“In this article, Maureen Bansah examines the mechanisms of insider trading as an economic crime, shedding light on its ethical and legal dimensions with a particular emphasis on Ghana’s regime. She explores various forms of insider trading and provides practical recommendations for businesses to prevent or minimise its occurrence. The article ultimately underscores the crucial role of ethical frameworks in protecting financial markets from the damaging effects of insider trading.”

I. Introduction

Imagine the scenario where you are the managing director of a thriving publicly listed company, with access to information that could significantly impact the company’s success. Suddenly, important news reaches your desk – the company’s upcoming earnings report is far better than anticipated and will likely cause the stock price to rise. What do you do? Some individuals find it hard to resist the temptation to use this privileged information for their benefit despite the legal and ethical challenges involved. This is the complex and risky world of insider trading, where the line between profit and crime is often blurred.

Insider trading, also known as insider dealing, is the practice of trading in a publicly listed company’s stocks or other securities by a person (insider) with material information about the company that is not yet in the public domain. The information must be significant enough to influence an investor’s decision to trade in stock and influence stock prices.

As a common white-collar crime, insider trading violates securities laws and undermines the principles of a fair and transparent market. Detailed rules on insider trading, including definition and scope, vary from country to country. For instance, some countries may take a narrow view of “insiders” to mean company executives or officials, while others may consider persons affiliated with company officials as insiders.

II. How does insider trading work?

The illicit practice of insider trading manifests in the following stages:

• Obtaining Information:Insiders such as company executives or employees access confidential information that could affect the company’s stock price. This information includes upcoming mergers or takeovers, financial reports, new product launches, changes in management or regulatory approvals.
• Making the Decision:Insiders leverage this confidential information to make informed decisions on whether to buy or sell stocks, giving them an unfair advantage in the market. This unfair advantage is a crucial reason why insider trading is usually considered unethical, as it distorts the level playing field that all investors should have.
• Stock trading:Insiders execute their decisions by buying or selling stocks through brokerage accounts or other alternative methods, profiting from the anticipated price changes. They might sometimes use friends, family, or offshore accounts to conceal their involvement.
• Profiting:Once the information becomes public and affects the stock price, insiders can sell their shares at a higher price for a profit or avoid losses before the stock price drops. In some jurisdictions like the USA, profit can be in the form of exchanging information for benefit – which could be a monetary benefit, reputational benefit or even as a gift to another.[1] For instance, a former financial analyst for Amazon, Brett Kennedy, was convicted of insider trading in 2017 for tipping a friend with information on Amazon’s first-quarter 2015 financial results before its announcement. The friend, who paid Brett $10,000 in exchange for the information, purchased Amazon stocks and sold them at huge profits once the announcement was made.[2]

III. What is the law on insider trading in Ghana?

In Ghana, the Securities Industry Act 2016 (Act 929), as amended by the Securities Industry (Amendment) Act 2021 (Act 1062), defines  “insider trading” as “the buying or selling of securities by a person who has access to material non-public information about the security.[3] It is worth noting that insider trading is considered a serious offence under the law.[4]

a. Section 153 of the same law provides specific prohibitions and exceptions in respect of insider trading as follows:

i. Insider trading by individuals

• The law prohibits individuals connected to a company within the last six months from trading its securities if they have non-public information that could impact stock price if disclosed to the public. Similarly, individuals connected to a company within the last six months are prohibited from trading the securities of any other company if they possess non-public information that could impact stock price and is related to transactions involving both companies.[5] A person is considered “connected” with a company if they are an officer of the company, a substantial shareholder, or hold a role that likely gives them access to confidential information about the company (based on business relationship, position as an officer of a major shareholder in the company).[6]
• Individuals with access to material non-public information but not restricted from trading in securities must still refrain from trading (i) where the information has been obtained from a party known to be prohibited from trading in those securities or (ii) where at the time of receiving the information, there was a pre-existing arrangement or connection with said party specifically for trading in securities.[7]
• The law also discourages proxy trading through others or information sharing. Thus, anyone subject to the above prohibitions cannot induce or arrange for another person to trade securities on their behalf. Additionally, they are barred from sharing this information with anyone if they know, or should reasonably know, that it will be used for securities transactions on any stock exchange, whether domestic or international.

ii. Insider trading by companies:

Since companies as separate legal entities have the right to own property and contract as natural persons, a company can also acquire the stock of another company. In doing so, a company risks committing the offence of insider trading. In Ghana, a company is prohibited from dealing in securities if the law prohibits an officer of that company from dealing in those securities.[8]

However, a company is allowed to trade even if one of its officers has insider information as long as the following conditions are met:

• the transaction decision was made by someone other than the officer,
• the company had safeguards to ensure that the insider information was not shared with the decision-maker and
• the insider information was not shared with or used by the person making the decision.[9]

Moreover, if the information was obtained during an officer’s official duties and is related to the company’s planned transactions with another company, the company can still trade.[10] These conditions ensure that the transaction is conducted fairly and free from any influence of confidential information.

iii. Broker-dealers and insider trading:

The rules on insider trading allow a licensed broker-dealer to trade securities on a stock exchange under certain conditions:

• the broker-dealer must trade on behalf of someone else (as an agent) and follow specific instructions from that person.
• the broker-dealer must not have given any advice to that person about trading similar securities of the company.
• the person the broker-dealer is trading for must not have any connection to the broker-dealer.

