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A Discussion of Some Aspects of the Regimes for the Regulation of Insider Dealing in South Africa and the United States of America

Published online by Cambridge University Press:  11 August 2015

Herbert Kawadza
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Abstract

Global regulators acknowledge the negative economic impact linked to insider dealing and have devised diverse regulatory frameworks aimed at minimizing its prevalence. Although their strategies differ, policy-makers realise that, with the inevitable internationalization of securities markets, the probability of cross-border insider trading escalates. With a view to providing a platform for regulatory re-examination and reform, this article discusses the divergent approaches that the United States and South Africa have adopted to counter the challenge of pervasive insider dealing. A paradox manifested with the US experience is that, while its theoretical prohibition of insider dealing is widely criticized as inadequate and inconsistent, robust enforcement has nonetheless led to strong institutions and a superior financial markets regime. The article concludes that the attainment of safer financial markets does not depend on the mere existence of superior proscriptions. Rather, it is the effective supervision of the sector and robust enforcement of those laws that enhance deterrence and ensure compliance.

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Type
Research Article
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Journal of African Law , Volume 59 , Issue 2 , October 2015, pp. 380 - 394
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Copyright
Copyright © SOAS, University of London 2015 

INTRODUCTION

In the wake of the challenges made manifest in the 2007–09 financial crisis and the well-documented scandals that preceded it, an international agenda for financial regulators has been needed to remove unethical market conduct from the sector. This has culminated in a series of legislative changes aimed at transforming regulation and supervision of the sector.Footnote 1 Such targeted financial market re-regulation is amply justified, especially as the bulk of the post crisis diagnoses translated into an indictment of the entrenched supervisory and enforcement mechanisms.Footnote 2 South African efforts towards creating a new regulatory paradigm have been noticeable in, inter alia, the repeal of the Securities Services Act, No 36 of 2004 (SSA) and the introduction of a new framework governing market abuse through chapter X of the Financial Markets Act, No 19 of 2012 (the FMA). Likewise, with its regulator's once unassailable reputation having been tarnished by a catalogue of inauspicious events, US reaction has been evidenced by the enactment of the Dodd Frank Wall Street Reform and Consumer Protection Act (HR 4173) aimed at, among other objectives, the promotion of financial stability and the protection of consumers from abusive financial services practices.

This article focuses on and compares the different regulatory strategies that South Africa and the US have adopted in a bid to curtail conduct likely to hinder fairness and capital market development. This objective may give rise to two questions, the first being, why a comparative analysis? The reason is attributable to a few basic premises. With the prevalence of global integration and the interdependence of the financial sector comes the need for transparency in financial markets. Such an environment would be beneficial, for instance, to issuers wishing to access capital markets in different jurisdictions and wishing to explore and understand the regulatory approaches in the intended investment jurisdiction.Footnote 3 Equally, a comparison of the experiences of multiple jurisdictions can provide insights about which regulatory mechanisms could usefully be transferred to the other jurisdiction and which cannot or should not. Similarly, a comparative approach can be an invaluable tool in broadening the perspectives of emerging economies, such as South Africa, which are engaged in reforming their legal regimes and need regulatory models on which to craft those regimes.Footnote 4

A second question one might ask is why a comparison of US and South African regulatory approaches? Comparing these two jurisdictions is particularly interesting because of the inherent characteristics that shape them. More particularly, the US is chosen on account of its long history and extensive evolutionary processes; its experience is archetypal of how a more developed and sophisticated securities market has dealt with the pervasive abusive conduct in the financial sector.Footnote 5 South Africa is chosen, first because of the author's familiarity with its regulatory capital markets regime and, secondly, to prove that it is possible to attain the objective of engendering market cleanliness in a less sophisticated regulatory environment.

On this basis, the article attempts to understand the differences that characterize US and South African regulatory efforts to promote market efficiency, fairness and integrity, by focusing on a particular element of that process: the regulation of insider dealing. It contends that, due to its long history and evolutionary processes, the US experience stands out as a model of how a more developed and sophisticated securities market has dealt with the challenge of pervasive insider dealing. This article is also motivated by other pragmatic considerations, mainly that:

“Given the ambiguity and complexity of US law in the insider trading area, the Congress and the Securities and Exchange Commission may be advised to assess the regulatory framework in certain other countries and determine their feasibility of application to the US system. It may eventuate that key principles readily can be implemented from favored securities jurisdictions in order to enhance the clarity and efficiency of the US framework.”Footnote 6

A comparison of the two jurisdictions is of course an immense task. It would be impractical to attempt an exhaustive discussion of all the variances in the two approaches. As such, this is not intended to be a comprehensive review of these frameworks, rather it seeks to provide insight into selected key aspects of their legislative frameworks, their application and enforcement. The remainder of this article briefly discusses the insider dealing debate and then considers the major characteristic features of the insider dealing prohibition that differentiate the US and South African strategies, before drawing a conclusion.

