Insider trading cases have seen a variety of sentences over the years. However, some jurisdictions have recently increased their focus on these cases, seeing more convictions and higher sentences. Blackout periods are a critical component of any public company’s trading policy to minimise the risk of insider trading occurring.
All public companies should have a share trading policy in place to regulate trading by key management personnel (KMP), including directors, in listed securities and other financial products of the entity.
Trading policies should also include specific information about blackout periods, during which trading in the company’s securities by KMP and sometimes employees is restricted. Blackout periods are specifically designed to reduce the risk of insider trading occurring while KMP and employees are in possession of material non-public information (MNPI).
This article explores the details of blackout periods (and, conversely, trading windows), examples of insider trading arising from MNPI misuse, and how your publicly listed company can reduce its risk of insider trading.
What Are Blackout Periods?
A blackout period is a fixed period specified by an entity in its trading policy when its Key Management Personnel (KMP), which includes directors, are generally prohibited from trading in its securities. These periods may also apply to employees who are in possession of material non-public information (MNPI).
What Are Trading Windows?
Trading windows work conversely to blackout periods by prohibiting trading activity by KMP at all times - except when these windows are expressly stated. In this case, a blackout period effectively becomes the entirety of the year, except for specified trading windows.
Why Are Blackout Periods Important?
At certain times, directors, executives, and employees may be aware of MNPI. A blackout period prevents these people from buying or selling securities in the company at certain times, mitigating the risk of unfair gains from trades while possessing MNPI.
Blackout periods are commonly observed before the release of publicly-traded company earnings reports. Most companies voluntarily impose these periods on employees who may have MNPI ahead of their earnings releases.
With robust internal trading policies and clear communication and enforcement of blackout periods, your publicly listed company can:
- Uphold market integrity and fairness
- Build public confidence in your firm’s ethical behaviour and transparency
- Establish and uphold investor trust in your firm’s processes
- Create an ethical culture by providing information and updating all employees about the critical nature of blackout periods or trading windows
- Meet regulatory compliance obligations and avoid non-compliance penalties
- Avoid possible reputational damage to your firm from association with insider trading
- Help all employees avoid legal issues, financial penalties, and even imprisonment in severe cases
What Is Considered Insider Trading?
Insider trading is where an individual publicly trades stocks or securities while using privileged information (before it is made publicly available) to gain an unfair advantage over the rest of the market. Cases of insider trading have often been seen where a person privy to MNPI within their organisation has either made a trade or passed information to a friend or a relative to make a trade, which financially benefits these parties. Conversely, the use of MNPI to avoid financial losses is also considered insider trading.
MNPI that can be used to create unfair gains (or unfairly avoid losses) may include mergers and acquisitions, sales of significant assets, executive and board member changes, earnings releases that are inconsistent with market expectations, and stock buyback schemes.
To Whom Does Insider Trading Apply?
Directors and key management personnel (KMP) commonly have access to MNPI and are classified in many jurisdictions as “insiders” by default. However, anyone who acts on information not publicly available to gain an unfair advantage may be conducting insider trading.
For example, suppose you work for a company you learn is about to post significant underperformance vs. guidance in its half-yearly report. You tell a friend before this information becomes publicly available, and they sell their shares. That friend avoids a heavy loss, where the rest of the market incurs losses. You and your friend may be guilty of insider trading.
Examples of Insider Trading
Singapore - Jail Sentences Handed Out Over BIGL Case
Mr Tay Yew Khem and Ms Hui Choy Leng have been convicted and sentenced to 12 weeks imprisonment and 4 months imprisonment, respectively, for insider trading in the shares of Broadway Industrial Group Limited (BIGL) and other offences under the Securities and Futures Act (SFA) and the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (CDSA).
In July and August 2016, Hui was made aware of material non-public information (MNPI) by her friend and then-Chief Financial Officer of Broadway Industrial Group (BIGL) Tan Chee Keong. The MNPI used concerned the sale of BIGL businesses, and ahead of the company’s 22 August announcement that it had entered into a conditional sale and purchase agreement to sell two of its businesses, Tay and Hui purchased BIGL shares.