This prevents conflicts of interest and ensures the trade is independent of the influence of insider knowledge or relationships.[11]

In line with the Securities Industry (Conduct of Business) Guidelines 2020, market operators are mandated to uphold the highest standards of integrity and fairness while exercising due skill, care, and diligence in protecting the integrity of the capital market. Employees of these market operators, including brokers and dealers, are strictly prohibited from trading securities or helping others to trade when they have confidential information that could affect the price of securities if made public. This restriction covers a wide range of sensitive information, including details about companies, listed securities, market orders, unpublished research, or positions held by market participants. Moreover, market operators must keep all client and third-party information confidential, except when disclosure is allowed or required by law.

b. Mandatory disclosure rules on insider information

The Ghana Stock Exchange (“GSE”) Listing Rules require issuers to immediately disclose material information that is likely to affect the price of the securities significantly or likely to be considered relevant by a reasonable investor in determining his choice of action.[12]

Beyond the immediate disclosure obligations under the GSE Listing Rules, the Securities Industry Act further strengthens the regulatory framework with strict disclosure requirements regarding insider information. Section 33 of the Act grants the Securities and Exchange Commission (“SEC”) authority to require a broker-dealer to provide detailed information about any securities transaction when it deems it necessary to protect investors. This includes the identity of the person who executed the transaction or on whose behalf it was conducted, as well as any instructions given. Furthermore, the SEC may require anyone who has acquired, held, or disposed of securities to disclose whether these actions were taken on behalf of another party, along with the name of the person and the instructions they received. Additionally, the SEC may request a stock exchange to identify the members involved in these transactions.

c. Defence and Enforcement

Where someone is being prosecuted for trading with inside information, the person can plead a defence that the other party in the transaction knew, or ought to have known, about the information before the trade.[13].

An individual who violates the insider trading rules under the law commits an offence. Upon summary conviction, the offender may be liable to a fine of 1,000 to 2,500 penalty units[14], imprisonment for four to five years, or both a fine and imprisonment.[15]

Moreover, the SEC has the power to enforce laws in the securities industry, including provisions governing insider trading. If anyone violates a code, directive, guideline, or circular issued by the SEC, the SEC can suspend, restrict, cancel or impose conditions and terms on their license or reprimand or disqualify the licensee from operating in the capital market. They may also impose a fine between 50 and 20,000 penalty units or apply both actions if necessary.[16] Additionally, the SEC may impose other fines and take necessary actions to protect investors and uphold the integrity of the securities market.[17]

A notable innovation brought by a recent amendment to the Securities Industry Act is the inclusion of deferred prosecution agreements between the SEC and individuals accused of insider trading. This amendment vests the SEC with the authority to resolve a matter without pursuing criminal proceedings. A person who commits insider trading may voluntarily admit the wrongdoing and submit a written offer of compensation or restitution to the SEC. The agreement must be submitted to the Attorney-General for review to determine if the offer of compensation or restitution is satisfactory. If satisfactory, the Attorney-General will notify the SEC in writing to enforce the agreement. The SEC will treat the admission of guilt as a conviction. If the individual makes the payment as agreed within 14 days, no legal proceedings will be initiated against them.[18] Since its introduction, the SEC has not yet documented any deferred prosecution agreements related to insider trading.[19]

IV. What is the rationale for the prohibition against insider trading?

The rationale for prohibiting insider trading is based on ethical and legal principles. Restricting insider trading ensures that officers of listed companies prioritise the interests of the company and its shareholders rather than exploiting privileged information for personal gain. By preventing the misuse of non-public, material information for personal gain, such restrictions ensure that all market participants operate on an equitable footing with equal access to information in the capital market. Furthermore, the prohibition of insider trading serves as a critical safeguard against the erosion of trust in capital markets, which deter investor participation in the long run. Again, companies embroiled in insider trading scandals risk significant reputational damage, which can impact goodwill and stock prices. Such companies may also face severe financial and legal repercussions. Thus, insider trading restrictions are necessary to uphold fairness, transparency, and integrity in financial markets.

V. How can companies prevent insider trading?

To safeguard against the dangers of insider trading, listed companies must take a proactive and comprehensive approach. By implementing the following strategies, businesses can create a robust framework that not only prevents insider trading but also promotes a culture of compliance and integrity:

a. Enforce a strict insider trading policy.

