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Why Your Business Should Steer Clear of Insider Trading

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The temptation to gain an unfair advantage can be compelling when trying to run a profitable business. However, insider trading is one avenue businesses must avoid as it has severe implications for the company, directors and employees involved. In New Zealand, engaging in insider trading is unethical and a serious criminal offence. This article explores insider trading and its consequences, emphasising why businesses in New Zealand should avoid it altogether.

What is Insider Trading?

Insider trading involves buying or selling securities in a publicly traded company based on material, non-public information. This information is typically unavailable to the general public and can significantly impact a company’s stock value.

In New Zealand, the Financial Markets Conduct Act 2013 (FMCA) explicitly prohibits insider trading, making it a criminal offence that can result in severe penalties.

New Zealand’s insider trading regulations revolve around the term ‘information insider’. An information insider, broadly defined by New Zealand law, encompasses anyone possessing material information about a public company or entity issuing financial products, such as publicly traded shares. Material information, in this context, refers to data not generally available to the public, making it ‘inside’ information. Likewise, information capable of influencing stock prices in either direction falls under ‘material’ information.

An Example

Company A’s Chief Financial Officer (CFO) collaborates with a team handling a new client. Their client discloses confidential information about an upcoming chatbot release, indicating potential skyrocketing stock market prices. The CFO and team members decide to purchase the client company’s stocks before the product launch, engaging in insider trading. This unethical behaviour, based on non-public positive earnings information, amounts to market manipulation. 

Legal repercussions can follow, including fines and imprisonment. It would also tarnish the CFO’s and team’s reputation, damage the company’s image, and erode investor trust. 

Why You Should Avoid Insider Trading

1. Regulatory Scrutiny

New Zealand’s regulatory authorities, including the Financial Markets Authority (FMA), actively monitor financial markets to detect and prevent insider trading.

The FMA has the authority to:

  • investigate suspicious trading activities;
  • access financial record; and
  • take legal action against those involved in insider trading.

With increased global cooperation among regulatory bodies, businesses engaging in cross-border transactions must be vigilant to comply with local and international regulations.

In particular, directors guilty of insider trading may face imprisonment and substantial fines. They may also be disqualified from acting as directors, jeopardising their professional reputation and future opportunities. Notably, company directors hold a position of trust and fiduciary duty to the company and its shareholders. Any involvement in insider trading not only violates these duties but also exposes directors to heightened legal consequences. 

2. Market Integrity and Investor trust 

Insider trading directly threatens the integrity of financial markets and erodes investor trust. When investors sense that the playing field is not level and certain individuals or entities have an unfair advantage, confidence in the market diminishes. This loss of trust can have far-reaching consequences, impacting a company’s ability to attract investors and raising questions about the fairness of the entire financial system. 

Again, if your company directors partake in insider training, they can further impact market integrity and investor trust. Their actions set the tone for the entire organisation. Any misconduct, especially related to insider trading, can have far-reaching consequences. The perception that directors are using privileged information for personal gain erodes investor confidence and undermines the principles of fair and transparent markets.

3. Impact on Company Culture

Engaging in insider trading can negatively impact a company’s internal culture. When employees witness unethical behaviour at the top levels of management, it can breed a culture of distrust and demoralisation. This, in turn, can lead to decreased productivity, increased turnover, and difficulties attracting and retaining top talent. A commitment to ethical business practices, on the other hand, fosters a positive workplace culture that promotes integrity and fairness.

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Key Takeaways 

There are legal and ethical reasons for New Zealand businesses to avoid insider trading. Beyond the immediate legal consequences, engaging in such practices can lead to reputational damage, loss of investor trust, and a damaging impact on company culture. Businesses can avoid legal troubles by prioritising ethical conduct, implementing stringent compliance measures, and fostering a culture of transparency. 

For more information, LegalVision’s experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on today on 0800 005 570 or visit our membership page.

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Helen Yu

Helen Yu

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