Curbing Stock Market Abuse and Insider Dealings: A Shareholder’s Perspective
by Tolu Aderemi
November 2, 2017 | 1:01 am| | | Start Conversation
In the wake of the technical restriction imposed on the trade of shares of Oando Plc (‘Oando”) by the Nigerian Stock Exchange (‘NSE’) on the directive of the Securities and Exchange Commission (‘Commission’), publicly quoted companies must now recognize the power of its Shareholders and the fiduciary duty to be commercially prudent in any decision made on behalf of the company.
As reported on various electronic media platforms (including those of Oando Plc and SEC websites), the Commission, on October 18, 2017, issued a public notice stating amongst others that it had:
i) Issued a directive to the Nigerian Stock Exchange (NSE) for a full suspension in the trading of Oando shares for a period of forty-eight hours followed by a technical suspension until further directed; and
ii) Announced that a forensic audit into the affairs of the Company be conducted by a team of independent professional firms
In rebuttal, Oando is of the view that the SEC’s directives were illegal, invalid and calculated to prejudice the business of the Company. According to the company, and to safeguard the interests of its shareholders, had immediately taken steps to file an action against the SEC and the NSE. It (Oando) noted that on Monday, October 23, 2017, it Company obtained an ex-parte order (interim order of injunction) from the Federal High Court granting the following orders:
i) An order restraining the NSE and any other party working on their behalf from giving effect to the directive of the SEC to implement a technical suspension of the shares of the Company pending the hearing and determination of the motion for injunction and;
ii) An order restraining the SEC and any other parties claiming through or working on behalf of the Commission from conducting any forensic audit into the affairs of the Company pending the hearing and determination of the motion for injunction.
According to the SEC, its decision was predicated on petitions received from two of Oando’s shareholders; Messers Dahiru Mangal and Gabriele Volpi (through Mr. Volpi’s company, Ansbury Incorporated) over alleged ‘insider dealings’ and ‘manipulation of the company’s shareholding structure’ in breach of the Investments & Securities Act 2007 and the SEC Code of Corporate Governance for Public Companies.
As a Shareholder, it is important to note that, at this stage, no one is right or wrong until there is a formal/final court pronouncement on the actions/decisions of the Commission. However, it is important to note that Shareholders are neither interested in the ultimate decision of who was right or wrong but to securing its investment/ownership rights of the company. A Shareholder would also be interested in understanding what market abuse is and how it can be curbed in the operations of a company.
In 2005, Mark Anson, the Chief Executive Office of Hermes Pensions Management Limited, reiterated that:
“Share ownership embodies two important principles; first, the term shareowner reminds all interested parties-executives, Directors, Creditors, who is the ultimate owner of the company. Second, with the acknowledgment of the share ownership comes the obligation to continue to exercise ownership rights in a public company”.
The relationship between the owners and the managers of a company is therefore one which is a continuing engagement and one which the managers are expected to exercise good business judgments whenever it finds itself making decisions on behalf of the company. This duty demands a certain degree of prudence which a reasonably prudent person must abide by if found in a position to make such judgment.
As the matter is currently before the Federal High Court, further comments may not be permitted until there is a definite court pronouncement on the same. This article will therefore focus on curbing the menace of market abuse in the capital market.
The concept of “market abuse”
This covers two main categories of behavior in relation to investment markets; insider dealings (trading on the basis of information which is not publicly available) and market manipulation (distorting the market by various means). Whilst this is not a new concept, the last few decades have seen concerted efforts to protect the securities market from this form of behavior.
Price manipulation and Insider trading globally have been categorized into four phases namely: Stealth, Awareness, Liquidation, and Enlightenment phases.
The Stealth Phase: At this stage, insiders buy the stock but keep their total positions below the disclosure limit. The increase in position must not result in drastic and obvious price changes and has to be safe from attracting the attention of the Regulator or other market participants. Therefore, prices are closing higher daily but the closing price must not be significantly higher than its usual past price. The volume traded must also be close to the norm.
