Essay question

Should insider dealing be criminalised?

Insider dealing: the law on insider dealing concerns information that has not been published
and price sensitive information. When an insider deals, or tries to deals, on the basis of
inside information. Improper disclosure and misuse of information are kinds of insider
dealings
EC Market Abuse directive, the FCA regulates ‘insider dealing and market manipulation (a
form of insider dealing)”. Insider dealing involves the misuse of “insider information” when
investing in securities. Market manipulation involves giving false impression as to the supply
of price of instrument, for example seeking to create a false market for shares by making
them appear to be more valuable than in fact they are. The FCA has the power to impose
“civil penalties” for market abuse under FSMA 2000 while it has also gained powers to
prosecute criminal offences of insider dealings

Margaret Cole of FSA in 2007 argued for the criminalisation of insder dealing provided the
following rationale ;
1. Impairs the allocative efficiency of the finanacial markets; reducing market liquidity
and increases the cost of capital. IF a stock market is functioning efficenctly, the
share prices should reflect all available information and so provide realiable signal
upon which invesments decision are based
2. It jeopradises the development of fair and orderly markets and in doing so it under
mines the investors confidenc. It can threaten to harm confidence byundermining
investors belief that the market is fair, leading them to withdraw their invesments;
3. It is immoral by being inherently unfair on the basis of inequality of access to
information; directly incontention with good business ethics.
4. Its damages companies and their shareholder investors; and more recent US
casessuch as Enron and WorldCom have emphasised the rbeach of fiduciary duty by
employees using priviledge information that belongs to a firm.

Alastair Hudson
Two broad school of thoughts on insider dealing.
1. Considers insider dealing is that it is a victimless crime and comparatively rare, and
there fore not worthy of criminalisation
2. Cancer in the heart of our securities markets and demonstration of a lack of market
integrity

Argument for criminalisation

 Principal reason for criminalisation are that if insiders are permitted then investors
will not have confidence in the integrity of the market; that is if insiders are
permitted to take profits from their investments on the basis of the manipulation of
information which is unknown to the investors, such that the insider can be
confident that that information will drive the market price of security either up or
down significantly, then inside investors are able to earn profits are able to earn
profits from the lack of knowledge of outsiders. The ethical problem that emerges
from this situation is that some investors will be able to exploit the ignorance of
 other investors when those other investors could not possibly have known better:
after all, for the insider to generate a profit, it is necessary that there are unwitting
investors buying at the price before the information becomes public knowledge and
after the information has become public knowledge, such that unwitting investors
were buying at prices which could only benefit the insiders.
 There is also an economic problem here, if some investors were allowed to take
profits in circumstances in which they are manipulating the lack of knowledge of
other investors then those other investors are likely to stop investing in securities
markets because they will consider that those markets are rigged in favour of
insiders. Consequently, there will be a drying up of liquidity for companies and other
bodies wishing to access capital markets by issuing securities because the number of
investors will have greatly reduce. This would be contrary to the goals of MAD which
in particular aim to promote deep, liquid capital markets: that requires as many
investors as possible to feel confident in investing in those markets.
Arguments Against :
Mc vea presented the arguments in favour of allow insider dealings which is in 3 parts.
1. Allocative efficiency : First is that markets are efficient and that they should be
allowed to proceed as they consider best because that will ensure the optimal
pricing and participant levels. There are said to be a number of reasons why insider
dealing is a better method for disseminating information into securities market.
Amongst these reasons is the idea that traders are moreliekly to believe information
transferred in this way between traders than the formal announcements issued by
company.
2. The second argument was that the information is property of the company and
therefore it is up to the company how it deals with it. In consequence, the argument
runs, the company’s management should be able to use that information as it sees
fit as an inducement to those managers to work hard and maximise their own profit.
Criticism: However, alastair Hudson criticises this argument given the fraud which
has been uncovered at organisations like Enron and WorldCom in misusing
information for personal gains, and the wilful behaviour of employees at Lehman
brothers and other banks in mispricing their assets so as to make it appear that
profits are higher than it truth they are. He adds in reality, such acts of fraud in
relation to insider dealing is committed intentionally to the detriment of
sharehodlers and the broader economy, preferring to instead to think of the markets
as being abstract entities which always operate rationally and without individual
foibles.
3. Third is that, regulation is simply not cost effective, what the financial crisis of 2007-
09 showed us is that too little regulation can be even more expensive.
Criticism: Professor Campbell dismisses the argument of Mc Vea’s arguments in that
free markets are rational and that hey should be left entirely to their own devices,
because their actors will always act in their own and everyone else’s entileghed self
interst has provened to be the bunkum as always. Instead the context which free
markets had direct effect on the real economcies of emerging nation as well as
established ones; and how the stock markets can distorts those economics,
especially if their prices are distorted by insider trading and so forth.

Principle objection to McVea’s arugment :

Is that people trading in securities are no limited to traders, ordinary member of the public
are alost involved, risking their pension fund and detrimentally affecting the value of
companies which generalte useful activites for the real economy. When securities trading is
treated as being a game between professional traders with inside informationand ordinary
members of the public risking everything, then it is no onger enough to treat securities
regulation as being another part of that game. Experienced investment banker would be is a
far better position to understand market movement, such that they are able to indulge in
market manipulation whch distorts the market. Allowing this would permit an unacceptable
amount of insider dealings and fraud such as the LIBOR scandal between traders.