DEFINING INSIDER TRADING

In general, insider dealing is defined as the making of a profit or avoiding of a loss by trading on the basis of material, privileged or non-public corporate information in organized securities markets.Footnote 7 While in some quarters prohibiting insider dealing is regarded as a needless exercise for want of a victim,Footnote 8 the prevalence of insider dealing has been widely accepted as a symptom of inefficient markets.Footnote 9 Proscription is based on the need to enhance the integrity of capital markets through information parity and enhanced availability of the efficient pricing of information. This serves to ensure that the sale and purchase of securities is a reflection of the market participants’ informed judgment, having had equal access to relevant information.Footnote 10 Much as that may be so, and despite both repeated calls for jurisdictions to craft robust regulatory and enforcement strategies and also the adoption of diverse and concerted approaches aimed at minimizing its occurrence,Footnote 11 controlling insider dealing has always proved to be a challenging pursuit.Footnote 12

To effect its purpose of creating cleaner financial markets in South Africa, section 78 of the FMA makes it unlawful, subject to certain defences, for an insiderFootnote 13 who knows that he is an insider knowingly to deal directly or indirectly on information that has not been made public.Footnote 14 This proscription extends to insiders who disclose such non-public information to other persons. An additional group captured by section 78 are agents who directly or indirectly deal for an insider with knowledge that the person for whom they are dealing is an insider. It is also an offence for such an insider to encourage or cause another person to deal or to discourage or stop another person from dealing in securities.

Similarly, conduct which is deemed to violate the financial markets is prohibited under section 10(b) of the US Securities Exchange Act of 1934 (the Exchange Act) which states:

“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange … (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.”

This section is buttressed by rule 10b-5 promulgated under section 10(b) of the Exchange Act whose provisions have been broadly construed to constitute the primary weapon against trading on the basis of material non-public information.Footnote 15 Rule 10b-5, provides:

“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”

A fundamental difference between the South African and US approaches to the regulation of insider dealing centres however on the definition of what constitutes the proscribed conduct. US Congress has never sought to define the nature of the insider trading prohibition and, as a consequence, the precise circumscription that characterizes the South African prohibition is not available in the US. Instead, the proscription on trading on the basis of non-public information has its foundation in the Securities and Exchange Commission (SEC) rule 10b-5 anti-fraud provision and Congress has left it to the judiciary and administrative bodies to construe the ambit of this rule.Footnote 16 Such an approach seems to be premised on, inter alia, arguments that crafting a definition would create interpretational loopholes and impede the free flow of information that stimulates market efficiency. Furthermore, seeing as the US judiciary has been grappling with insider dealing litigation for many years, the resultant large corpus of insider dealing judgments makes a statutory definition irrelevant.Footnote 17

By contrast, except for administrative sanctions handed down by South Africa's financial markets regulator, the Financial Services Board (FSB), through its Enforcement Committee, a common law character in South Africa's insider dealing jurisprudence is sparse, if not non-existent. In the absence of judicial involvement or common law direction, reliance is ordinarily placed on the explicit prohibition set forth in section 78(1)(a) of the FMA. Nonetheless, the purported benefits of sections 77 and 78 of the FMA over section 10(b) and rule 10b-5 in the US are watered down by criticism that, in an attempt to create clarity, the FMA has in fact inadvertently generated interpretive issues arising from the flawed definitions. In particular, in reference to the definitions of an “insider” and “inside information”, Jooste, in a critique of similar wording in the previous statute, argues that “[t]he definitions, which are interconnected, are, however…, ‘cumbersome and counter-intuitive’. They are in fact circular - to know whether information is ‘inside information’ one has to know who an ‘insider’ is; and to know who an ‘insider’ is, one has to know what ‘inside information’ is.”Footnote 18

It is further argued that the fact that conduct constituting insider dealing has been spelt out relatively well, and leaves no-one in any doubt as to the prohibited conduct, has an adverse effect of compounding the burden of proof dilemma. The fact that proving knowledge of both the inside information and the fact that one is an insider is an essential requirement for a conviction, may explain why South Africa is yet to attain an insider dealing conviction. It has also been postulated that the legislature's endeavours to supply an extensive list of what completes the offences end up being manipulated or taken advantage of by the skilled insider.Footnote 19 An additional problem with the wording of the prohibition relates to the lack of clarity as to what is considered information “which has not been made public” under section 77 of the FMA. A similar problem has been encountered in other jurisdictions whose statutes do not provide guidance or bring precision to such a classification.Footnote 20

Much as that may be so, it is argued that having a definition of some sort is associated with enforcement benefits, such as the predictability of both exoneration and liability.Footnote 21 Thus, unlike its South African counterpart, despite having proscribed insider dealing since 1961, the US regime still lacks the certainty which the relatively straightforward South African framework, even though flawed, provides. Such conceptual expansivenessFootnote 22 is arguably associated with the danger that “[w]ithout a statutory definition on the horizon, the courts will continue to muddle through the tortuous path of Rule 10b-5 liability for insider trading.”Footnote 23

FIDUCIARY DUTIES AND CONSTRUCTIVE INSIDERS

Although both regimes expressly outlaw any direct or indirect dealings in securities or financial instruments by any individual who has knowledge that he is dealing on inside information, remarkable differences nonetheless emerge regarding preconditions for liability. Generally, rule 14e-3, promulgated under section 14(e) of the Exchange Act, and section 78 of the FMA make it an offence for anyone to trade on the basis of material non-public information where they have knowledge that the information originated from an insider. However, two complementary theories have evolved from the interpretation of section 10(b) and rule 10b-5. Of these, the classical approach is predicated on the argument that no offence is committed in the absence of a fiduciary duty between the insider and the shareholders of the corporation. As such, outsiders who deal in securities while having no connection with that corporation are not affected. Furthermore, in cases of disclosure to third parties, no liability attaches unless the insider stands to benefit directly or indirectly from the disclosure.Footnote 24 This obviously presents complications.

