Prohibition of Insider Trading

2020 CLD 1483 SECURITIES-AND-EXCHANGE-COMMISSION-OF-PAKISTAN Judicial Precedent

Ss. 74 & 150Securities (Leveraged Markets and Pledging) Rules, 2011, R. 34Brokers and Agents Registration Rules, 2001, R. 12 [since repealed]Prohibition of insider tradingStandards of conductDisciplinary action in respect of licensed personProhibitionBrokers to abide by code of conductScope

Appellant was imposed upon a penalty for using clients' accounts for front running and extending funds to the said clients' accounts

Validity

Front running was akin to insider trading and a criminal offence

No evidence was available to suggest that front running had taken place through the appellant

Karachi Automated Trading System (KATS) operator was an employee of the appellant and the appellant should have ensured that proper checks were in place to prevent front running from taking place with its clients' accounts

Appellant had violated the Securities Rules by extending unlawful financing to clients

Appellate Bench, while believing the statement of the appellant that the violations were unintentional and that it was in the process of surrendering its license, reduced the penalty

Appeal was disposed of accordingly.

2020 CLD 929 SECURITIES-AND-EXCHANGE-COMMISSION-OF-PAKISTAN Judicial Precedent

Ss. 15A & 15EProhibition of insider tradingScope

Allegation against appellant was that he was privy to the scheme of amalgamation of the company before it was made public and that the appellant, being an insider, disclosed the scheme to others

Validity

Respondent relied on the statement of appellant, made during investigation, wherein he had allegedly admitted that he was privy to the inside information of the scheme

Overall answer of the appellant suggested that he had considered the relevant question in reference to the investor, therefore, it could not have been considered as an "admission"

Regulatory authority had specifically denied the fact that the scheme was shared with the appellant

Letter of the regulatory authority had further stated that refusal of investor's proposal was communicated to the investor with a 'cc' (carbon copy) to the appellant at 7:10 p.m.

Presumption drawn by respondent had lost is evidentiary value in view of the letter of the regulatory authority

Appellant could not be held responsible for dissemination of the inside information of the scheme to others

Respondent had failed to establish "possession of inside information" by said appellant and its "disclosure prior to announcement" to the other appellant

Appellants had successfully made out their case in appeal, therefore, impugned order was set aside and their appeal was accepted

Appeal was disposed of with majority view of two to one.

2020 CLD 929 SECURITIES-AND-EXCHANGE-COMMISSION-OF-PAKISTAN Judicial Precedent

Ss. 15A & 15EProhibition of insider tradingTransactions executed after disclosure of inside informationEffect

Allegation against appellant was that he, while acting on the inside information provided by his friend, had avoided a loss by selling 11,600,000 shares

Validity

Evidence showed that the brother of appellant's friend had become privy to the inside information at 7:30 p.m., the day before, and that the appellant had started selling his shares at 12:33 p.m. and by 2:00 p.m. he had sold his entire shareholding

Inside information was announced by the transferee company on the relevant day at 9:36:18 a.m. wherein the phrase "at a token nominal value" was used which was sufficient reason for a vigilant and prudent investor to believe that the company's equity would be diluted significantly

Respondent had failed to establish a case against the appellant, therefore, impugned order was set aside to his extent

Appeal was disposed of with majority view of two to one.

2020 CLD 929 SECURITIES-AND-EXCHANGE-COMMISSION-OF-PAKISTAN Judicial Precedent

Ss. 15A & 15EProhibition of insider tradingScope

Allegations against appellant was that he was privy to the scheme of amalgamation of the company before it was made public and that appellant, being an insider, disclosed the scheme to others

Validity

Appellant was sponsor, major shareholder and Chairman/CEO of the Corporation which owned the company, therefore, it was not possible that the company's management had not shared the scheme with him

Involvement of appellant with the investor and regulatory authority was an admitted fact

Regulatory authority had communicated the refusal of the investor's proposal to the appellant through an e-mail, therefore, the refusal was sufficient to draw an inference that the regulatory authority was about to announce the company's merger into another company

Majority view of Appellate Bench of the Commission was that the appellant was an insider and he had inside information of the scheme, which was disseminated to others

Respondent had successfully established his case against the appellant

Appeal was disposed of with majority view of two to one.

2020 CLD 929 SECURITIES-AND-EXCHANGE-COMMISSION-OF-PAKISTAN Judicial Precedent

Ss. 15A & 15EProhibition of insider tradingTransactions executed after disclosure of inside informationEffect

Allegation against appellant was that his real brother had become privy to the inside information and using such information, appellant had avoided a loss by selling shares worth eight million of the company and that he had passed on the inside information to his friend

Validity

Evidence showed that the brother of appellant had become privy to the inside information at 7:30 p.m. and that the appellant on the next day had started trading the company's shares at 9:28 a.m. and had offloaded eight million shares by 12:16 p.m., whereas before that day he had always traded the company's shares after 12 p.m.

Facts and circumstances suggested that the appellant, while acting upon the disclosure of inside information, had indulged in insider trading and had avoided loss

Inside information was announced by the transferee company on the relevant day at 9:36:18 a.m. wherein the phrase "at a token nominal value" was used, which was sufficient reason for a vigilant and prudent investor to believe that the company's equity would be diluted significantly

Majority of Appellate Bench held that the appellant could be held accountable as an insider only for those sale transactions, which were executed prior to 9:36:18 a.m. because information with regard to the scheme was made public after 9:36:18 a.m.

Appellate Bench reduced the penalty imposed on appellant for indulging in insider trading and set aside the penalty imposed on the appellant for sharing inside information with his friend as his friend had started selling shares at 12:33 p.m.

Appeal was disposed of with majority view of two to one.

2013 CLD 158 SECURITIES-AND-EXCHANGE-COMMISSION-OF-PAKISTAN Judicial Precedent

Ss. 15-A, 15-D & 15-EProhibition of Insider Trading

Purpose and intent behind the prohibition of Insider Trading was to prevent a person from making a gain, or avoiding a loss by trading in listed securities based on inside information relating to such listed securities before the issuer of such securities disclose such information as required by S.15-D of Securities and Exchange Ordinance, 1969

In order to come within the ambit of S.15-A of Securities and Exchange Ordinance, 1969, the insider information, the insider and security should relate directly to the issuer.