Introduction:
One of the biggest crimes in the financial market, which affect the market negatively, is insider trading. Although, some laws, and professionals think that this crime should not be prohibited, many laws around the world prohibited these actions for several reasons. Understanding this action either from rational or irrational investors is still limited, especially in many developed countries, such as Saudi Arabia. Saudi has new financial market regulations since 2004, so we got some experience from US laws, in order to put very powerful law. This article would focus on several aspects, that would benefit the Saudi law, in order to see that if we should change some of the articles in our laws, or we should keep it the same. Further, there are some benefits from the US court’s precedents, which afford solid ground for many principles how to apply the law. Finally, this article would talk about the settlement procedures; the US Securities and Exchange Commission may take towards a defendant to avoid going to the court.
Comparative laws in Saudi Arabia and United States in this article:
Our study will focus essentially on the securities exchange act 1934. It contains one of the most important articles in criminal liability. It is used in most of crimes such as market manipulation and insider trading. This section is 10-b. After that, the Securities and Exchange Commission issued articles 10-b5-1 and 10-b5-2, which is re4alted to our study about insider trading. Also, some of articles explain the 1934 law. For example, 34 Act §§ 20, 15 USC 78t (d), 34 Act §§ 20A, 15 USC 78t-1, 34 Act §§ 21, 15 USC 78u, 15 USC Sec. 78u-1, 15 USC Sec. 78u-3, and some sections from "Insider Trading and Securities Fraud Enforcement Act of1988". These laws and articles from the SEC would give a complete picture about insider trading, and afford good articles to be added to Saudi law. On the other hand, the Saudi capital market law issued in 2004, and then the Saudi capital market authority issued its implementing regulations. For instance, the market conducts regulations in 2004, the authorized person regulations in 2005, and the merger and acquisition regulations in 2007. The basic section is article 50 in Saudi capital market law, which talks about insider trading as a crime. Then, the other sections and articles would give some information explicitly about insider trading.
Baker & McKenzie LLP, which is one of the most famous law firms in the US, assessed the CMA in developing the regulatory framework for implementing the Capital Market Law in the Kingdom. As a result, we can see the sense of the US securities law in Saudi law.( Baker & McKenzie).
What is insider trading?
The author did not find any definition either from Saudi law or US law about insider trading. It is acceptable why both of laws left that to the court or dictionaries. Insider trading might be legal or illegal as we will see later. The Black"s Law Dictionary, as insider trading “The use of material, nonpublic information in trading the shares of a company by a corporate insider or other person who owes a fiduciary duty to the company”. This is the classic definition. Then the Supreme Court has also approved a broader definition, known as the "misappropriation theory": the deceitful acquisition and misuse of information that properly belongs to persons to whom one owes a duty. (8th ed. 2004). The second one was given in United States v. O’Hagan as we will see later in precedents section. Furthermore, the SEC in its enforcement department has defined insider trading as buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. From these definitions, we can see that many things would broad our knowledge to understand the insider trading. It is related to inside (non public) information, which is an insider, and the breach of fiduciary duty or trust and confidence, so we have to know what does mean each one. (U.S Securities and exchange commission.2006).
What does non public (insider) information mean?
The Saudi Capital Market Act 2004 stated clearly in article 50-b the meaning of inside information as “information obtained by the insider and which is not available to the general public, has not been disclosed, and such information is of the type that a normal person would realize that in view of the nature and content of this information, its release and availability would have a material effect on the price or value of a Security related to such information, and the insider knows that such information is not generally available and that, if it were available, it would have a material effect on the price or value of such Security.” In contrast, there is not any rules explicitly define it, however the court of appeal, second circuit relied on the Securities Exchange Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b) in Securities and Exchange Commission v. Texas Gulf Sulphur Co case to clarify the meaning of material non public information which insider is required by rule of Securities and Exchange Commission to disclose before dealing in stock and securities of corporation includes not only information disclosing earnings and distributions of corporation but also those facts which affect probable future of corporation and those which may affect desire of investors to buy, sell, or hold corporation"s securities (1986). Indeed, I think the Saudi law gives more clarification for ordinary person to understand the concept than the court decision in the US. It is better to be in law, so any one will have better understanding the concept, which is necessary to understand illegal insider trading. I recommend that US law add a rule to make it much easier for specialists and regular investors.
Who is an insider?
