Material nonpublic information is a topic I decided to analyze right after publishing an article about grave abuse of discretion. (Feel free to post any objections or violent reactions that you have on that post. It won’t be the last time I’d be writing about it.)
Some examples used would be from US-based articles. There are more cases related to insider trading brought about my disclosure of material nonpublic information abroad than here in the Philippines. To strike a balance, certain provisions from the Securities Regulation Code would also be mentioned here to show how Philippine law tried to catch up with trends in securities law.
What is material nonpublic information?
Republic Act No. 8799, a.k.a. the Securities Regulation Code, provided 2 definitions on what material nonpublic information is, to wit:
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; orSRC Section 27.2 [a]
[Material nonpublic information] would be considered by a reasonable person important under the circumstance in determining his course of action whether to buy, sell or hold a security.SRC Section 27.2 [b]
Material nonpublic information is basically a tip or ruse used by someone holding said information in exchange of a sale. This brings us back to what the SRC does not allow when it comes to transactions based on said tip, to wit:
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.SRC Section 27.1
The exemptions mentioned in SRC Section 27.1 though are consistent with the examples provided by MarketWatch. For example
The insider proves that the information was not gained from such relationship.SRC Section 27.1 (a)
Traders in stock exchange may or may not have overheard some tips tantamount to material nonpublic information from the movies, the coffee shop or any other “public place”, to borrow the word used in the MarketWatch article. If the person who overheard the tip bought stocks or securities based on overheard information and profited from it, how can it punish the person disclosing said information?
This caused one judge in the US to overturn the verdict on a couple of hedge fund managers regarding insider information. Proving that the person providing the tip – and proving said tip is material nonpublic information leading to profits on the former – is necessary to secure a conviction.
If insider trading is largely blamed on material nonpublic information used as a carrot, who is then an insider? SRC enumerates them as the following, to wit:
A director or officer (or person performing similar functions) of, or a person controlling the issuer;
A person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally available to the public;
A government employee, or director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or
Constructive insider – a person who learns such information by a communication from any of the foregoing insiders.SRC Section 3.8
In other words, it was the Federal Government asking one trader why he got tipped off. Whoever made the accusation that the tip led to a windfall (like $912,000 in profits according to WSJ) must prove that the information used to make the sale was illegally obtained.
If the other party selling to or buying from the insider (or his agent) is identified, the insider proves: (i) that he disclosed the information to the other party, or (ii) that he had reason to believe that the other party otherwise is also in possession of the information.SRC Section 27.1 (b)
Perhaps the best example to connect to this provision is Raj Rajaratnam. He was described by MarketWatch as someone suspected by the FBI as either very adept at spotting windfalls or good at getting tipped off. Because how can he explain his purchase of stock options from the Hilton Hotels prior to the Blackstone Group takeover?
With the authorities discovering other transactions taken by Rajaratnam after listening to several phone calls, they managed to get him convicted for 11 years, the longest term so far imposed on an individual accused of insider trading.
Certain topics from Commercial Law Review has become quite challenging to study about knowing that not everyone is familiar with insider trading. Let alone, the stock exchange itself. This is where I would love to hear your suggestions, comments and violent objections, if any.
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