Hot tips can be trouble
A senior business reporter at the South China Morning Post looks at insider trading
Hey, you got any hot stock tips? C'mon, your dad's on the board of that big company, so he must know about corporate deals way before they're in the newspaper. Let me know if he mentions anything to you, ok?
That could be the start of an insider trading case, as innocent as it sounds. Sometimes insider trading sounds like heavyweight businessmen manipulating information and deceiving others for their own gain, but often it's just a case of someone getting a hot stock tip from a person in the know who should not be talking about it.
In a big business town such as Hong Kong, insider trading cases are everyday stuff. But recently a new case has grabbed the headlines.
Wong Kan-king and his wife, Charlotte Wong Leung Ka-on, have been accused of having inside information and using it to trade Dow Jones shares before a US$5 billion bid for the company by News Corp became public knowledge. The pair allegedly borrowed US$15 million from various sources to buy 415,000 Dow Jones shares.
News of the bid sent the stock soaring almost 60 per cent, producing an instant profit of more than US$8 million for the couple. Insider trading, by definition, means dealing in shares of a company that the trader works for or heads, and therefore has inside information.
However, the term is also commonly used to describe deals such as the Dow Jones one, where people simply had information not available to the public.
But everyone is looking for an edge in the market, so why is it wrong to make some money out of that offhand comment your banker uncle made the other night?
Everyone bases their investment decisions on what they know, right? Rules on using insider information are there to make sure that the people running the company are making it a fair game for all investors.
Stopping the leaks
If an executive leaks information to someone, intentionally or unintentionally, the other investors are at a disadvantage, and this can undermine the public trust in the company, market and their regulators.
Insider trading isn't always illegal. Executives are allowed to trade the shares of the company they work for, which is insider trading.
As long as the insider is trading on information that is generally available to the public, no laws are broken. However, they have to report these trades to the regulators, and there are strict rules on when and how they can make these trades.
Trading on secret information hasn't always been illegal, and in Hong Kong it was only prohibited in law in 2003. For many years, profiting from inside information was considered a perk of being inside the circles of corporate power.
Illegal insider trading : This occurs when someone makes an investment decision based on information that is not available to the general public. Insider information is information not available to the general public.
Securities and Exchange Commission (SEC) : The financial markets regulator in the United States, which investigates and takes to court people who break banking and financial laws. The equivalent in Hong Kong is the Securities and Futures Commission (SFC). On the mainland, it is called the China Securities Regulatory Commission.