Insider trading, money laundering and computer crime

• DOI: 10.10520/EJC73778
• Author: J.J. Henning,G.J. Ebersohn
• Published date: 01 January 2001
• Pages: 105-152
• Date: 01 January 2001

INSIDER TRADING, MONEY LAUNDERING AND

COMPUTER CRIME

JJHenning

Dean of the Faculty of Law; Director of the Centre for Business Law, Uni-

versity of the Free State.

GJEbersöhn

Researcher, Dean’s Office, Faculty of Law, University of the Free State.

1. Introduction

In this contribution we observe various risks to the South African

financial markets such as insider trading, money laundering and

computer crimes. While insider trading and money laundering, on

the other hand, pose a threat to financial markets in that they can

destroy investor confidence, computer crimes such as hacking, vi-

ruses and software piracy, on the other hand, inhibit electronic

commerce.

2. Insider trading

Insider trading occurs when an individual who possesses inside

information (also referred to as price sensitive information)

(a) through—

(i) being a director, employee or shareholder of an issuer

of securities or financial instruments to which the inside

information relates; or

(ii) having access to such information by virtue of his or

her employment, office or profession; or

(b) where such individual knows that the direct or indirect

source of the information was a person contemplated in

paragraph (a);1

deals in (or encourages or discourages or stops another person

from dealing in) securities or financial instruments on the basis of

unpublished price sensitive information.2“Price sensitive informa-

tion” means that if such information were made public, it would li-

kely have a material effect on the price or value of any securities

or financial instrument.3

105

1Act 135/1998, s 1 - “insider”.

2Act 135/1998, s 2; See Du Plessis 2000:9.

3See Act 135/1998, s 1 - “inside information”.

Some writers distinguish between corporation and market infor-

mation when it comes to insider trading. According to Osode, the

former includes news about research breakthroughs, establish-

ment of new plants, a significant discovery of mineral resources, a

rush of new orders or a potential merger, anyone of which can be

expected to cause a rise in the price of the corporation’s stock u-

pon public disclosure.4

Examples of market information are an impending tender offer at a

price higher than the current market price, a decision by the holder

of a large block of shares to liquidate her holdings, or even an im-

pending decision of a stock exchange to delist a company’s shares.5

Afew reasons why insider trading should be prohibited are:

Insider trading destroys both local and foreign investors’ confiden-

ce in the financial markets in that investors have no assurance —

a) that they are trading on equal footing;6and

b) that they will be protected against improper use of insider in-

formation.7

It should, at all relevant times, be kept in mind that the “securities

market is essentially the most important sector of the contemporary

capital market.”8For this reason, an atmosphere of “trust and confi-

dence in the securities market” is required.9Levitt maintains that:

As long as the rules of the game are fair to all, investors’

confidence will remain strong. But if there is a perception of

unfairness, there’ll be no investor confidence ... Trading ba-

sed on privilege access to information can demoralize in-

vestors and destabilize investment ... Trading on inside in-

formation — and giving early tips to other potential traders

— damages the entire structure of our markets, because it

deeply shakes the vital investor confidence.10

106

4Osode 1999:24.

5Osode 1999:24.

6Malan 1997:307; Van Zyl 1989:77. Du Plessis 2000:11 states that:

“The reality, however, is that international investors are not prepared to

invest in markets where the playing fields are not level and where the

local investors have an inside track with regard to inside information in

respect of economic indicators and financial market information”.

7Malan 1997:307.

8Osode 1999:29.

9Osode 1999:29.

10 Levitt 1998:355-356.

In the case of a director, insider trading also amounts to breach of

his fiduciary duties owed to his company. This, in turn, infringes

upon the confidence that shareholders (investors) have in the ma-

nagement of the company.

When a stockbroker is guilty of insider trading it often amounts to

“frontrunning”.11 Frontrunning threatens the integrity of the market

as well as the fiduciary relationship between him and his clients.12

Hence we come to the conclusion that the prohibition on insider

trading is based on the so-called “Inequality of legal access theo-

ry.”13 This theory maintains that nobody is allowed to act on any

“price-sensitive information which is legally beyond the reach of

the average investor”.14 15

Additionally, we may state that insider trading affects the integrity

of financial markets. The South African law does not and cannot

tolerate insider trading. The “little guy” trading on the Johannes-

burg Stock Exchange should have the same fair chance as the

“big guys”. Everyone deserves a fair chance when dealing on the

South African securities market. It is simply a matter of fairness. In

order for the South African markets to grow, investors must belie-

ve that the South African market is fair and that the law protects

them. Maintaining investor confidence is the key.

3. Money laundering

Money Laundering

refers in general to any process that obscures the illicit na-

ture or the existence, location or application of proceeds of

crime.16

The Internet made it possible to launder more money, much faster

and easier by shifting it between different accounts and even dif-

107

11 Malan 1997:312. Malan defines “frontrunning” as “wanneer ’n make-

laar weet dat ’n klient se opdrag geplaas is en dat dit die vermoë het

om die mark te beïnvloed en dan self op die mark handeldryf met die

bedoeling om homself te bevoordeel.”

12 Malan 1997:312.

13 Osode 1999:22.

14 Osode 1999:25.

15 A US court recently upheld the “misappropriation theory” as a sound

legal basis for prohibiting insider trading. Briefly put, this theory main-

tains that the use of information or property belonging to a company

to make gains on their own account, should be condemned. See

Levitt 1998:355.

16 De Koker 1999:15. See also De Koker 1997:18 and Itzikowitz 1999:89.