This is a really important aspect, in order to decide and know who exactly is the tipper in insider trading crime. Thus, it should be clear and whether the insider has to be working in the company or not. In fact, not only the employee of the issuer are insider but also people and professionals who have business relation are insiders, so they have the liability to keep the secrecy of information and not trading on the security until the information become public. article 50-a Any person who obtains, through family, business or contractual relationship, inside information (hereinafter an “insider”) is prohibited from directly or indirectly trading in the Security related to such information, or to disclose such information to another person with the expectation that such person will trade in such Security. In addition, the market conduct regulation clarifies exactly who insider is in its rule 4-b as following:
“For greater certainty, insider means any of the following:
1) A director, a senior executive or an employee of the issuer of a security related to inside information;
2) A person who obtains inside information through a family relationship including from any person related to the person who obtains the information;
3) A person who obtains inside information through a business relationship, including obtaining the information:
* From the issuer of a security related to inside information;
* From any person who has a business relationship with the person who obtains the information;
* From any person who is a business associate of the person who obtains the information;
4) A person who obtains inside information through a contractual relationship, including obtaining the information:
* From the issuer of a security related to inside information; or
*From any person who has a contractual relationship with the person who obtains the information.” In my opinion, this is really clear indication about who is insider; however, I think that in part 2, which talks about family relationship to become an insider when obtaining non public information is not appropriate for several reasons. One is extending the concept to anyone who has a family relationship with insiders. Further, it does not specify what are the conditions to become a tipper, although, as we will see that both the tipper and tippee has the same liability. Also, it does not distinguish between a person who is under his her control/supervision, and can the insider deal on behalf of him or her like children under 18, and someone who has separate legal entity like wife and adult son or daughter or any relatives. In recent SEC allegation vs. Maher Kara, a former director in Citigroup Global Markets" investment banking division in New York, tipped his brother Mr. Michael Kara about merger transaction. Then, Mr. Michael tipped his cousins and friends, Nasser Mardini and Joseph Azar. (April 30, 2009) here, we can decide who is the tipper and other tippes like the first and second, etc, while in Saudi CMA is not clear. Thus, I recommend adding some information for this section.( U.S SEC.2009).
On the other hand, the securities exchange act 1934 and SEC rules do not give clear definition for insider; however, the Insider Trading and Securities Fraud Enforcement Act of 1988 put clear indication about broker dealer or any associate person with such a broker or dealer is considered as insider. Moreover, the same act indicate that the investment advisor 1940 act added a new section 204, which talks about the procedures of acquiring non public information to prevent the misuse of it, which will be mentioned later. So, only two categories are mentioned explicitly. Finally, the SEC put some cases about the type insiders, whom they brought cases in front of courts. Those people are: corporate officers, directors, and employees who traded the corporation"s securities after learning of significant, confidential corporate developments; friends, business associates, family members, and other "tippees" of such officers, directors, and employees, who traded the securities after receiving such information; employees of law, accountants, banking, brokerage and printing firms who were given such information in order to provide services to the corporation whose securities they traded; government employees who learned of such information because of their employment by the government; and other persons who misappropriated, and took advantage of, confidential information from their employers.(U.S SEC.2006).
From these examples, we can advise the Saudi regulator to add new sections about the governmental employees, who can have no public information, and some of their employees can deal in illegal transactions. For instance, the Saudi capital market authority employees who are working in corporate governance division can acquire highly secretive information or in the Saudi stock exchange (Tadawul). Thus, the regulator should add this section to impose stricter or at least the same sanctions. Also, if the law can give the Saudi securities and resolution dispute committee (court) the authority to add new categories as insiders relied in cases, so we can get some benefit from misappropriation theory for example.
How insiders trading can be legal?
As we mentioned earlier, not all insider trading are illegal. It can be legal if an insider takes all reasonable steps and procedures by law to deal with any transaction whether from the law directly or from the authority itself. The SEC has 3 forms to be filled by corporation insiders, such as directors or corporate officers, and any beneficial ownership that has 10% or more in the security. These forms called forms 3, 4, 5. Form 3 is registering equity securities for the first time under Section 12 of the Exchange Act must file this Form no later than the effective date of the registration statement. If the issuer is already registered under Section 12, the insider must file a within ten days of becoming an officer, director, or beneficial owner. Changes in ownership are reported on Form 4 and must be reported to the SEC within two business days. You can find the limited categories of transactions not subject to the two-day reporting requirement in the new rule. Insiders must file a Form 5 to report any transactions that should have been reported earlier on a Form 4 or were eligible for deferred reporting. If a Form must be filed, it is due 45 days after the end of the company"s fiscal year through the SEC"s EDGAR system. Similarly, the CMA has same templates called 7a, b, c, and d. Only one is different is template d, which is asking for approval to make a transaction from CMA, from an owner who has 10%. The other templates considered any owner or interested person of 5% ownership has to give CMA a notice of trading during specific period of time. Actually, it gives more transparency and disclosure, especially for investor to know the change in ownership, which might change their objectives if big investors or companies employees change their ownership. Another thing is the changing of ownership aim/goal from long term to short term or vice versa. This really good form because it can be used in the future if there is any breach in same security at least.