The Awareness Phase: At the earlier stage, more revelation of the dealings starts to emerge due to increase in market knowledge of inside information. The volume traded at this stage starts to rise above average. The gradual increase in prices will soon become more intense as investors re-balance their portfolios and short positions on the stock are bought back. Toward the end of this phase, there may be parabolic price rises as investors jump onto the bandwagon and the media may report on the rumors and the dramatic price increases.
The Liquidation Phase: As information regarding these dealings become more prevalent and inside information is leaked to a wider audience, the Regulators must wade in to ask questions. At this stage, the company may be forced to issue an official denial of the rumor(s) or confirm the event. With the new information, whether substantiated or rumored, analysts may revise their estimates and investors rebalance their portfolios.
The Enlightenment Phase: This is a very critical stage as any liquidation process may occasion a price crash. At this time, neutral or indecisive investors hold on tenaciously to their positions, hoping that the fall in the prices is a temporary hiatus. It is also at this stage that regulatory decisions are made; whether to recommend prosecution or a take-over of the company.
Control of Market Abuse
It is unethical for a director of a company or any insider to deal in a company’s shares having been seized of some development which will affect the price of the shares, and which other members or the general public may not be privy to. In such cases, it is important to have the under-listed techniques in place to curb the incidence of market abuse and engender market confidence. The techniques include:
The doctrine of Mandatory Disclosure: This is the oldest anti-insider trading technique introduced on the recommendation of the Cohen Committee of 1945 in the United Kingdom. This doctrine requires Directors and their family members to disclose dealings in the company’s shares on the philosophy that, if they know such dealings will be made public, these category of people are less likely to trade on the basis of inside information. The doctrine has been described as the “the best safeguard” against improper transactions by directors.
Share Trade Prohibition (by Insiders): This approach has proven a veritable approach in curbing market abuse. It prohibits share trading by potential insiders, irrespective of whether they are in possession of inside information or not. This approach was proposed sometimes in 1967 by the Jenkins Committee (UK) and the has since been replicated in Section 323 of the 1985 Companies Act as well as the Company Securities (Insider Dealing) Act 1985, which prohibits an individual connected with a company from trading or dealing on a recognized stock exchange, or through a dealer in securities of that company, if he is in possession of unpublished price-sensitive information concerning the company. In Nigeria, the Dealing Rules are operated by the Nigerian Stock Exchange (NSE) which is the ‘technical suspension’ of the shares of a company. Section 27 of the Investments and Securities Act grants SEC powers to suspend the trading in the shares of any listed company in the interest of the public. As has become obvious, there is often collaboration between the Stock Exchange and SEC in the use of the power of technical suspension.
The Common Law Approach: A third approach is to rely on the common law principles to deal with insider trading. Ordinarily at common law, directors and officers of a company had always been freely permitted to hold and deal in the shares of their company. The only sanction which the common law imposed was to make actionable the use of certain confidential information belonging to the company. However, if directors make use of information acquired as director for their personal advantage they would have breached their fiduciary duties to the company and be liable to account to it for any profits they had made, whether or not the company suffered loss. The duty is not owed to the directors or shareholders but to the company.
There is no doubt that the unethical practice of insider trading in company law is a world-wide phenomenon. The various efforts at eradicating it, which started under self-regulatory market codes, and the common law doctrine of disclosure have developed to the state where many countries including Nigeria have criminalized the practice in its various ramifications. Insider traders will not only pay fines, disgorge their unjust profits, they will also go to jail.
It must however be stated clearly that any allegation and consent punishment for market abuse must be meritorious and without any political interest(s) or interference. This is the only way market confidence can be restored.
The Consultants engaged by SEC to carry out the forensic investigation, though very creditable organizations must be above board and discharge this duty with utmost responsibility and objectivity. It must not be seen to be ‘working towards an answer’. Where necessary, it must ensure its reports also protect the rights of shareholders. In sum, the Committee must remember that its report will either deepen market activities or completely erode market confidence.
Tolu Aderemi is a Partner with the commercial law firm of Perchstone & Graeys, Lekki-Lagos.
Big Read |