the proper performance of his function.
The tippee is forbidden from dealing in securities of that company or any other company if he
knows the information to be price sensitive in relation to those securities: the tipeee must have
“obtained” the information. Ordinarily, this suggests some effort or solicitation by the tippee to
acquire the information. In R. v. Fisher (1988) 4B C. C. 360, the defendant was given unsolicited
price sensitive information about s securities of a company. The defendant used the information to
buy shares which he later resold at a profit. It was held that defendant was not liable because the
word “obtained” means to “procure” or to gain as a result of effort. The matter was however
referred to the Court of Appeal by the Attorney General on points of law. The Court of Appeal
held that “obtained” meant “received”. The House of Lords affirmed this in Re Attorney General’s
Ref. (no 1 of 1988) (1988) A. C. 971.

The word “knowingly” would seem to exclude information communicated to the tippee against
his wish. The prohibition in s. 111(2) and (3) ISA is not restricted to shares “offered to the public
for sale or subscription”. Thus, the prohibition may extend to dealings in securities of private
company. This is in line with the US regime. The United States Securities and Exchange
Commission recognizes that the law against insider trading applied to private companies. In an
announcement made on 12 December 2011, the US SEC announced an enforcement proceeding
that serves as a useful reminder that the federal laws against insider trading and misrepresentation
applied to private companies purchasing stock from employees and other shareholders as it is done
in the public companies.

3. A tippee shall not deal in the securities of a company if he has knowingly obtained unpublished
price sensitive information from a person who contemplated or is no longer contemplating a
takeover offer – s.111(5) ISA.
4. A person contemplating a takeover in a different capacity is prohibited from dealing in the
securities – s. 111(4) ISA. An individual contemplating a take-over offer for a company is
forbidden from dealing in securities of that company in another capacity if he knows that the offer
is contemplated or is no longer contemplated and information is unpublished price sensitive
information in relation to those securities.
5. Prohibition of counseling or procuring any other person to deal in the securities – s.111(6)
ISA. An individual who is prohibited from dealing in securities of a company on an approved
securities exchange or capital trade point shall not counsel or procure any other person to deal in
those securities if he knows or has reasonable cause to believe that such other person would deal
in them.
Section 111(6) ISA specifically mentions “dealing on an approved securities Exchange or
Capital Trade Point”. This raises the issue as to whether only some or all of the prohibited
categories or dealers are affected by s.111(6).

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 Section 111(6) ISA appears to be breached once there is counseling or procuring even if
the person counseled does not thereafter deal in the securities provided the counselor knows or has
reasonable cause to know that he would do so.
6. Communicating the price sensitive information – s. 112(3) (c) ISA - (88(7) before). The
section states that an individual who is prohibited from dealing in securities of a company because
he is seized with price sensitive information shall not communicate that information to any other
personnel if he knows or has reasonable causes to believe that that other person will make use of
the information to deal, counsel or procure another person to deal in those securities. Here, there
is a breach even if the person receiving the information does not use it. See Re Cady, Robert & Co
91961) 40 S. E. C. 907 at 911 where the court warned that “if … disclosure is unrealistic under
the circumstances, …the alternative is to forgo the transaction”. See also Oliver v. Oliver (1934)
45. S. E. C. 232 at 234.
7. Prohibition of a public officer or former public officer from using information obtained in
his official capacity – s. 112 (1-3) ISA. By section 112(1-3) ISA, such public officer or former
public officer; or any individual who knowingly obtained (directly or indirectly) from a public
officer or former public officer unpublished price sensitive information which he knows or has
reasonable cause to believe that the public officer or former public officer held the information by
virtue of his position shall not deal in any relevant securities counsel or procure any other person
to deal in the securities knowing or having reasonable causes to believe that such person would
deal in them and shall not communicate such information to any other person.