Prohibition sections, articles of insider trading in both laws:
There are two different methods in establishing an insider trading case. It depends on the development of the law, and precedents, which affect the SEC rules, and let her add new rules regarding insider trading like rule 10b5-1 and 10b5-2. On the other hand, the new CMA regulations have specific implementing regulations regarding insider trading, information secrecy,and Chinese walls. Also, because there is not enough precedents, we can add some of US experience to improve the Saudi law. The securities exchange act 1934 in section 10b-5 has the most important section, which criminalize market manipulation, insider trading, untrue statement, and any crime. The general concept in this section is the employment of manipulative and deceptive devices. This section stated that “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
- To employ any device, scheme, or artifice to defraud,
- To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
- To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
In connection with the purchase or sale of any security.
Then the SEC adopted rule 10b5-1 which focus on insider trading
Rule 10b5-1 -- Trading "on the Basis of" Material Nonpublic Information in Insider Trading Cases
- In connection with the purchase or sale of any security. As it can be seen, this is very broad articles, and there was some disagreement in court’s precedents. Thus, the SEC added two rules to resolve the issues of insider trading. One is 10b5-1 which puts clear distinguish between dealing on the basis of non public information if the person is aware during that time, and someone trade in special circumstances and the non public information is not the main factor in his/her decision to trade such as pre-existing plan, contract, or instruction that was made in good faith. This article says “General. The "manipulative and deceptive devices" prohibited by Section 10(b) of the Act and Rule 10b-5 thereunder include, among other things, the purchase or sale of a security of any issuer, on the basis of material nonpublic information about that security or issuer, in breach of a duty of trust or confidence that is owed directly, indirectly, or derivatively, to the issuer of that security or the shareholders of that issuer, or to any other person who is the source of the material nonpublic information.
b. Definition of "on the basis of." Subject to the affirmative defenses in paragraph (c) of this section, a purchase or sale of a security of an issuer is "on the basis of" material nonpublic information about that security or issuer if the person making the purchase or sale was aware of the material nonpublic information when the person made the purchase or sale.
c. Affirmative defenses.
1.
i. Subject to paragraph (c)(1)(ii) of this section, a person"s purchase or sale is not "on the basis of" material nonpublic information if the person making the purchase or sale demonstrates that:
A. Before becoming aware of the information, the person had:
1. Entered into a binding contract to purchase or sell the security,
2. Instructed another person to purchase or sell the security for the instructing person"s account, or
3. Adopted a written plan for trading securities;
B. The contract, instruction, or plan described in paragraph (c)(1)(i)(A) of this Section:
1. Specified the amount of securities to be purchased or sold and the price at which and the date on which the securities were to be purchased or sold;
2. Included a written formula or algorithm, or computer program, for determining the amount of securities to be purchased or sold and the price at which and the date on which the securities were to be purchased or sold; or
3. Did not permit the person to exercise any subsequent influence over how, when, or whether to effect purchases or sales; provided, in addition, that any other person who, pursuant to the contract, instruction, or plan, did exercise such influence must not have been aware of the material nonpublic information when doing so; and
C. The purchase or sale that occurred was pursuant to the contract, instruction, or plan. A purchase or sale is not "pursuant to a contract, instruction, or plan" if, among other things, the person who entered into the contract, instruction, or plan altered or deviated from the contract, instruction, or plan to purchase or sell securities (whether by changing the amount, price, or timing of the purchase or sale), or entered into or altered a corresponding or hedging transaction or position with respect to those securities.
ii. Paragraph (c)(1)(i) of this section is applicable only when the contract, instruction, or plan to purchase or sell securities was given or entered into in good faith and not as part of a plan or scheme to evade the prohibitions of this section.
iii. This paragraph (c)(1)(iii) defines certain terms as used in paragraph (c) of this Section.
A. Amount. "Amount" means either a specified number of shares or other securities or a specified dollar value of securities.
B. Price. "Price" means the market price on a particular date or a limit price, or a particular dollar price.
C. Date. "Date" means, in the case of a market order, the specific day of the year on which the order is to be executed (or as soon thereafter as is practicable under ordinary principles of best execution). "Date" means, in the case of a limit order, a day of the year on which the limit orders is in force.
2. A person other than a natural person also may demonstrate that a purchase or sale of securities is not "on the basis of" material nonpublic information if the person demonstrates that:
i. The individual making the investment decision on behalf of the person to purchase or sell the securities was not aware of the information; and
ii. The person had implemented reasonable policies and procedures, taking into consideration the nature of the person"s business, to ensure that individuals making investment decisions would not violate the laws prohibiting trading on the basis of material nonpublic information. These policies and procedures may include those that restrict any purchase, sale, and causing any purchase or sale of any security as to which the person has material nonpublic information, or those that prevent such individuals from becoming aware of such information.