Consider a case where someone hacks into an issuer's electronic information system and acquires relevant non-public information which he then passes to someone; if the insider did not breach the fiduciary duty for his own benefit, the absence of fiduciary duty would vitiate liability.Footnote 25 To assuage the possible gap and absurdity of a situation where only corporate insiders are targeted, the misappropriation theory and rule 10b5–2Footnote 26 emerged to outlaw “constructive insiders” from dealing on the basis of non-public information acquired from insiders.Footnote 27 In this case, even if no fiduciary duty exists between the outsider and the corporation, section 10(b) and rule 10b-5 are construed to impose the fiduciary duty not on the shareholders of the corporation per se but on the source of the confidential informationFootnote 28 (constructive fraud).Footnote 29

The South African approach is less cumbersome; considerations such as fiduciary connection or the mechanism of acquiring the non-public information or the deception on the part of an outsider are irrelevant. Merely contravening the insider dealing prohibition under section 78 of the FMA is sufficient to trigger the FSB's administrative sanction of up to R1 million or a fine equivalent to the profit that the person, such other person or such insider, as the case may be, made or would have made if he or she had sold the securities at any stage, or a fine equivalent to the loss avoided through such dealing.

TIPPERS AND TIPPEES

While both the US and South African insider dealing regimes recognize that many people who deal on the basis of inside information are not always themselves insiders, there is a sharp difference in the way liability attaches in cases where some-one trades on information emanating from a secondary insider (tippee). Likewise, differences exist in the liability of the primary insider (tipper) who discloses the information which is acted upon.

The US approach attaches no liability unless it is shown that the insider breached a fiduciary duty to the shareholders and disclosure of the information was motivated by a need to secure a personal gain; further, the tippee need not be aware of that personal benefit.Footnote 30 However, upon becoming aware, the tippee is obliged either to disclose the information or abstain from trading. What constitutes personal advantage has been broadly interpreted to include both pecuniary and intangible advantages, such as reputational enhancement,Footnote 31 creating or maintaining a useful networking contact,Footnote 32 a giftFootnote 33 or merely the prospect of financial or non-financial benefits.Footnote 34 Whether an insider personally benefited from divulging specific information is a factual, and yet potentially uncertain, considerationFootnote 35 which “will not always be easy for courts”Footnote 36 to decipher. However, if the disclosure objective was not spurred by personal gain, then the tippee would not assume a derived fiduciary duty and hence will not be liable if he trades on the basis of the information.

The South African proscription is clearly not concerned with such considerations. Section 78(4)(a) of the FMA simply provides that “[a]n insider who knows that he or she has inside information and who discloses the inside information to another person, commits an offence.”Footnote 37

A common feature in both jurisdictions is therefore that the tipper and tippee can be subjected to liability. However, under the FMA and contrary to the US requirement, whether an insider is liable does not depend on the secondary insider actually trading on that information; neither is there a precondition that the insider have a motive to benefit personally from the disclosure. Instead, under section 78(4), liability is premised purely on knowing communication of non-public information to another. Likewise the tippee's liability is not derived from the insider-tipper being in breach of a fiduciary duty or having a motive to benefit from such disclosure. Rather, by obtaining information from an insider with knowledge that the direct or indirect source of that information is an insider, the tippee automatically becomes an insider by operation of section 77 of the FMA. Furthermore, by dealing “directly or indirectly or through an agent for his or her own account”, that person commits an offence under section 78 of the same act and the motive behind the disclosure by the insider is irrelevant. The knowledge requirement in both the USFootnote 38 and South Africa that the tippee knew that the information came from a corporate insider) is however associated with problems in cases of secondary insidersFootnote 39 or where information came indirectly from the primary insider through a series of information transmissions. Likewise, proving subjective knowledge of the fact that the secondary insider had the necessary knowledge would be problematic asFootnote 40 it requires the “fact-finder to enter the mind of the accused insider trader or tipper to draw some kind of inference … that is laden with difficulty”.Footnote 41 However, by covering instances where the tippee had reason to know or ought to have known,Footnote 42 the US approach seems to offer an easier route round the problem. Such a broad construction is sadly not available with the South African approach.Footnote 43

ENFORCEMENT

Both the US and South African regulators have a wide array of sanctions for insider dealing at their disposal. Whereas the US has been extensively exploiting all of them (administrative, civil and criminal), for South Africa the most preferred enforcement tool has been the administrative option under section 82 of the FMA.Footnote 44 Owing to evidentiary requirements, litigation costs and the delays associated with civil actions, among other obstacles, no civil case has been pursued to final judgment in the South African courts and the judiciary has only been involved in rubber-stamping settlements reached out of court.Footnote 45 Such challenges make the FSB's shift towards administrative sanctions appropriate. As such, section 82 provides that the maximum penalty for contravening the insider trading prohibition is an administrative sanction not exceeding the equivalent of the profit that the insider, as defined in section 77, made or would have made if he or she had sold the securities, or the loss avoided through such dealing. Furthermore, the insider may be liable to pay an amount of up to R1 million. Besides administrative penalties, section 109 of the FMA makes such a person liable on conviction to a fine not exceeding R50 million or to imprisonment for a period not exceeding ten years, or both. For want of insider dealing prosecutions in South Africa, such stiff criminal penalties are yet to be imposed.

