Insider trading is when a person has “inside” information about a public company and uses it to get an unfair and illegal advantage when trading stocks on a public market. 

For example, if you knew that the company was about to report a record loss in their quarterly financial update to shareholders, selling your shares in the company ahead of that update would be a breach of insider trading laws. 

As this misconduct in New Zealand is relatively rare, there can be some confusion around what the rules are. This article will set out:

  • what it means to be an ‘information insider’;
  • the definition of insider trading; and
  • what the penalties can be.

What Does It Mean To Be An ‘Information Insider’?

Insider trading laws in New Zealand are built around the concept of an ‘information insider’. If you qualify as an ‘information insider’, you can be liable for insider trading.

The definition of an information insider is relatively broad. The law in New Zealand defines an information insider as any person in possession of material information about a public company or other body that issues a financial product.

For example, information about shares that trade on a public market.

To qualify as an information insider for a company, the material information must not be generally available to the public. This is why the information is ‘inside’ information.

There is a lot of detail about what qualifies as material information under the law. The essence of the rule is that information that would move stock prices in either direction counts as material.

The hypothetical of where a company executive knew that the company was about to declare a huge financial loss is a good example of an event that would move stock prices. This qualifies that executive as an information insider. If an executive then sold her shares before the company announced the news publicly, this is likely insider trading.

What Is Defined As Insider Trading?

Information insiders cannot use their knowledge to gain financial or any other advantage. They also cannot help another person to gain a similar advantage. Specifically, an information insider is strictly prohibited from: 

  • trading stocks or derivatives of the company they have material information about;
  • directly or indirectly disclosing their material information to anyone else if the insider knows or should have known that that person will trade stocks or derivatives of the company (or talk to someone else who would); and
  • advising or encouraging another person to hold stocks or other interests in that company.

Trading the stocks of a company that you are an information insider of is enough to breach insider trading laws. There does not necessarily have to be a link between a particular decision to buy or sell a stock and the inside knowledge you possess as an insider. 

What Are The Penalties For Insider Trading?

Insider trading offences are managed by the Financial Markets Authority. Penalties can be extremely significant and scale depending on the magnitude of the infringement. The criminal penalties can include jail time of up to five years’ imprisonment. The maximum civil penalty that can be imposed is the highest amount out of the three following options:

  • the amount paid for the shares;
  • NZ$1 million for individuals; or
  • three times the gain made by the transaction or three times the loss avoided.

The Financial Markets Authority can also settle insider trading cases with the information insiders themselves.

As the possible consequences for this can be so serious, it is important for public companies to have appropriate policies. These policies should advise employees about insider trading. Specifically, that employees should be fully informed about the definition of insider trading. They should also understand the severity of the penalties if they engage in it themselves.

Key Takeaways

Insider trading is when an information insider uses the information they have about a particular public company to improper advantage. An information insider is a person in possession of ‘material information’ which would have a material impact on stock prices, in either direction. To qualify as an information insider for a given company, the material information they possess must not be generally available to the public. Insider trading is when that information insider either buys or sells shares themselves, or if they encourage or ‘tip’ another person into buying or selling those shares. The penalties for this can be extremely serious. If you want to know more about insider trading, contact LegalVision’s business and commercial lawyers on 0800 005 570, or complete the form on this page.

FAQs

How is an information insider defined?

An information insider is any person in possession of material information about a public company or other body that issues a financial product (such as shares that trade on a public market), where that information is not publicly available.

Can a company executive ‘let slip’ to a friend or family member that they should sell their stocks in that company, but not explain why?

No, this will be classified as insider trading, even if they do not actually divulge the information they hold about why the share price is likely to go down or up.

How much can the penalties be for insider trading?

It depends on the nature and extent of the insider trading, as the penalties can scale relative to the quantum of gain or loss. However, the criminal penalty can be up to five years’ imprisonment, and civil penalties can range to over NZ$1 million. 

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