Insider trading

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In finance, insider trading means the use of inside information for stock exchange transactions and is a term used in the financial market , especially the stock market . Insider trading is a criminal offense in Germany and most of the member states of the European Union because it affects the functioning of the capital market .

Legal regulation

Ban on insider trading in Germany

The ban on insider trading is contained in Article 14 of the Market Abuse Ordinance (MMVO) that came into force on July 2, 2014 . This standard prohibits several practices: attempting or engaging in insider dealing, inducing or inciting a third party to engage in insider dealing, and unlawful disclosure of inside information. According to Art. 8 Paragraph 1 Clause 1 MMVO, insider trading occurs when someone directly or indirectly purchases or sells a financial instrument using inside information for their own account or for the account of a third party.

The behavior prohibited by Art. 14 MMVO is threatened with imprisonment of up to five years or fines in accordance with Section 119 (3) of the Securities Trading Act (WpHG) .

insider

An insider is anyone who has access to price-relevant information relating to an insider security or its issuer before this information became public.

The term “insider paper” is defined in Art. 2 Paragraph 1 MMVO. According to this, it is a financial instrument to which one of the conditions specified in Art. 2 Paragraph 1 MMVO applies. This includes in particular instruments that are traded on an organized market or a multilateral trading facility or that are to be admitted to such a trading platform. The term also includes rights to subscribe for, purchase or sell securities ( option transaction ), rights to payment of a difference based on the performance of securities (contracts for difference ), futures contracts and rights to futures contracts on share or bond indices or interest rate futures contracts as well other futures contracts that oblige you to buy or sell securities ( futures contracts ).

According to the definition extended by the Investor Protection Improvement Act in 2004, insider papers are now also financial instruments whose price depends on financial instruments traded on the stock exchange. This means that values ​​that are not traded on a stock exchange are recorded as insider securities if their price is determined by stock exchange traded financial instruments.

For example, people who have a stake in the capital of a company or a company affiliated with it, who gain knowledge due to their work in the company (e.g. members of the executive board , supervisory board members ), who gain knowledge due to their profession or task (e.g. Lawyers , notaries , auditors , tax consultants , management consultants ) or who have obtained inside information due to the preparation or commission of criminal offenses.

The earlier division of the WpHG into primary insiders who, as intended, receive information that is not publicly known and relevant to the price, and other persons designated as secondary insiders is not carried out by Art. 7 MMVO. The prohibitions of the MMVO are therefore aimed equally at both insider groups. However, this distinction is still of importance for the legal consequences associated with the act.

Existence of inside information, Art. 7 MMVO

The term “inside information” is defined by Art. 7 MMVO. According to this, it is precise information about a circumstance that is related to a security issuer. Furthermore, the information must be unknown to the public and it must be able to significantly influence the price of the security. This essentially coincides with the earlier section 13 (1) sentence 1 of the WpHG.

Sufficiently precise fact

On the one hand, facts come into consideration as circumstances. Facts that can typically represent inside information are takeover bids, a company's research success, unexpected increases in profits or large orders (these usually lead to price increases), an unexpected drop in profits, filing for insolvency due to insolvency or over-indebtedness (the price will fall regularly) and company mergers and personnel changes. In addition, circumstances can also be value judgments and prognoses, provided they have a sufficiently precise factual basis. Information according to Art. 7 Paragraph 2 Clause 1 MMVO is considered to be sufficiently precise if it can be assumed that it is specific enough to influence the price of the financial instrument, it would be generally known. This usually does not apply to mere rumors. Something else can apply if the rumor is based on a demonstrable factual basis.

If their occurrence is sufficiently likely, such circumstances can also constitute inside information that will not occur until the future, such as the intended resignation of a leading manager. The European Court of Justice saw a sufficient probability in the Geltl ruling issued in 2012 if the occurrence of the circumstance is reasonably foreseeable. Art. 7 paragraph 2 sentence 1 MMVO adopted this definition.

According to Art. 7 Paragraph 3 MMVO, intermediate steps within a multi-stage decision-making process can also represent inside information. This is important, for example, in the case of company acquisitions or the resignation of executives. This paragraph builds on the case law of the ECJ in the case of Geltl.

The Federal Court of Justice demands that the information must be related to a third party. This is lacking if the information relates exclusively to the person of the insider. This applies, for example, to personal intentions, such as the intention to recommend a security in a stock market magazine as reliable. Because of this criterion, scalping is generally not an insider deal. However, it can represent prohibited market manipulation .