By repealing the previous provisionFootnote 46 and pronouncing the insider dealing violation to be subject to the FSB's administrative processes, section 82 of the FMA has elevated South Africa's regulator to a similar status of that of the SEC as the primary enforcement agent in market misconduct actions. However, whereas the US has managed to create a visible presence in criminal insider dealing prosecutions, this has not been the case in South Africa. For instance, compared to previous years, the US enforcement regime has seen a sharp increase in insider dealing actions against individuals and entities.Footnote 47 By contrast, notwithstanding the clarity and comprehensive nature of its prohibition, South Africa is yet to arraign anyone on a charge of contravening the insider dealing prohibition, and as such is yet to attain a conviction and set a precedent.Footnote 48

Furthermore, compared to South Africa, the US cherishes a largely unforgiving criminal enforcement model.Footnote 49 Following the enactment of the Insider Trading Sanctions Act in 1984, there was a ten-fold increase from $10,000 to $100,000 in criminal penalties. Furthermore, the Insider Trading and Securities Fraud Enforcement Act 1988 increased the maximum term of imprisonment from five to ten years and likewise, under the Sarbanes-Oxley Act of 2002, criminal penalties for both corporations and individuals saw a remarkable increase.Footnote 50 The attainment of convictions is arguably eased by the relatively less stringent evidentiary requirements which allow courts to admit circumstantial evidence, subject to stipulated admissibility criteria. Such evidence has been said to be as appropriate and to have as much probative value as direct evidence.Footnote 51 In addition, the well-developed and incentivized whistle-blowing tradition in the US significantly accounts for the large volume of cases reported to the SEC and hence complements its investigative and surveillance efforts.Footnote 52 In addition, strategies such as informants’ bounty programmes, effective surveillance, capable personnel and the sound allocation of resources, endow the SEC with robust enforcement machinery. These strategies are further reinforced by a superior judicial culture that favours comparatively rigorous sanctions stipulated in sentencing guidelines and which are pursued with an efficient prosecutorial zeal.Footnote 53 For those reasons, and in comparison, the US regulatory framework is better equipped than its South African counterpart and has accordingly managed to craft and maintain an effective enforcement strategy that other countries have thus far failed to achieve.Footnote 54

The irony however is that, despite such plaudits, the US approach is not perfect. Given its longstanding history in regulating financial markets, one would expect the US regulatory environment for insider dealing to be faultless. It is however far from ideal and scholars have roundly slated the “astonishingly dysfunctional nature of the current insider trading regime”.Footnote 55 Additionally, the US approach of regulation by enforcement, where its insider trading law has developed on a case-by-case basis through judicial pronouncements, means that the process amounts to work in progressFootnote 56 and “the federal law of insider and outsider trading remains in an unacceptable state of flux”.Footnote 57 Inconsistencies built around unique and highly complex concepts focusing on the fiduciary duty, misappropriation and financial benefit aimed at determining the propriety of transactions have been said to portray an “erratic treatment of insider trading law that ill serves the investing public”.Footnote 58 For those reasons the US model is far from ideal and “is not one to be emulated”.Footnote 59 It is arguably this indictment on the US and to an extent the South African experiences which give credence to the assertion that insider trading law is notoriously difficult to articulate and understand, and even more difficult to apply.Footnote 60

CONCLUDING REMARKS

This article has attempted to consider some of the key elements that differentiate the frameworks governing insider dealing in the US and South Africa. This endeavour has been necessitated by the growing interconnectedness of financial markets; what has emerged is that, even though the US and South Africa seek to pursue a common purpose of eliminating insider dealing, their approaches are crucially distinct and relatively flawed. In spite of the highlighted imperfections, both countries have arguably managed to attain the objective of promoting and protecting market efficiency through market integrity by minimizing insider dealing. Given the US's long tradition and rich experience honed through decades of insider dealing litigation, it is fair to suggest that South Africa could learn from its counterpart's insider trading regulations and enforcement strategies.

Footnotes

1 See generally N Véron “Financial reform after the crisis: An early assessment” (2012), available at: <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1986922> (last accessed 21 July 2013); M Kawai and ES Prasad Financial Market Regulation and Reforms in Emerging Markets (2011, Brookings Institution Press and Asian Development Bank Institute) at 2–27; Botha, E and Makina, D “Financial regulation and supervision: Theory and practice in South Africa” (2011) 10/11International Business & Economics Research Journal 27; Prentice, RA “Permanently reviving the temporary insider” (2011) 36/2The Journal of Corporation Law 343; M Merlin “Financial supervision in Europe after the crisis” in M Balling, F Lierman, F Van den Spiegel, R Ayadi and DT Llewellyn (eds) New Paradigms in Banking, Financial Markets and Regulation? (2012, SUERF) 13, available at: <http://www.researchgate.net/profile/Donato_Masciandaro/publication/254410959_New_Paradigms_in_Banking_Financial_Markets_and_Regulation/links/00b4953c6976111804000000.pdf#page=17> (last accessed 22 June 2014).