It is really good article because it gives special clauses how can the trade not established on the nonpublic information either for natural person or artificial person. The latter is also can be used in Saudi law as examples how can authorized person put some procedures in order to prevent the flow of non public information to arrive to another department in the same firm, who has not the same obligation in trading on the security. I also think that this article doesn’t specify one category as Saudi law only focused on authorized person. As a result, it should be changed like US rules to broad any one to be liable unless they have written procedures of non public information.
Furthermore, the 10b5-2 indicates clearly how misappropriation theory can be applied to specific nonbuisness relationship. If someone has secretive information, he/she has a duty of trust or confidence not to trade on it. Otherwise, they are liable under this theory as we will discuss in precedents section. One of the cases that if there is agreement between parties. Another case is the history of the receiver, or the pattern, or the practice of sharing information. Lastly, the opposite case is that a person has no duty not to trade, because there is an agreement or understanding to keep the information secretive. Rule 10b5-2 main title is Duties of Trust or Confidence in Misappropriation Insider Trading Cases. It says “
a. Scope of Rule. This section shall apply to any violation of Section 10(b) of the Act and Rule 10b-5 thereunder that is based on the purchase or sale of securities on the basis of, or the communication of, material nonpublic information misappropriated in breach of a duty of trust or confidence.
b. Enumerated "duties of trust or confidence." For purposes of this section, a "duty of trust or confidence" exists in the following circumstances, among others:
1. Whenever a person agrees to maintain information in confidence;
2. Whenever the person communicating the material nonpublic information and the person to whom it is communicated have a history, pattern, or practice of sharing confidences, such that the recipient of the information knows or reasonably should know that the person communicating the material nonpublic information expects that the recipient will maintain its confidentiality; or
3. Whenever a person receives or obtains material nonpublic information from his or her spouse, parent, child, or sibling; provided, however, that the person receiving or obtaining the information may demonstrate that no duty of trust or confidence existed with respect to the information, by establishing that he or she neither knew nor reasonably should have known that the person who was the source of the information expected that the person would keep the information confidential, because of the parties" history, pattern, or practice of sharing and maintaining confidences, and because there was no agreement or understanding to maintain the confidentiality of the information.
In contrast, the Saudi Capital Market Act 2004 in its Article Fifty part a has stated “Any person who obtains, through family, business or contractual relationship, inside information (hereinafter an “insider”) is prohibited from directly or indirectly trading in the Security related to such information, or to disclose such information to another person with the expectation that such person will trade in such Security.” In addition, it prohibited any person who knows non public information is liable also as it is mentioned in part b “ No person may purchase or sell a Security based on information obtained from an insider while knowing that such person, by disclosing such insider information related to the Security, has violated paragraph (a) of this Article.” Then, the implementing regulations clarify more about this crime. In market conduct regulation distinguish between direct and indirect illegal insider trading in its rule 4 as following “a. For purposes of the application of Article 50 of the Capital Market Law and the 3) A person shall be considered directly trading in a security in any of the following two situations:
* if he executes a trade in the security for any account in which he has an interest; or
* if he makes a bid or offer on the Exchange for the security.
4) A person shall be considered indirectly trading in a security in any of the following situations:
* if he executes a trade as agent for another person;
* if he arranges a trade to which a relative or person with whom he has
a business or a contractual relationship is party; or
* if he arranges for his agent or any other person acting on his behalf or
at his direction to trade in the relevant securities.
5) Trading shall constitute insider trading, if it is directly or indirectly effected in a security related to inside information.” Then, articles 5 and 6 prohibited the disclosure of inside information for insider and non insider when he know or should have known that other might trade in the same security. What I noticed that it is not clear and difficult to prove how a tipee acquired the information. Also, how could you prove the good faith? On the one hand, the SEC rules 10b5-1, 2 has provided clear procedures about dealing on insider trading without any liability as it discussed above. Thus, it is recommended to add these two rules among the market conduct regulation by the Capital Market Authority whenever it is needed, especially if there are new precedents from Saudi CRSD (court). Another regulation is authorized persons regulations, which organized investment advisors who are working as broker dealer beside the regular work. In its article 30, it talks about Chinese walls arrangements in more details. It stated the following “Chinese wall arrangements” means written policies and procedures established by an authorized person to secure confidential or inside information obtained by the authorized person in the course of carrying on securities business that are designed to ensure that the information is known only to employees of the authorized person who are authorized to receive it, and to ensure that the information is not disclosed to any other persons.
b. An authorized person that provides corporate finance services and also provides other types of dealing, advising or managing services must establish Chinese wall arrangements.
c. An authorized person or an employee acting on behalf of an authorized person is not in violation of the provisions of articles 5 or 6 of the Market Conduct Regulations if the authorized person deals or advises in a security related to inside information while another department of the authorized person is in possession of inside information, if the following conditions are met:
1) The authorized person has established appropriate Chinese wall arrangements in view of the nature and size of its securities business;
2) The authorized person has effectively implemented and maintained its Chinese wall arrangements; and
3) None of the individuals involved in the dealing or advising activity has knowledge of the inside information or has received advice on the dealing or advising activity from an individual who has knowledge of the inside information.