Hui purchased 1.1 million shares for her father, 930,000 for herself and 300,000 for her brother and sister-in-law, later selling the shares for a profit of S$188,895, of which S$77,906 was her profit.
In April 2023, Hui was sentenced to four months jail time for two counts of insider trading under the Securities and Futures Act (SFA). Tan also received three months and two weeks in jail for his involvement.
Malaysia - RM2.36 Million Penalty Imposed in the Ban Seng Plastic Industries Case
On 13 April 2023, the Malaysian High Court ordered Toh Kai Fatt, the Managing Director of plastics company Ban Seng Plastic Industries & Assembly Sdn Bhd, to pay a penalty of RM2.36 million to the Securities Commission Malaysia (SC) on account of insider trading.
In 2011, Toh acquired 974,000 shares of HPI Resources Berhad (HPI) while in possession of material non-public information (MNPI). The information in question related to a proposed acquisition of HPI by Oji Paper Co. Ltd. and saw Toh make a substantial profit from the deal. However, the fines imposed due to Toh’s insider trading are three times the amount of those profits.
Toh will also need to pay a civil penalty of RM250,000 and costs of RM100,000 to the SC. In addition, The SC has barred Toh from being appointed as a director of any public company and from trading any securities on the Malaysian stock market (Bursa Malaysia) for five years.
The SC’s press release about the case explains, “Insider trading is a major concern, and the SC will continue to monitor and take action against any suspicious conduct to protect the integrity of the capital market.”
Australia - A Domino Effect of Charges Against Big Un Executives and Connected Persons
ASX-listed company Big Un Ltd hit a billion-dollar market valuation in 2017, but collapsed after the exposure of one of the country’s worst accounting and insider trading scandals.
In 2020, Former Maple Brown Abbott analyst Michael Ho narrowly missed serving jail time when he was handed a three-year prison sentence for insider trading related to shares and options in Big Un Ltd. Ho was able to serve time in the community after he pleaded guilty and assisted authorities.
At one stage, Ho’s unrealised gains from the scheme totalled around AUD$14 million based on an $80,000 investment. Ho presented himself to ASIC in March 2018, admitting to trading shares and options of Big Un Ltd while in possession of MNPI, which he obtained from CEO Richard Evertz.
In February 2023, Richard Evertz was also charged with communicating inside information while serving as CEO of Big Un. If found guilty, he could face 10 years’ imprisonment. Magistrate Susan Horan said the communications that form the basis of the charges relate to Evertz’s dealings with Ho.
Further still, former CFO Andrew Scott Corner was the latest person connected with Big Un insider trading allegations to face charges in June 2023. The allegations relate to Corner’s procurement of two private companies to sell 1.7 million Big Un shares for more than $5 million.
“The information that Mr Corner allegedly possessed related to a funding arrangement between Big Un’s subsidiary, Big Review TV Limited, and Sydney-based financier, First Class Capital,” says the Australian Securities and Investments Commission (ASIC) in a statement.
USA - Martha Stewart Imprisoned in One of the Most Infamous Insider Trading Scandals
One of the most famous insider trading cases involved TV personality, writer, and businesswoman Martha Stewart.
In 2001, Stewart disposed of nearly 4,000 shares of biopharmaceutical company ImClone Systems after receiving information from Peter Bacanovic, a broker at Merrill Lynch. Bacanovic alerted Stewart after finding out that ImClone Systems CEO Samuel Waksal had sold all of his shares in the company.
At the time, ImClone was awaiting a Food and Drug Administration (FDA) decision on its cancer treatment drug, Erbitux. However, the drug did not obtain FDA approval. The sale of Stewart’s shares, occurring one day before public information was released about the FDA’s rejection of the ImClone drug, caused the stock price to plummet 16% in one day and sparked suspicions of insider trading.