2 See generally E Avgouleas Governance of Global Financial Markets: The Law, the Economics, and the Politics (2012, Cambridge University Press); E Wymeersch, KJ Hopt and G Ferrarini Financial Regulation and Supervision: A Post-Crisis Analysis (2012, Oxford University Press); N Moloney and  JG Hill The Regulatory Aftermath of the Global Financial Crisis (2012, Cambridge University Press) at 1–52; A Carvajal and JA Elliott “The challenge of enforcement in securities markets: Mission impossible?” (2009), available at: <http://www.imf.org/external/pubs/cat/longres.aspx?sk=23140.0> (last accessed 29 July 2013); US Treasury “Financial regulatory reform: A new foundation: Rebuilding financial regulation and supervision” (2009), available at: <http://www.treasury.gov/initiatives/Documents/FinalReport_web.pdf> (last accessed 31 July 2013).

3 This has been an important factor, for instance in comparing risk management practices and regulatory capital across different countries; see Basel Committee on Banking Supervision “Risk management practices and regulatory capital: Cross-sectoral comparison” (November 2001), available at: <http://www.bis.org/publ/joint04.pdf> (last accessed 4 August 2013).

4 Emerging economies have generally sought the examples of their more developed counterparts and these have generally imposed great influence on the outcomes of the legislation enacted. For instance, scholars argue that, as far back as 1988, the US government has been influential in persuading foreign jurisdictions to craft laws and put in place structures aimed at restricting insider dealing; see for example Houle, MJ “Survey of national legislation regulating insider trading” (1998) 9 Michigan Yearbook of International Legal Studies 209; see also MA Glendon, PG Carozza and CB Picker Comparative Legal Traditions: Text, Materials and Cases on Western Law (3rd ed, 2007, West); Picker, CB “International law's mixed heritage: A common / civil law jurisdiction” (2008) 41 Vanderbilt Journal of Transnational Law 1083.

5 See for instance K Franklin “US v UK insider trading laws: Who is the top dog?” (21 February 2013), available at: <http://ssrn.com/abstract=2308356> (last accessed 4 August 2013); SM Bainbridge “An overview of insider trading law and policy: An introduction to the Insider Trading Research Handbook 2” (4 September 2012), available at: <http://ssrn.com/abstract=2141457> (last accessed 5 August 2013); Mindful Money “A brief history of insider trading” (14 October 2011), available at: <http://www.mindfulmoney.co.uk/7850/economic-impact/a-brief-history-of-insider-trading.html> (last accessed 4  August 2013); American Experience “Timeline: A selected Wall Street chronology” (PBS IPTV), available at: <http://www.pbs.org/wgbh/americanexperience/features/timeline/crash/1/> (last accessed 4 August 2013).

6 MI Steinberg International Securities Law: A Contemporary and Comparative Analysis (1999, Kluwer Law International) at 2.

7 See generally SM Bainbridge “The law and economics of insider trading: A comprehensive primer” (February 2001), available at: <http://papers.ssrn.com/paper.taf?abstract_id=261277> (last accessed 7 August 2013); Bhattacharya, U and Daouk, H “The world price of insider trading” (2002) 57Journal of Finance 75; K Alexander “The law of insider dealing: A tale of two jurisdictions”, available at: <http://www.rwi.uzh.ch/lehreforschung/alphabetisch/alexander/person/publikationen/2013TheLawofInsiderDealingATaleofTwoJurisdictions.pdf> (last accessed 22 June 2015); E Avgouleas The Mechanics and Regulation of Market Abuse (2005, Oxford University Press) at 11–14; Salbu, SR “A legal and economic analysis of insider trading: Establishing an appropriate sphere of regulation” (1989) 8/2Business and Professional Ethics Journal 3; Cox, JD “An outsider's perspective of insider trading regulation in Australia” (1990) 12/2–3The Sydney Law Review 455; K Alexander “Insider dealing and market abuse: The Financial Services and Markets Act 2000” (2000, ESRC Centre for Business Research, University of Cambridge working paper 222); Haft, RJ “The effect of insider trading rules on the internal efficiency of the large corporation” (1982) 80 Michigan Law Review 1051.

8 See for example McVea, H “What's wrong with insider dealing?” (1995) 13/3Legal Studies 390. Other arguments proffered in favour of insider trading are to the effect that it is a form of executive compensation for entrepreneurial efforts and a way of increasing a corporation's internal efficiency. See H Manne Insider Trading and the Stock Market (1966, The Free Press); and Manne, H “In defense of insider trading” (1966) 44/b Harvard Business Review 113. Furthermore, Manne posits that corporate information is property that is owned by the corporate organization. As such, property owners have the prerogative to deal with that property in any way they deem necessary. See R Nozick Anarchy, State and Utopia (1974, Basic Books) at 54. For a short overview of the debate on the pros and cons of insider dealing, see generally McGee, RW “Analyzing insider trading from the perspectives of utilitarian ethics and rights theory” (2009) Journal of Business Ethics 1.