In my opinion, this is really good article about permitting the same authorized person to deal in the same securities, which the person has an insider information about when the clauses are accomplished. It returns back to the ethics and obligations of the same financial advisor about not talking about the deal, and having separate unit, or management to trade in the security without knowing the inside information, i,e there is decentralized decisions in the same entity. The US laws as Investment advisor act 1940 has prevention of misuse of non public information in its section 204 required the investment advisor to have written procedure and to consider the business. Also, the Insider Trading and Securities Fraud Enforcement Act of 1988, in its section 780 has similar obligation to broker dealers. It can be seen that Saudi law provide better procedures than American law; however, 10b5-1 gives broader idea about any person than natural person has to have written procedures. As a result, not only financial advisor has to have written procedures but also any issuer of the securities. That is why I recommend all joint stock companies have to write effective procedures and should be added in corporate governance regulations. We will provide an example from a company in this article.
In addition to market conduct regulation, there are important aspects related to Chinese walls for issuers in merger and acquisition regulation 2007 to increase the transparency and disclosure in the market, and give more confidence for all investors that not some people can get benefit from any deal when they acquire non public information unless there is good faith to provide this information. In article 3 part c, it says “During the course of an offer, or when an offer is in contemplation, neither an offeror, nor the offeree company, nor any of their respective advisers may furnish information to some shareholders who are not made available to all shareholders. This principle does not apply to the furnishing of information in confidence by the offeree company to a bona fide potential offeror or vice versa.” This article impose directors, officers and affiliated parties such as financial advisors, accountant, and lawyers not trade or afford information to others until it becomes public to all investors while working on the deal until it becomes public to all investors in Tadawel or in New York exchange commission for example. Lastly, article 6 part a in the same implementing regulation talks about secrecy when it stated “All persons privy to confidential information, and particularly price sensitive information, concerning an offer or contemplated offer must treat that information as secret and may only pass it to another person if it is necessary to do so and if that person is made aware of the need for secrecy. All such persons must conduct themselves so as to minimize the chances of a leak of information.” this article mentioned Chinese walls and how to prevent the leak of information, so we can know exactly who hold the information, and if there is investigation, we would know who are insiders. Thus, I think the CMA has to add a rule obliging any issuers or authorized person or anyone with business contract to be in insider list while working in a deal not made to the public yet.
Joint and Several liability:
The securities exchange act 1934 in its §§ 20A, 15 USC 78t-1 part c mentions this idea. It gives clear indication that any person either an insider or not has the same liability. This rule stated “Any person who violates any provision of this chapter or the rules or regulations thereunder by communicating material, nonpublic information shall be jointly and severally liable under subsection (a) of this section with, and to the same extent as, any person or persons liable under subsection (a) of this section to whom the communication was directed.” In comparison, Saudi capital market act or its implementing regulations do not mentioned general concept, but only mentioned that authorized person is liable unless has specific procedures prevents this wrong doing. I think that Saudi law has to mention that.
Sanctions:
When all conditions of insider trading complete, either the SEC or the CMA will request from the court to impose sanctions. These sanctions may vary from case to case, and depend on the nature of the crime. The sanctions differ in both laws. Thus, we will try to add and suggest some sanctions to Saudi law. The Saudi capital market act 2004 in its article 59 specify sanctions to anyone who pleads guilty from the respected court without allocating whether sanction is temporarily or permanently. This is a general rule to most of violations except some. It highlights the following “a. If it appears to the Authority that any person has engaged, is engaging, or is about to engage in acts or practices constituting a violation of any provisions of this Law, or the regulations or rules issued by the Authority, or the regulations of the Exchange, the Authority shall have the right to bring a legal action before the Committee to seek an order for the appropriate sanction. The sanctions include the following:
1. Warning the person concerned.
2. Obliging the person concerned to cease or refrain from carrying out the act which is the subject of the suit.
3. Obliging the person concerned to take the necessary steps to avert the violation, or to take such necessary corrective steps to address the results of the violation.