Stewart’s informed sale of her shares avoided a loss of around USD $45K. Following a 2004 trial, Stewart was charged with lesser crimes of obstruction of a proceeding, conspiracy, and making false statements to federal investigators and served five months in jail.
How Can Your Public Listed Company Reduce its Risk of Insider Trading?
Implement the Right Trading Policy for Your Organisation
At a bare minimum, every listed entity should have a securities trading policy in place to regulate trading by KMP, directors, and executives. However, consider extending it to employees, family members, and entities closely connected to KMP who have access to inside information.
Set Up a Pre-Clearance Process
As part of your organisation’s trading policy, a pre-clearance process enables employees to request permission to make a securities transaction. This process helps the firm’s chief compliance officer, chief financial officer, or other senior officers to properly evaluate whether the transaction should be approved or denied.
Regulatory Technology (RegTech) solutions, such as MCO’s Personal Trade Manager (PTM), can be implemented to automate this process based on your firm’s policies. Compliance resources can save significant time while ensuring full audit trails of all requests, approvals, and denials by using a compliance management software solution instead of manual processes.
Monitor Personal Trade Activities
Irregularities in the trading patterns of employees can sometimes be an early indicator of insider trading activity. Such trades may be incongruent with established trading patterns due to MNPI being acted upon. While this does not confirm that insider trading is happening, it may suggest further investigation is needed.
Maintain Insider Lists
Help protect your firm’s confidential information by keeping accurate records of who is in possession of MNPI, at what times, and for what reasons.
An “insider list” is your record of individuals with access to MNPI. This list can include directors, KMPs, employees and external parties with inside information about your firm, such as contractors, advisors, accountants, and those involved in business transactions where sensitive information may have been disclosed.
Your records should maintain accurate information about these people’s contact details, why they are on the insider list, and dated additions and changes to the list. It is also crucial to record when people are removed from the list to understand when they stopped being in possession of MNPI. Insider lists are vital when responding to requests for information from regulatory bodies during market surveillance activities.
Consider Extending Blackout Periods to Virtual Asset Trading
Trading blackout periods should already be communicated to employees for traditional securities trading. These blackout periods help minimise the risk of anyone privy to sensitive company information making trades or providing information to connected persons that could unfairly benefit the individuals involved. The recent example of a Coinbase employee tipping connected persons about virtual assets set to be listed on Coinbase exchanges shows a compelling reason for firms to review policies and inclusions, such as blackout periods.
A Robust, Technology-Led Approach to Reducing Insider Trading Risk
Robust trading policies that specify blackout periods (or trading windows) are essential for publicly listed companies to maintain market integrity, protect sensitive information, uphold regulatory compliance obligations, create a culture of compliance, and reduce the risk of financial, reputational, and legal damage.
By properly establishing and maintaining policies, your firm can demonstrate its commitment to ethical behaviour and drive long-term success as a publicly listed company.
Regulatory Technology (RegTech) solutions, such as MCO’s Personal Trade Manager (PTM), can be implemented to automate the monitoring, detection, and automatic alerts of suspicious trade activity. The PTM module helps compliance teams efficiently review employee trading activity against restricted lists and insider trading rules, simplify employee trade pre-clearance processes, and produce complete audit histories of pre-clearances and insider list updates.
Compliance resources can save significant time and automatically maintain full audit trails of all transactions by using a compliance management software solution instead of manual processes.
Additionally, MCO’s integrated compliance management suite enables firms to identify broader conflicts of interest across their organisation. MCO provides a consolidated platform for compliance teams to manage areas of potential conflict, including:
- Close personal relationships
- Personal account dealing
- Gifts and entertainment
- Outside business activities
- Registrations and licenses
MyComplianceOffice (MCO) provides the leading RegTech solution across the Asia-Pacific region and globally, enabling publicly listed companies to more effectively manage regulatory compliance, mitigate risk, and stay out of their regulator’s spotlight.
Learn more about Corporate Compliance for Listed Companies in Singapore.
Also, access your in-depth eBook - The Ultimate Guide to Conflicts of Interest.