9 The endorsement of the prohibition by the International Organisation of Securities Commissions (IOSCO) is a manifestation of the wider recognition of the adverse economic effects of insider dealing. See IOSCO “Objectives and principles of securities regulation” (2001) at 18, para 9.3. Likewise, through the implementation of the Insider Dealing and Manipulation Directive (directive 2003/6/EC of the European Parliament and Council, 28 January 2003), European Union countries have collectively condemned insider dealing and other forms of manipulative conduct in the financial markets.

10 For further discussion of the rationale for the prohibition of such conduct, see for example: Steinberg International Securities Law, above at note 6; Alexander “The law of insider dealing”, above at note 7; Avgouleas The Mechanics and Regulation of Market Abuse, above at note 7 at 11–14; Salbu “A legal and economic analysis”, above at note 7; Cox “An outsider's perspective”, above at note 7.

11 IOSCO “Objectives and principles”, above at note 9 at 18, para 9.3.

12 See generally Alexander “Insider dealing and market abuse”, above at note 7; Opiyo, E “Effects of corporate governance on insider trading: A case of listed companies on Nairobi securities exchange” (2013) 3/10Prime Journal of Business Administration and Management 1202; Tomasic, R “Casino capitalism? Insider trading in Australia” (1991) Australian Institute of Criminology 115.

13 According to sec 77, an “‘insider’ means a person who has inside information - (a) through - (i) being a director, employee or shareholder of an issuer of securities listed on a regulated market to which the inside information relates; or (ii) having access to such information by virtue of employment, office or profession; or (b) where such person knows that the direct or indirect source of the information was a person contemplated in paragraph (a)”.

14 Further, under sec 77 “‘inside information’ means specific or precise information, which has not been made public and which - (a) is obtained or learned as an insider; and (b) if it were made public, would be likely to have a material effect on the price or value of any security listed on a regulated market”.

15 See for example Humke, JJ “The misappropriation theory of insider trading: Outside the lines of section 10(b)” (1997) 3/13Marquette Law Review 819; Sullivan, T “We're still against fraud, aren't we? United States v O'Hagan: Trimming the oak in the wrong” (1997) 71/1St John's Law Review 197; Nelson, AR “Extending outsider trading liability to thieves” (2012) 80 Fordham Law Review 2157; Bainbridge, SM “Incorporating state law fiduciary duties into the federal insider trading prohibition” (1995) 52 Washington and Lee Law Review 1189; O'Connor, MA “Toward a more efficient deterrence of insider trading: The repeal of section 16(b)” (1989) 58 Fordham Law Review 309.

16 For a discussion of this “catchall” approach, see for example JD Cox and RW Hillman Securities Regulation (5th ed, 2010, Aspen Publishers) at 879–80; Swanson, CB “Insider trading madness: Rule 10b5–1 and the death of scienter” (2003) 52 University of Kansas Law Review 147; Finnell, LJ “States v Carpenter: Second circuit overextends the misappropriation theory of criminal liability under rule 10b-5 comment” (1987) 12 Delaware Journal of Corporate Law 60; SM Bainbridge “An overview of US insider trading law: Lessons for the EU?”, available at: <http://compliance.knowledgeplatform.com/Files/Attachments/c25a7c8d-e8be-47f4-9876-dc4aaf2d8a5aOverview%20of%20US%20Insider%20Trading%20Law.pdf> (last accessed 19 August 2013).

17 See generally Salbu, R “Regulation of insider trading in a global market place: A uniform statutory approach” (1992b) 66 Tulane Law Review 837; Junewicz, JJ “Insider trading act is needed, but without defining the term” (1984) National Law Journal 25. Early attempts at interpreting those provisions were made in In The Matter of Cady, Roberts & Co 40 SEC 907 (1961) and later expanded in SEC v Texas Gulf Sulphur Co 401F.2d 833 (2nd cir 1968).

18 Jooste, R “Critique of the insider trading provisions of the 2004 Securities Services Act” (2006) 123/3South African Law Journal 437 at 438.

19 See Jooste ibid; see also Van Zyl, F “South African insider trading regulation and enforcement” (1994) 15/3Company Law 92; JRL Milton South African Criminal Law and Procedure III: Statutory Offences (2nd ed, 1988, Juta Law) at 10.

20 Krause, H “The German Securities Trading Act (1994): A ban on insider trading and an issuer's affirmative duty to disclose material non-public information” (1996) 30 International Law 555. This contrasts with sec 1002B(2) of the Australian Corporations Law which sets forth that information is generally available if “(a) it consists of readily observable matter; or (b) without limiting the generality of paragraph (a), both the following subparagraphs apply: (i) it has been made known in a manner that would, or would be likely to, bring it to the attention of persons who commonly invest in securities of bodies corporate of a kind whose price or value might be affected by the information; and (ii) since it was so made known, a reasonable period for it to be disseminated among such persons has elapsed.”

21 Salbu “Regulation of insider trading”, above at note 17; Hatch, JJ “Logical inconsistencies in the SEC's enforcement of insider trading: Guidelines for a definition” (1987) 44 Washington and Lee Law Review 935.

22 Hazen, TL “Defining illegal insider trading lessons from the European Community Directive on Insider Trading” (1992) 55 Law and Contemporary Problems 231; Cady, Roberts & Co, above at note 17.