4. Indemnifying the persons who have suffered damages as a consequence of a violation that has
occurred, or obliging the violator to pay to the Authority’s account the gains realized as a consequence of such violation.
5. Suspending the trading in the Security.
6. Barring the violating person from acting as a broker, portfolio manager or investment adviser for such period of time as is necessary for the safety of the market and the protection of investors.
7. Seizing and executing on property.
8. Travel ban.
9. Barring from working with companies whose Securities are traded on the Exchange.
b. The Authority may, in addition to taking the actions provided for under paragraph (a) of this Article, request the Committee to impose a financial fine upon the persons responsible for an intentional violation of the provisions of this Law, its Implementing Regulations, the rules of the Authority and the regulations of the Exchange. As an alternative to the foregoing, the Board may impose a financial fine upon any person responsible for the violation of this Law, its Implementing Regulations, the rules of the Authority and the regulations of the Exchange. The fine that the Committee or the Board can impose shall not be less than SR
10,000 and shall not exceed SR 100,000 for each violation committed by the defendant.”
When I analyzed this article, I found that some of sanctions are inappropriate and very harsh. In sanction 4, the CMA collects defrauded investor money, and then it takes this money although it is not fair. Either the regulator has to change this article, or the CMA takes another way as what SEC does these days. They have fund distribution to bring back defrauded investor money after knowing them by making defrauded investors who deal in the same period report to the SEC or SEC itself look for them. In sanction 5, it mentions suspending the trade on the security. It is very broad because it does not give specific period. For example, the suspending period until the end of investigation, or suspending the trading for certain time, and it can be renew again from the court if there is necessity. Other investors might be hurt without any reason, so we need to protect them. Sanction 6 has to provide specific period. I also suggest the maximum of barring is five years, so we can achieve the public and private deterrence and get their experience again. In sanction 7, I really think it is a good idea, especially if there is some loss in the financial instrument so that we can take most or all money from a defendant. It is better if imposed after appointing a receivership, and then the receivership search about all properties. Any way, it is not written in the securities exchange 1934 act but can be found in other law. In sanction 8, I agree with this procedure because it helps the investors, and CMA to claim very quickly in its jurisdiction, so we keep the respondent under our eyes, and enforce him/her to come to the court, unlike here in the US; they do not have this sanction. However, it should be specific for such a period of time, or the respondent can travel if he/she has authorization from the committee, and give some guarantee (money) to let him/her come again in the next hearing. Further, not to stop the defendant business, so he/she can loss other money. Lastly, in sanction 9, the bar long bar should be specified for example five years as maximum.
Another important article is 57, talks about criminal sanction that the CRSD (Saudi court) might take if a person committed an insider crime. It says “In addition to the penalties and financial compensation provided for under this Law, the Committee may, based on a claim filed by the Authority, punish the persons who violate Articles 49 and 50 with imprisonment terms not exceeding five years.” This is article is similar to US laws; however, we will see later the congress increases the sanctions, which I recommend to be added to the Saudi law. Another article is 58 is similar to US law about the time of hearing the complaint. Lastly, Article 64, give the respondent another way to avoid the dispute in front of the court by reaching a settlement with CMA. It stated “A person charged with violation of Article 50 of this Law may avoid proceedings before the Committee by reaching an agreement with the Authority pursuant to which he agrees to pay the Authority a sum not exceeding three times the profits he has realized, or three times the losses he has averted by committing the violation Such arrangement shall be without prejudice to any compensation awardable as a result of the violation.”Moreover, it doesn’t mentioned reaching settlement without accepting or denying the allegation), so does the respondent has to commit the crime? Moreover, there is no need to release the decision in CMA website, unlike SEC, and if there is some negotiation when they release the valuation between parties. The article clarifies more about the benefit of settlement in later section.
In contrast, the securities exchange 1934 act, and SEC rules give some similar and other different sanctions. In rule 15 USC Sec 78u-1, part 2 Section. 21A mentioned “The amount of the penalty which may be imposed on the person who committed such violation shall be determined by the court in light of the facts and circumstances, but shall not exceed three times the profit gained or loss avoided as a result of such unlawful purchase, sale, or communication.” As it can be seen from what mentioned above that there is a difference between Saudi and US law, which the defendant can reach an agreement with the CMA and to pay triple profit gained or loss avoided, and that does not apply in front of the court, i.e. the same amount of money. On the one hand, the US court may impose three times of gained or loss avoided. I believe this is better because defendants can avoid going to the court and try to reach a settlement before court for lighter sanctions. Another part in the same rule pointed out the payment of penalty to the treasury, while in Saudi to CMA. I think it is better to pay to the treasury department so there is not any interest to impose harsh penalties if is not need it although the CMA has to find some sources to finance itself. Also, the collection of the penalty has the same procedures. Actually, I prefer the US system and we apply it in Saudi except in the financial market, so we Saudi has to unified its system or give the general prosecutor to have the same authority as the attorney of CMA.