EXEMPTIONS
The ISA makes certain exceptions of transactions which could not constitute insider trading. These
include:
(a) Acts not done with a view of profit or avoidance of loss s. 113 (1)(a) ISA.
(b) Transactions entered into by a liquidator, receiver or trustee in bankruptcy - S 113(1)(b).
(c) Stock brokers and market-makers using information obtained by them in the course of their
business as such.
(d) Acts done to facilitate completion of carrying out of transaction – s.90(2) – this appears to
have been removed. However, it should be noted that share buy-back scheme and
stabilization of volatility in shares are exemptions to insider trading - current CAMA
reform includes this. See also SEC Rule and Regulations.
(e) Acts done by trustees and personnel representative.

EFFECTS OF PROHIBITED TRANSACTIONS

Any transaction done in contravention of section 111 or 112 of this Act is avoidable at the instance
of the Commission – section 114 ISA. See Chase Manhattan Equities Ltd. v. Goodman (1991)
BCLC 897. It has been argued that the difficulty in putting the parties fairly back to their original
position accounts for the neutrality of effect. It has been submitted that such as transaction should
be at least voidable.

PUNISHMENT
The Act provides for both civil and criminal liability. Section 115 provides that any person who
contravenes any of the provisions of this part of this Act commits an offence and is liable on
conviction (criminal liability aspect) —
(a) in the case of a person not being a body corporate, to-

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(i) a fine of not less than ₦ 500,000 or an amount equivalent to double the amount of profit
derived by him or loss averted by the use of the information obtained in contravention of any
of the provisions of this part; or
(ii) to imprisonment for a term not exceeding seven years; or
(b) in the case of a person being a body corporate, to a fine not less than ₦1,000,000 or an amount
equivalent to twice the amount of profit derived by it or loss averted by the use of the information
obtained in contravention of any of the provisions of this part.
Section 116 (1) ISA states that a person who is liable under this part of this Act shall pay
compensation at the order of the Commission or the Tribunal, as the case may be, to any aggrieved
person who, in a transaction for the purchase or sale of securities entered into with the first-
mentioned person or with a person acting for or on his behalf, suffers a loss by reason of the
difference between the price at which the securities would have likely been dealt in such a
transaction at the time when the first mentioned transaction took place if the contravention had not
occurred.

1.6.3 Market Manipulation

Apart from insider dealing, ISA generally prohibits market manipulation and rigging as well.2
Accordingly, it is an offence to create, or cause to be created, or do anything which may create a
false or misleading appearance, (a) of active trading in any securities on a securities exchange or
capital trade point; or (b) with respect to the market for the price of any such securities.3 Similarly,
it is an offence for any person to by means of purchase or sale of any securities that do not involve
a change in the beneficial ownership of those securities; or by any fictitious transactions or devices,
maintain, inflate, depress, or cause fluctuations in the market price of any securities.4 Prohibition
extends to false or misleading appearance of active trading in securities on a securities exchange
or capital trade point provided it is not unintentional.5

Moreover, it is an offence to effect, take part in, be concerned with or carry out, either directly or
indirectly, two or more transactions in securities of a body corporate being transactions which
have, or are likely to have the effect of raising or lowering the price of securities of the body
corporate on a securities exchange or capital trade point with intent to induce other persons to
purchase, sell or subscribe for securities of the body corporate or of a related body corporate.6 The
prohibitions extend to the following: (i) knowingly, recklessly or negligently engaging in false or
misleading statements that induce, or likely to induce the sale or purchase of the securities;7
fraudulently inducing persons to deal in securities;8 dissemination of illegal information with the

2 See also Regulation 400(1)(a-d) of SEC Rules and Regulations 2013 that prohibits manipulative and deceptive
devices and contrivances.
3 Section 105(1) of ISA.
4 Section 105(2) of ISA.
5 Section 105(3-4) of ISA.
6 Any person who contravenes the provisions of subsection (4) above shall be liable to a penalty of N500,000 in

addition to a nullification of the said transaction. See section106 (1-5) of ISA.

7 Section 107 of ISA.
8 Section 108 of ISA.

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effect that the price of any securities of a body corporate will or is likely to rise or fall or be
maintained;9 and other fraudulent means employed in securities dealing.10

9 Section 109 of ISA.

10 Section 110 of ISA.