23 Hazen, TL “Identifying the duty prohibiting outsider trading on material non-public information” (2010) 61 Hastings Law Journal 881 at 889.

24 For a comprehensive legal analysis of the US approach, see US v O'Hagan 521 US 642 at 655 (1997); SEC v Adler 137 F.3d at 1337; United States v Smith 155 F.3d at 1067; SM Bainbridge “An overview of insider trading law and policy: An introduction to the insider trading research handbook” (4 September 2012), available at: <http://ssrn.com/abstract=2141457> (last accessed 1 September 2013); Bainbridge, SM “Incorporating state law fiduciary duties into the federal insider trading prohibition” (1995) 52 Washington and Lee Law Review 1189; Lobb, J “SEC rule 14e-3 in the wake of United States v O'Hagan: Proper prophylactic scope and the future of warehousing” (1999) 40 William & Mary Law Review 1853; Prakash, S “Our dysfunctional insider trading regime” (1999) 99/6Columbia Law Review 1491.

25 See generally Salbu, SR “Noninformational tippee trading, and abstention from trading: An analysis of gaps in the insider trading laws” (1993) 68 Washington Law Review 307; Aldave, B “The misappropriation theory: Carpenter and its aftermath” (1988) 49 Ohio State Law Journal 373; O'Hagan, id.

26 See Securities Act Release No 33-7881 (“Selective disclosure and insider trading”), Exchange Act Release No 34-43154 and Investment Company Act Release No IC- 24599, 65 Fed Reg 51716-01 (15 August 2000). These are rules issued by the SEC, the aim of which is to provide guidance relating to the disclosure of material information (with the objective of promoting the full and fair disclosure of information by issuers), as well as to clarify and enhance existing prohibitions against insider trading.

27 Macey, J “Getting the word out about fraud: A theoretical analysis of whistleblowing and insider trading” (2007) 105 Michigan Law Review 1899; Smith, DG “The critical resource theory of fiduciary duty” (2002) 55 Vanderbilt  Law Review 1399; SEC v Lund 570 F Supp 1397 (CD Cal 1983); Dirks v SEC 463 US 646 at 659 (1983). Under certain circumstances, not all of a corporation's agents are employees but it is possible that people like underwriters, accountants, lawyers or consultants may come across privileged information in the course of  their temporary association with the organization. For that reason they are deemed to be constructive insiders and are bound by the classical insider dealing prohibition.

28 O'Hagan, above at note 24 at 655 underscores the fact that, in the absence of deception, mere breach of fiduciary duties does not form the basis of liability; that is simply not enough for misappropriation under rule 10b-5. The rationale is that a misappropriator could breach a duty owed to the source of information and yet not deceive anyone. See also Santa Fe Industries, Inc v Green 430 US 462 (1977). For a comprehensive discussion, see generally Prakash “Our dysfunctional insider trading regime” above at note 24 at 1510.

29 United States v Newman 664 F.2d 12 (1981); US v O'Hagan, ibid.

30 Dirks, above at note 27; United States v Newman, 12 Cr 121 (RJS) (SDNY 7 February 2012); SEC v Obus 693 F.3d 276 (2nd cir 2012).

31 SEC v Maxwell 341 F Supp 2d 941 (SD Ohio 2004).

32 SEC v Yun 327 F.3d 1263 (11th cir 2003).

33 SEC v Blackman 2000 WL 868770.

34 See generally Langevoort, DC “‘Fine distinctions’ in the contemporary law of insider trading” (2013) Columbia Business Law Review 429; Hiler, BA “Dirks v SEC: A study in cause and effect” (1984) 43 Maryland Law Review 292; Menghini, MD “Tippee liability under rule 10b-5 predicated on whether tipper tips to secure personal benefit, Dirks v SEC 103 S Ct 3255 (1983)” (1984) 62 Washington University Law Quarterly 165; Ebaugh, NS “Insider trading liability for tippers and tippees: A call for the consistent application of the personal benefit test” (2003) 39/2Texas Journal of Business Law 264.

35 See generally SM Himes “The amorphous ‘personal benefit’ requirement for insider trading tipping liability securities” (2013), available at: <http://www.ballardspahr.com/alertspublications/articles/~/media/Files/Articles/2013-10-22-Amorphous-Personal-Benefit-Requirement.ashx> (last accessed 20 October 2013).

36 Dirks, above at note 27 at 664.

37 Under sec 78(40)(a) of the FMA, such an insider would nonetheless escape liability if he can prove “on a balance of probabilities that he or she disclosed the inside information because it was necessary to do so for the purpose of the proper performance of the functions of his or her employment, office or profession in circumstances unrelated to dealing in any security listed on a regulated market and that he or she at the same time disclosed that the information was inside information”.

38 SEC v Obus docket no 10-4749 (2nd cir, decided 6 September 2012) (Obus II); DC Langevoort “What were they thinking? Insider trading and the scienter requirement” (2012), available at: <http://scholarship.law.georgetown.edu/facpub/989> (last accessed 21 October 2013).