Another section in 78u-1 gives the statute of limitation as the following “No action may be brought under this section more than 5 years after the date of the purchase or sale. This section shall not be construed to bar or limit in any manner any action by the Commission or the Attorney General under any other provision of this title, nor shall it bar or limit in any manner any action to recover penalties, or to seek any other order regarding penalties, imposed in an action commenced within 5 years of such transaction.” This article shows that no limitation for SEC or general prosecutor to raise any claim even after 5 years, and the only limitation is for private disputes. We can see that from cases here, while in Saudi is not clear because the law is new and not written explicitly. Therefore, I recommend adding new articles in Saudi law or professional would think about the limitation of five years as a general base, which mentioned in article 58 from CMA act. In part E, it gives 10% to anyone who affords information lead to a crime, and without judicial review except for government employee. I urge the Saudi regulator to add this article because it support anyone to afford information about any crime, and also reduce the CMA effort, time, and money. Lastly, a new section added to securities exchange 1934 act. It increases the criminal liability, and I recommend stricter sanctions to be added to Saudi law. This section 32(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78ff(a)) is amended--
(1) by striking "$100,000" and inserting "1,000,000";
(2) by striking "five years" and inserting "10 years";
(3) by striking "is an exchange" and inserting "is a person other than a natural person"; and
(4) by striking out "$500,000" and inserting "2,500,00". Another sanction is imposed and calculated by the court which offsetting disgorgements against liability. Because of Shariah law, Saudi can not apply this sanction. Shariah prohibits interest even for good reasons.
Important Precedents about insider trading:
There are thousands of cases about insider trading since applying the law. Here, we only will focus on four precedents makes some changes to the concept or the court disagreed with in applying 10b5. Thus, the SEC has put new rules after these precedents. First case is Securities and Exchange Commission v. Texas Gulf Sulphur Co (1968). The second circuit in court appeal gave two main concepts. One is that anyone who is in the possession of non public information is an insider. Thus, anyone in possession of material inside information is an ‘insider’ and must either disclose it to investing public, or, if he is disabled from disclosing it in order to protect corporate confidence, or he chooses not to do so, must abstain from trading in or recommending securities concerned while such inside information remains undisclosed. The other concept is about “Material inside information” which insider is required by rule of Securities and Exchange Commission to disclose before dealing in stock and securities of corporation includes not only information disclosing earnings and distributions of corporation but also those facts which affect probable future of corporation and those which may affect desire of investors to buy, sell, or hold corporation"s securities. Securities Exchange Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b).
Another case is Chigarella vs US (1980). Petitioner Vincent Chiarella worked in the composing room of Pandick Press (Pandick) a financial printer. An acquiring corporation hired Pandick to produce announcements of corporate takeover bids. Although the identities of the acquiring and target corporations were concealed, Chiarella was able to deduce the names of the target companies. Without disclosing his knowledge, Chiarella purchased stock in the target companies and sold the shares immediately after the takeover bids were made public. Chiarella realized slightly more than $30,000 in profits from his trading activities. The court held that a duty to disclose information arises if there is a relationship of trust and confidence between parties to the transaction. Chiarella had no such duty. He was not a corporate insider in the acquiring corporation and he did not receive confidential information from the target company. He also had no fiduciary relationship with the shareholders of the target company: he was not their agent; they placed no trust or confidence in him; indeed, they had no prior dealings with him. A duty to disclose under Section 10(b) does not arise from the mere possession of nonpublic market information. (The Oyez Project.1980).
Another case is Dirks vs SEC (1980). This person was a securities analyst. In this case, the Supreme Court held that Dirks, someone who gets non public information from an insider (or anyone else holding information in trust) is not liable under Rule 10b-5 for trading on the information unless the insider, by disclosing the information to the tippee, breached a fiduciary duty of loyalty to refrain from profiting on information entrusted to him, and the tippee knows or has reason to know of the breach of duty. There was no such breach of duty in Dirks:
Secrist tipped off Dirks to expose the fraud at Equity Funding, and not for any personal gain. So, we can see that the SEC after this case issued 10b5-2 which we talked about earlier in this article (westlaw.com).
Last case is between United States v. O"hagan ( 1997). It brings a new theory of liability called misappropriation theory. O"hagan was a lawyer in law firm, and knew that Dorsey"s client (his law firm client), Grand Metropolitan PLC, was considering placing a tender offer (a public offer to pay shareholders a premium for their stock at a specified time) to acquire a majority share in Pillsbury Company. Then, O"Hagan bought a large number of stock options without telling his firm and later sold his options for a $4.3 million profit. The Court held that a security-trader who fails to disclose personal profits gained from reliance on exclusive information is guilty of employing "a deceptive device...in connection with the purchase of a security." The security-trader knowingly abuses the duty owed toward the source of information, whether the source is the company he works for or not. (Dickie,McCamey).
