Corporate Crime

insider dealing
The Criminal Justice Act 1993 (CJA) contains the rules on insider dealing.

What is insider dealing?
Insider dealing is dealing in securities while in possession of inside information as an insider, the securities being price-affected by the information.  To prove guilty (under s 52 CJA):
  

Dealt in price-affected securities on a regulated market, or Encourage another to deal in them on a regulated market, or Disclosed the information other than in the proper performance of their employment, office or profession

Dealing is acquiring or disposing of or agreeing to acquire or dispose of relevant securities whether directly or through an agent or as agent

Inside information
 Inside

information is ‘price sensitive information’ relating to a particular securities that are price-affected  Inside information must, if made public, be likely to have a significant effect on price  Must be specific or precise.

. mean information that a takeover bid would be made for a specific company. for example.specific or precise Specific would. precise information would be details of how much would be offered for shares.

Insiders A person has information as a primary insider if it is (and they know it is) inside information and if they have it from an inside source:  Through being a director. employee or shareholder of an issuer of securities  Through access because of employment. office or profession .

would infringe the law  Any dealing takes place.  The inside information is given to that person. encourages another to deal in price-affected securities in relation to that information.Encouraging another to deal An offence is committed if an individual. the offence being committed at the time of encouragement . having information as an insider. a simple recommendation to the effect that ‘I cannot tell you why but now would be a good time to buy shares in blogs plc. For example.

Securities covered by the Act Securities include(s 54 CJA):  shares  associated derivatives  debt securities  warranties .

the individual has a defense if they prove that: They did not expect there to be a profit or  avoidance of loss    They had reasonable grounds to believe that the information had been disclosed publically. .General defenses   Under s 53. They would have done what they did even if they did not have the information.

profit or avoidance of loss was not expected .General defenses Defense to disclosure of information by an individual are that:  They did not expect any person to deal  Although dealing was expected.

g. e.‘Made Public’ Not defined by the statue. such as the Stock Exchange  It is in public records. Information is made public if:  It is published under the rules of the regulated market. leaving determination to the Court. notice in the London Gazette .

.‘Made Public’ Information may be treated as made public even:  It can only be acquire by exercising diligence or expertise  It is communicated only to a section of the public  It can be acquire only by observation  It is communicated only on a payment of a fee or is published outside the UK.

. Contracts remain valid and enforceable at civil law.Penalties Maximum penalties given by the statute are seven years’ imprisonment and/or an unlimited fine.

(business prospects ) .Problems with the law on insider dealing  problems deciding: specific or precise. or profit or dividend levels which would be out of line with market expectations.  The requirement that price-sensitive information has a significant effect on price limits the application of the legislation to fundamental matters. These include an awaiting takeover.

The FSA has statutory civil powers to impose unlimited fines for the offence of market abuse. and requires anyone to co-operate with investigation into market abuse.Market abuse Market abuse is likely to be regarded as a failure on the part of the person/s concerned to observe the standard of behavior reasonable expected of a person in his position in relation to the market. . It also has statutory powers to require information. The offence of market abuse under the Financial Services and Markets Act 2000 complements legislation covering insider dealing.

Crating a false or misleading impression about supply and demand or prices and values of investments. Recklessly making a statement or forecast that was misleading and false. Engaging in a misleading course of conduct for the purpose of inducing another person to exercise or refrain from exercising rights in relation to investments. which is interfering with the normal process of share prices moving up and down in accordance with supply and demand for the shares. An example posting an inaccurate story on an internet. knowingly buying shares in a takeover target before a general disclosure.Market abuse could consist of:      Misuse of information. Market distortion. .

Money laundering .

 The aim .Money laundering Money laundering is the term given to attempts to make the proceeds of crime are converted into assets which appears to have a legal rather than an illegal source.

The three phases  Placement  layering  Integration .

Placement the initial disposal of the proceeds of criminal activity into an apparently legitimate business activity or property .

 or place to place.layering the transfer of money from  business to business. in order to conceal its initial source .

.Integration the culmination (conclusion ) of the previous procedures through which the money takes on the appearance of coming from a legitimate source.

Crime and Security Act 2001  Proceeds of Crime Act 2002  Serious Organised Crime and Police Act 2005 .Legislation Money laundering is regulated by the  Terrorism Act 2000  Anti-terrorism.

Categories of Money laundering The Proceeds of Crime Act 2002 created three categories of criminal offence:  Laundering  Failure to report  Tipping off .

 disguise. .Laundering It is an offence to  conceal.  transfer.  convert.  remove criminal property from UK: s327 Proceeds of Crime Act 2002.

Concealing or disguising Concealing or disguising criminal property includes concealing or disguising its  Nature  Source  Location  Movement  ownership.  any rights connected with it. .

.Criminal property ‘Criminal property’ is defined as property which constitutes or represents benefits from any criminal conduct.

.  constitutes an offence in any part of the UK  Would constitute an offence in any part of the UK if it occurred there.Criminal conduct Criminal conduct' is defined as conduct that.