Issuer reference

The circumstance according to Art. 7 Paragraph 1 a MMVO has the necessary reference to the issuer if it affects the issuer at least indirectly. This applies in particular to circumstances that relate to the business or financial situation of the issuer. The fact may also affect the security. This is the case when it affects trading in the paper.

No public announcement

Information is only considered inside information if it is not publicly known. Such awareness exists when the information can be taken note of by an indefinite group of people. Such a possibility can be created, for example, by publishing an ad-hoc announcement.

Price influence potential

The information according to Art. 7 Paragraph 4 MMVO is suitable for influencing the price if it is taken into account by a knowledgeable investor in his investment strategy.

In its decision of January 27, 2010, the Federal Court of Justice expressed itself on criteria which concern inside information as being relevant to the price. After that, fixed thresholds could not be established. An individual assessment of the information from an ex-ante perspective is decisive. In view of the large number of factors that regularly contribute to pricing in addition to the offense, no excessive requirements for evidence should be placed on the determination of such price-relevant circumstances. It is not necessary to interview market participants. Instead, it is sufficient to take a look at the share price and sales.

Prohibited behavior, Art. 14 MMVO

Acts of fact

. Article 14 prohibits MMVO three branches: the making or attempts of insider trading, recommending or instigation to insider trading and the unlawful disclosure of inside information. This behavior was already inadmissible under section 14 of the WpHG.

According to Art. 8 Paragraph 1 MMVO, insider trading occurs when someone buys or sells financial instruments and uses inside information. Use is when the investment decision of the insider is influenced by the information. Buying or selling a financial instrument after gaining knowledge of inside information relating to this instrument is therefore not permitted. In contrast to the application of Section 14 WpHG, according to Art. 8 Paragraph 1 Clause 2 MMVO, cancellation and changes to an order relating to a financial instrument also count as the use of inside information. As soon as the insider becomes aware of a circumstance, this obliges him to stand still with regard to the financial instrument concerned until the circumstance becomes public.

Another case of insider trading is according to Art. 7 paragraph 1 d MMVO the front running . Here, a company carries own orders through and makes this knowledge of information advantage resulting from got from customer orders.

Exceptions to the prohibition

According to Art. 5 Paragraph 4 MMVO, an act does not fall under the prohibition of insider trading if it is carried out as part of a buyback program or a stabilization measure.

Further exceptions to the prohibition of Art. 14 are contained in Art. 9-11 MMVO. According to this, the disclosure of inside information in the context of journalistic activities (Art. 10 Paragraph 1 MMVO), market sounding (Art. 11 MMVO) and acting as a market maker (Art. 9 Paragraph 2 MMVO) are permitted.

Also excluded from the prohibition according to Art. 9 Paragraph 4 MMVO is the decision on the takeover of a company after a due diligence has been carried out there. Even before this reason for an exception was introduced, there was agreement in jurisprudence that this test procedure, which is necessary from an economic point of view, is permissible. The only controversial issue was the way in which this exception would be achieved. In some cases, the causality between knowledge of the inside information and the decision was denied, since the willingness to buy already exists before knowledge. Others, due to the fact that the behavior was not worthy of sanction, made a teleological reduction of Section 14 WpHG.

Monitoring insider trading

The task of insider surveillance is to prevent insider trading. For this purpose, national stock exchange and securities supervisory authorities are active in the western states. Its aim is also to ensure the functionality of fair markets for securities and compliance with legal regulations. One element of their monitoring tasks is the detection and prosecution of prohibited insider trading.

Transactions in insider securities are checked daily by the Federal Financial Supervisory Authority (BaFin) with the help of special IT programs, both automatically and manually, for conspicuous price movements or suspicious transactions. These filter out abnormalities from the daily turnover on the stock exchanges and off-exchange trading. Investment services companies, such as banks and savings banks, must report transactions that give rise to suspicion that the ban on insider trading or the ban on price manipulation has been violated.

To facilitate the identification of insiders, Art. 18 MMVO obliges the issuers of financial instruments to compile insider lists and send them to the supervisory authorities on request.

The stock market in the USA is also closely monitored. The Securities and Exchange Commission (SEC), an independent federal agency in Washington (DC) founded in 1934, is responsible for the discovery of unlawful insider trading in addition to the listing of securities and investor protection . Under gentle pressure from this authority, the regulations were tightened in Europe in the 1980s.

Preventive measures against insider trading

According to Art. 17 MMVO, listed companies are obliged to publish insider information in a timely manner in order to forestall possible dissemination of insider information to third parties. This obligation of ad hoc publicity is intended to prevent third parties from using secret information to their advantage.