Settlement Procedures in the US and how it can be applied in Saudi Law:
As we discussed earlier in this article, the Saudi CMA has the authority to reach a settlement with respondent as it stated in article sixty four. As a result, it is important to know the benefit of reaching settlement and avoid the dispute for respondent and his/her lawyer. Usually, the SEC does not start investigation unless there is solid and reasonable basis, so they try to look for sanction to impose. (managing regulatory investigation and examination for cause,Uhlenhop Paul, Wise Michael, 2001) As Mr Wise says “Making it Go Away as Painlessly as Possible”
The lawyer should be very smart and imaginative when he/she discuss any settlement on behalf of the defendant to get least sanction. The authority usually impose lighter sanction for mid and large size broker dealer or financial advisor firms because they try to conduct the business continuously without effect; however, they need to take further steps to prevent insider trading valuation for example again in the future.( Uhlenhop Paul, Wise Michael, 2001 pp 282) The settlement in Saudi Arabia not necessary to be public, unlike the US except the investigation.
There are two SEC rules talks about settlement. One is Rule 201.240 talks about when anyone notified a proceeding, he/she might seek for settlement any time. Also, it mentioned that the settlement should go to the interested department, and the most important division is enforcement. This division writes its recommendation to the board to accept or not the conditions of settlement agreement. The second rule is 202.5(f). It gives the SEC staff to provide settlement before the authorization of an enforcement action by the SEC. it is better to be in settlement discussion after a case brought for several reasons. One is the opportunity to deny the allegation when the charged are first filed and become public. Another reason, the defendant can see how strong the commission case toward him/her, so he/she can build more arguments about. Lastly, the SEC staff might softness their settlement conditions due to the weakness of their litigation when it becomes more apparent.(Money Manager Compliance, pp 76) . Thus, I think that there might be big chance in any case to reach a settlement without denying or admitting the allegation, which affords time, effort and expenses. There always some strategies for negotiation settlemtn by the lawyer or defendant. The first strategy is the defendant belief of powerful defense at least in some of the claims. Even though that he/she does not have very powerful defense, the defendant believes that litigation would afford better result than the staff’s proposed settlement. Third, the ability of defendant to go to court if there is not fair settlement. Of course, if there is chance for the lawyer in front of the staff, he/she should tell them that the violation was not with intention, or the defendant did not benefit from the violation or the defendant is ready to compensate any harmed investor, or the sanctions they ordered is too severe, or the SEC standard they apply is not clear. These strategies give the authority more pressure to reduce the sanction or remove it. Thus, the lawyer has to be very prepared if there were recent similar cases and argue the precedents. It gives the defendant a try to change the authority methodology in imposing the same sanction. Moreover, be sure to negotiate the language of settlement and not only charges. It really matters. Finally, get a clear commitment from the authority that they will not take further action after the settlement. (Money Managers Compliance, 2005 ,pp79-80).
In conclusion, this article discusses the insider trading crime in Saudi and US laws. The US experience can be added value to Saudi Arabia because the similarity of systems. We provide some rules that are not in Saudi and the most valuable precedents, which benefit the professional. Lastly, I focused on settlement procedures and strategies because it very helpful to reduce the time and effort either for lawyers, or CMA’ staff, or for CRSD.
References
1) Baker & McKenzie. Riyadh. Office locations. Retrieved on May 5 2009 from http://www.bakernet.com/BakerNet/Locations/Europe+Middle+East/Offices/Riyadh/default.htm
2) U.S Securities and Exchange Commission. 2006. Insider Trading: Information on Bounties. Retrieved on May 5 2009 from http://www.sec.gov/divisions/enforce/insider.htm.
3) U.S Securities and Exchange Commission. 2009. SEC Charges Wall Street Investment Banker and Seven Others in Widespread Insider Trading Scheme. Retrieved on May 5 2009 from http://www.sec.gov/news/press/2009/2009-99.htm
4) The Oyez Project, Chigarella v. United States , 445 U.S. 222 (1980).Retrived on May 6 2009.
Available at:http://oyez.org/cases/1970-1979/1979/1979_78_1202
5) http://lawschool.westlaw.com/DocForums/ViewSingleDocument.aspx?postingID=4033239&courseID=59341).
6) Dickie,McCame. The Broadening of Insider Trading Liability. Retrieved on May 6 2009 from http://www.dmclaw.com/documents/PUBS_29.pdf