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REVIEW , NEWS  5 minute read

Editorial: All you need to

know about insider
trading
Omoleye Omoruyi
April 18, 2022

 

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 o!ce,
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.

All you need to know about 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 o!cial
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 o!cers of the insider company are
also considered insiders of the public
company.

Meanwhile, there is legal insider trading.

Insider
Trading

All you need to know about 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
a!liated with the firm in other significant ways
— who are not in possession of material, non-
public information.

Insider trading in Nigeria

All you need to know about insider trading

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
o!ered 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
o!cials, major shareholders, public o!cers,
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 e#ects 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.

Herbert Nwigwe, GMD, Access Bank

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 di#erent
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.

Ebenezer-Onyeagwu-CEO-Zenith-Bank

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

Olugbenga Agboola, CEO, co-founder, 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 o#ered an option to sell at $3.4999,

which they round o# 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.

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