As a further measure to prevent insider trading, from July 1, 2002, Section 15a of the WpHG introduced the statutory obligation to immediately report proprietary transactions by executives and to publish this notification (on the part of the company). In the course of the new regulation of the market abuse law by the MMVO, § 15a WpHG was replaced by Art. 19 MMVO. This regulation supplements the reporting obligation by a prohibition for executives to trade in financial instruments of the issuer to which they belong within 30 days prior to the announcement of an interim or annual financial statement.

European Union

Until July 3, 2016, European insider law was based on the Market Abuse Directive , which obliged the member states to enact provisions with comparable content. The MMVO, which came into force on July 3, 2016, replaced the directive and, as a European regulation, acts directly as part of the legal system. Thus, the insider law in the member states is based directly on the MMVO. However, sanctions linked to violations of the MMVO are reserved to national law.

United States

The USA is considered the "motherland" of the ban on insider trading. As early as the early 1930s, insider trading was perceived and discussed as a regulatory problem within the framework of capital market legislation. The ban was standardized for the first time with the Securities Exchange Act of 1934. The regulatory approaches underlying the US insider trading ban, however, still differ from the European concept. According to the European concept, the prohibitions serve to protect the capital market. In the USA, the prevailing theory so far is that the exploitation of insider knowledge represents a breach of loyalty to the other market participants (“ fiduciary duty theory ”). Recently, American insider law has followed the “ misappropriation theory ”, according to which insider trading is an act similar to unfaithfulness: the insider “embezzles” the inside information vis-à-vis the issuer. With this approach, the American insider ban is aligned with corporate law.

Penalties for insider trading in the United States
insider Judgment of prison sentence Fine
David S. Brown September 1986 30 days -
Ilan K. Reich October 1986 1 year -
Ira B. Sokolov November 1986 1 year -
Dennis B. Levine February 1987 2 years $ 362,000
Robert M. Wilkis February 1987 1 year -
Ivan F. Boesky December 1987 3 years $ 100 million
Boyd L. Jeffries July 1989 - $ 250,000
Paul A. Bilzerian September 1989 4 years $ 1.5 million
Robert M. Freeman April 1990 4 months $ 1 million
Martin A. Siegel June 1990 2 months -
John A. Mulheren November 1990 1 year $ 1.7 million
Michael Milken November 1990 10 years, released after 22 months $ 600 million
Raj Rajaratnam October 2011 eleven years 10 million plus a $ 53.8 million profit levy

Source: Facts on File. World News Digest 1990.

Insider trading in practice

In practice, noticeable price movements can often be observed before the official disclosure of inside information on the stock markets. However, BaFin's investigations rarely lead to convictions before the courts. In addition, the boundaries between price-influencing and non-price-influencing information are fluid and are often misjudged by insiders.

One of the few and at the same time best-known examples of uncovered insider trading was the exploitation of an information advantage by the then IG Metall boss Franz Steinkühler in 1993. As a member of the Supervisory Board of Daimler-Benz AG, he was aware that an exchange of Mercedes shares for Daimler- Shares was imminent. It was foreseeable for him that once this information became known, the price of the Mercedes share would rise significantly. He therefore recommended that relatives buy this stock. This action did not have any legal consequences, since it was not until August 1, 1994 that the use of information advantages in stock trading was made a criminal offense. About a year after the criminal provision came into force, the first insider trading proceedings in court became public in Germany.

The largest known insider trading to date was uncovered in the United States in October 2009 when the FBI arrested six alleged accomplices after three years of wiretapping . They are said to have generated around US $ 20-25 million through insider trading . Those arrested were high-ranking employees of large public companies, including Robert Moffat ( IBM Global System and Technology Director and Senior Vice President), Rahiv Goel ( Intel ), two hedge fund managers Danielle Chiesi and Mark Kurland ( Bear Stearns ), billionaire Raj Rajaratnam (Galleon hedge fund (alleged main culprit)) and Anil Kumar (a director of McKinsey & Company ). It is said that inside information about companies such as Google, Sun Microsystems, IBM, AMD, Moody's, Hilton Hotels, Peoplesupport and Polycom have been exploited. Rajaratnam was convicted for this and for conspiracy, and in October 2011 the sentence was set at 11 years in prison. Previously, 34 accomplices had been convicted by May 2011.

A well-known case of insider trading in Germany concerned Infomatec in 2000 .