A crucial first step is establishing and enforcing a robust insider trading policy. This policy must clearly outline the legal obligations of officers and employees concerning insider trading and the potential consequences of violations. It should provide a precise definition of insider trading, establish criteria for identifying insiders, and define the type of information that constitutes insider information. Additionally, the policy should specify the potential consequences of violations, including legal actions and internal disciplinary measures. Furthermore, the company must review and communicate this policy to employees and stakeholders. Scancom PLC (MTN Ghana) is a prime example of a Ghanaian company with a robust and comprehensive insider trading policy.

b. Voluntarily adopt insider lists and Chinese walls.

While Ghana has no legal requirement for insider lists or Chinese walls, companies can draw guidance and benefit from adopting best practices in other jurisdictions, such as the EU’s Market Abuse Regulation (MAR). By voluntarily creating and maintaining insider lists, companies can easily track individuals with access to sensitive, non-public information. These lists should include all relevant insider information and identify internal personnel and external stakeholders with access to this information. Additionally, implementing a Chinese wall (i.e., internal barriers designed to prevent the spread of insider information between different departments) can help to reduce the risk of insider trading within the company.

c. Conduct Routine Audits and Monitor Trading Activities:

Companies must conduct regular audits and monitor trading activities on an ongoing basis to identify and combat potential insider trading within their organisations. By employing advanced data analytics and monitoring tools, they can effectively detect and investigate any suspicious patterns to ensure that no potential insider trading activities go unnoticed. Early detection through comprehensive monitoring and data analysis is critical to safeguarding the integrity of the trading process and upholding fair practices within the company.

d. Establish a well-structured whistleblowing program.

Establishing a comprehensive whistleblowing program that empowers employees and other stakeholders to report insider trading without fear of retaliation is essential. This program may include a dedicated whistleblowing platform, such as IntegrityLog, that is easily accessible, user-friendly, and designed to protect the anonymity of whistleblowers. By creating a safe reporting environment, companies can guarantee that concerns about insider trading are brought to light and addressed promptly.

e. Provide comprehensive education and training.

Companies can significantly minimise the likelihood of violations by providing employees with the necessary knowledge and awareness to identify and avoid insider trading. This is done by conducting regular comprehensive training sessions for all employees, especially those in sensitive positions, so they can fully understand the rules and consequences of insider trading. The training should cover the legal framework, company policies, and real-world examples of insider trading cases.

VI. Conclusion

Insider trading exists in a dangerous space where the pursuit of profit can quickly cross into criminal territory. Successfully navigating this line requires a robust legal framework and commitment to ethical practices from all market participants. The absence of restrictions on insider trading could result in information asymmetry, leading to market distortions, decreased liquidity, and reduced investor participation, ultimately undermining the very foundations of modern financial markets. As stringent regulations and severe penalties demonstrate, the risks associated with insider trading far outweigh any potential benefits. Listed companies must, thus, show responsibility in preventing such activities to maintain investor trust and market fairness. It is also necessary for regulatory bodies to stay abreast of emerging trends and technologies to maintain fairness and market integrity. Ultimately, the vigilance of market operators and ethical commitment are crucial in ensuring that the financial markets remain a level playing field for all.

[1] Dirks v SEC, US 463 US 646 (1983)
[2] US Attorney’s Office, Former Amazon Financial Analyst sentenced to Prison for insider trading, https://www.justice.gov/usao-wdwa/pr/former-amazon-financial-analyst-sentenced-prison-insider-trading (last accessed 28 August, 2024)
[3] Section 216 of the Securities Industry Act, 2016 (Act 929)
[4] Section 74 of the Economic and Organised Crime Act, 2010 (Act 804)
[5] Section 153(1) & (2) of the Securities Industry Act, 2016 (Act 929)
[6] Section 153(8) of the Securities Industry Act, 2016 (Act 929)
[7] Section 153(3) of the Securities Industry Act, 2016 (Act 929)
[8] Section 153(5) of the Securities Industry Act, 2016 (Act 929)
[9] Section 153(6) of the Securities Industry Act, 2016 (Act 929)
[10] Section 153(6) & (7) of the Securities Industry Act, 2016 (Act 929)
[11] Section 153(9) of the Securities Industry Act, 2016 (Act 929)
[12] Section 54 of Ghana Stock Exchange Listing Rules
[13] Section 153(10) of Security Industry Act, 2016 (Act 929)
[14] The value of one penalty unit is GHS 12.00
[15] Section 154 of the Securities Industry Act, 2016 (Act 929)
[16] Section 209(4) of of the Securities Industry Act, 2016, as amended by the Securities Industry (Amendment) Act, 2016.
[17] Section 209(5) of the Securities Industry Act, 2016, as amended by the Securities Industry (Amendment) Act, 2016.
[18] Section 209 (6)-(11) of the Securities Industry Act, 2016, as amended by the Securities Industry (Amendment) Act, 2016.
[19] Staff Member on a no-name basis from the Securities Exchange Commission.

The author is a lawyer and academic. She can be contacted via email at [email protected]