Failure to report individuals carrying on a ‘relevant business‘ may be guilty of an offence of failing to disclose knowledge or suspicion of money laundering where they  know  or suspect.  or have reasonable grounds for knowing or suspecting. . that another person is engaged in laundering the proceeds of crime.

who are acting in the course of business in the regulated sector. . such as accountants.individuals This offence only relates to individuals.

.  or directly to the Serious Organised Crime Agency (SOCA) as soon as is practicable.individuals Any individual who is covered by s330 is required to make disclosure to  a nominated money laundering reporting officer within their organization .

Tipping off  it is an offence to make a disclosure likely to prejudice a money laundering investigation.  punishment  The .  It therefore covers the situation where an accountant informs a client that a report has been submitted to SOCA. offence is punished by up to 5 years imprisonment and/or a fine.

 Failure . to report and tipping off are punishable on conviction by a maximum of five years’ imprisonment and/or a fine.Penalties  The maximum penalty for the s327 offence of money laundering is 14 years’ imprisonment.


Fraudulent trading  Fraudulent trading occurs where the company’s business is carried on with intent to defraud creditors or for any fraudulent purpose.  It is a criminal offence under CA 06  Liable to imprisonment up to 10 years or a fine .

.Fraudulent trading can give rise to:  civil liability under s213 Insolvency Act 1985 if the company is in the course of being wound up  Criminal liability under CAO6 whether or not the company is in the course of being wound up.

.Re WiIliam C Leith Bros (1932) it was said that if the directors carry on the business and cause the company to incur further debts at a time when they know that there is no reasonable prospect of those debts being paid this is a proper inference of dishonesty. The court also added that if the directors honestly believed the debts would eventually be paid there would be no intent to defraud.

The second point required to establish liability is that the person concerned shall be knowingly a party to the fraudulent trading. .R v Grantham (1984)   Facts: The directors ordered a consignment of potatoes on a month's credit at a time when they knew that payment would not be forthcoming at the end of the month when it was due. Held: The directors were convicted of fraudulent trading.

 Only persons who take the decision or play some active part  Carrying on the business can include a single transaction  It not only relates to defraud creditors but also to Carrying on the business for the purpose of any fraud .

consequences  The court can order the individual to contribute to the company’s assets. they may be disqualified for 15 years under CDDA 1986  If found guilty of the criminal offence.  If a director. the individual can be fined and/or imprisoned for up to 10 years .

Wrongful trading .

before the start of winding up. the director knew or ought to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation: S214 insolvency Act 1986.Wrongful trading Wrongful trading occurs where on a winding-up it appears to the court that the company has gone into insolvent liquidation and. .

It was difficult to prove that necessary fraud. Therefore a civil liability for wrongful trading was to introduced. which means that the director will have to make contribution to the Co.’s assets as court see fit .

or should have know.Directors will be liable  Knew. that there was no reasonable prospect that the company could have avoided going into insolvent liquidation  Directors did not take sufficient steps to minimize the loss .

skill and experience which may reasonably be expected of a person carrying out the same functions as were carried out by that director  Use the general knowledge. skill and experience he himself has . The legislation also expects such a director to:  Have the general knowledge.The director is expected to reach those conclusions and take such steps as a reasonably diligent person would take.

the court will have regard not only to those functions he carried out but also to those entrusted to him. When considering the director’s functions. This means that the director could be made liable for those actions he should have carried out but failed to. .

had a continuing trading loss and had an excess of liabilities over assets. In February 1987 the directors recognized that liquidation was inevitable but carried on trading until October 1987. .Re Produce Marketing Consortium Ltd (1989)  Facts: The company. for value. arguing that this period of trading minimized the loss to creditors by allowing an orderly disposal. of the company’s goods. after trading successfully for nine years. built up an overdraft.

after trading successfully for nine years. had a continuing trading loss and had an excess of liabilities over assets. . for value. arguing that this period of trading minimized the loss to creditors by allowing an orderly disposal. of the company’s goods. In February 1987 the directors recognized that liquidation was inevitable but carried on trading until October 1987. built up an overdraft.Re Produce Marketing Consortium Ltd (1989) Facts: The company.

000 to the assets of the company on the grounds that:  they would have known that liquidation was inevitable in July 1986 had the Co.Re Produce Marketing Consortium Ltd (1989) Held: The court required them to contribute £75. . the directors had done no more than dispose of assets and so had failed to take every step to minimize losses. produced timely internal accounts and this therefore marked the beginning of the period from which they should have been minimizing losses to creditors  while trading on to dispose of assets might sometimes be justifiable.

 They may be disqualified for 15 years under CDDA86 . thereby increasing the assets available for distribution to the creditors .Consequences Wrongful trading can give rise to the following consequences :  a liquidator may apply to the court for an order that the director should make such contribution to the company’s assets as the court thinks fit.

being liquidated. Person is liable for fine and imprisonment. . S216 and s217 Insolvency Act 1986 makes it criminal offence where a director creates such a Co.Phoenix companies Phoenix companies are created by Directors of insolvent co. as a method of continuing their business (often with similar name) . within 5 yr of the original Co.

.Directors They apply where a person was a director or shadow director of a company at any time in the period of 12 months ending with the day before the company went into liquidation.

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