See also

literature

  • Thomas Koch: Due diligence and acquisition of shares from the perspective of insider law , Baden-Baden, 2006, NOMOS Verlagsgesellschaft, ISBN 3-8329-2427-2
  • André-M. Szesny: Financial Market Supervision and Criminal Procedure - The investigative powers of the BaFin and the stock exchange supervisory authorities according to the Banking Act, the Securities Trading Act and the Stock Exchange Act and their relation to the law of criminal procedure . Publishing house Dr. Kovac, Hamburg 2008, ISBN 978-3-8300-3622-7 .

Web links

Individual evidence

  1. ^ Petra Buck-Heeb: Capital Market Law . 8th edition. CF Müller, Heidelberg 2016, ISBN 978-3-8114-4247-4 , Rn. 282.
  2. ^ Petra Buck-Heeb: Capital Market Law . 8th edition. CF Müller, Heidelberg 2016, ISBN 978-3-8114-4247-4 , Rn. 305
  3. ^ Petra Buck-Heeb: Capital Market Law . 8th edition. CF Müller, Heidelberg 2016, ISBN 978-3-8114-4247-4 , Rn. 285.
  4. ↑ a b Bernd Graßl: The new EU market abuse regulation . In: Der Betrieb 2015, p. 2066 (2067).
  5. ^ Katja Langenbucher: Stock corporation and capital market law . 3. Edition. CH Beck, Munich 2015, ISBN 978-3-406-66738-1 , § 15, Rn. 35-37.
  6. ↑ ECJ, judgment of June 28, 2012, C-19/11 = Neue Juristische Wochenschrift 2012, p. 2787 (2789).
  7. ^ Petra Buck-Heeb: Capital Market Law . 8th edition. CF Müller, Heidelberg 2016, ISBN 978-3-8114-4247-4 , Rn. 294-295.
  8. ^ A b Klaus von der Linden: The new market abuse law at a glance . In: German Tax Law 2016, p. 1036 (1037).
  9. ↑ BGHSt 48, 373 .
  10. ^ Petra Buck-Heeb: Capital Market Law . 8th edition. CF Müller, Heidelberg 2016, ISBN 978-3-8114-4247-4 , Rn. 286.
  11. ^ Katja Langenbucher: Stock corporation and capital market law . 3. Edition. CH Beck, Munich 2015, ISBN 978-3-406-66738-1 , § 15, Rn. 31.
  12. ↑ BGH, judgment of January 27, 2010, 5 StR 224/09 = Neue Juristische Wochenschrift 2010, p. 882.
  13. ↑ see also: Criminal option transactions - selling at the wrong time is insider trading in: "Frankfurter Allgemeine Zeitung" of February 23, 2010
  14. ^ Petra Buck-Heeb: Capital Market Law . 8th edition. CF Müller, Heidelberg 2016, ISBN 978-3-8114-4247-4 , Rn. 316-317.
  15. ↑ Barbara Grunewald, Michael Schlitt: Introduction to Capital Market Law . 3. Edition. CH Beck, Munich 2013, ISBN 978-3-406-65413-8 , pp. 265 .
  16. ^ Katja Langenbucher: Stock corporation and capital market law . 3. Edition. CH Beck, Munich 2015, ISBN 978-3-406-66738-1 , § 15, Rn. 59.
  17. ^ Petra Buck-Heeb: Capital Market Law . 8th edition. CF Müller, Heidelberg 2016, ISBN 978-3-8114-4247-4 , Rn. 329
  18. ↑ Klaus von der Linden: The new market abuse law at a glance . In: German Tax Law 2016, p. 1036 (1038-1039).
  19. ↑ Klaus von der Linden: The new market abuse law at a glance . In: German Tax Law 2016, p. 1036 (1039).
  20. ↑ Der Spiegel , issue 34/1995, page 88: Gap in the law , queried on November 26, 2010
  21. ↑ RP-online: After charges of insider trading: IBM and Intel managers Moffat and Goel on leave ( memento of October 24, 2009 in the Internet Archive ), queried on October 28, 2009
  22. ↑ crn.de: Wall Street scandal: insider trading in IT stocks , queried on October 28, 2009
  23. ^ Judge punishes Wall Street. In: Spiegel Online from October 13, 2011
  24. ^ Raj Rajaratnam - Galleon Group Founder Convicted in Insider Trading Case. In: The New York Times, October 13, 2011
  25. ↑ US billionaire Rajaratnam to jail in: Spiegel Online from May 11, 2011