39 See definition of “inside information” in the FMA, sec 77.

40 Jooste “Critique of the insider trading provisions”, above at note 18 at 443; Blackman, MS, Jooste, RD and Everingham, GK “Commentary on the Companies Act” (2001) 1 Revision Service 1 at 5–394; R Tomasic, S Bottomley and R McQueen Corporations Law in Australia (2nd ed, 2002, Federation Press) at 20.9.8.

41 Langevoort “What were they thinking?”, above at note 38 at 5.

42 Obus II, above at note 38.

43 Sec 78 simply refers to “an insider who knows that he or she has inside information …”

44 Until the enactment of the FMA, the FSB heavily relied on sec 78 of the SSA to “withdraw, abandon or compromise” any civil proceedings initiated under the civil process.

45 See FSB “Enforcement actions” (2013), available at: <https:// www.fsb.co.za/enforcementCommittee/Pages/enforcementActions.aspx> (last accessed 22 October 2013).

46 Sec 77 of the SSA stated that insider dealing violations were subject to a civil liability regime. Although this was the case in South Africa, unlike in the US, there is no precedent of any civil trial relating to insider dealing in South Africa. The South African judiciary's involvement has mainly been in rubber-stamping out of court settlements reached between the FSB and violators. See FSB Enforcement Actions, ibid.

47 See SEC “SEC enforcement actions: Insider trading cases”, available at: <www.sec.gov/spotlight/insidertrading/cases.shtml> (last accessed 22 October 2013); see also SEC “SEC enforcement actions: Addressing misconduct which led to or arose from the financial crisis”, available at: <www.sec.gov/spotlight/enf-actions-fc.shtml> (last accessed 22 October 2013); Heminway, JM “Just do it! Specific rulemaking on materiality guidance in insider trading” (2012) 72 Louisiana Law Review 999.

48 Since F van Zyl made his observation in 1994, there has been no change in those statistics; South Africa is yet to levy criminal charges against anyone for insider dealing and for that reason there is no corpus of insider dealing convictions. See Van Zyl “South Africa insider trading regulation”, above at note 19.

49 See SEC “SEC enforcement actions: Insider trading cases”, above at note 47; Atkins, PS and Bondi, BJ “Evaluating the mission: A critical review of the history and evolution of the SEC enforcement program” (2008) 13 Fordham Law Review 367.

50 18 USC sec 1305(c) (2002). See also S Brody “Criminal insider trading: Prosecution, legislation, and justification” (October 2009), available at: <http://works.bepress.com/cgi/viewcontent.cgi?article=1000&context=steven_brody> (last accessed 23 October 2013); JH Thompson “A global comparison of insider trading regulations” (2013) 3/1 International Journal of Accounting and Financial Reporting 1.

51 See generally Symposium “The federal sentencing guidelines: Ten years later” (1997) 91 Northwestern University Law Review 1231; SEC v Sargent 229 F.3d 68, 75 (1st cir 2000). See also United States v Pruett Lwc No 11-30572, slip op (5th cir, 15 May 2012) and Williams v Illinois No 10-8505, 2012 WL 2202981 (US, 18 June 2012).

52 Safeguards are available under sec 806 of Sarbanes-Oxley Act (18 USC § 1514A) (supp 11 2003) for employee whistle-blowers who report forms of corporate misconduct. Such protection covers all instances the employee inter alia files, testifies, participates in, or assists in any proceeding relating to an alleged violation of securities laws. Furthermore, under rule 10A-3 of the Exchange Act, the New York Stock Exchange, NASDAQ and other stock market self-regulatory organizations have an obligation to ensure that the audit committees of listed companies have in place formal procedures dealing with whistle-blowers’ complaints relating to accounting and auditing matters. See also JR Macey “Getting the word out about fraud: A theoretical analysis of whistleblowing and insider trading” (2007), available at: <http://digitalcommons.law.yale.edu/fss_papers/1383> (last accessed 24 October 2013). See also B Masters and D McCrum “Gulf between US and UK insider trading” (26 January 2012) Financial Times, available at: <http://www.ft.com/intl/cms/s/0/d2f943ae-4811-11e1-a4e5-00144feabdc0.html#axzz3dnHmZM62> (last accessed 22 June 2015).

53 See for example Pitt, HL and Hardison, DB “Games without frontiers: Trends in the international response to insider trading” (1992) 55/4Law and Contemporary Problems 199 at 223; N Poser Broker-Dealer Law and Regulation (2 leaf ed, 1997, Aspen Law and Business, 1997).

54 See Steinberg International Securities Law, above at note 6 at 2.

55 Prakash “Our dysfunctional insider trading regime”, above at note 24 at 1493.

56 Prentice “Permanently reviving the temporary insider”, above at note 1; Cox, JD “Choices: Paving the road toward a ‘definition’ of insider trading scholarship” (1998) 39 Alabama Law Review 381.

57 Hazen, TL “Identifying the duty prohibiting outsider trading on material non-public information” (2010) 61 Hastings Law Journal 881 at 914.

58 Steinberg International Securities Law, above at note 6 at 12.

59 Id at 16. See also Padilla, A “Should the government regulate insider trading?” (2011) 22 Journal of Libertarian Studies 379. Further sharp criticism is premised on the understanding that, by having no insider dealing definition, “market professionals and other investors lack the specific guidance that a statutory definition of insider trading would provide. Under any circumstances, the ambiguities in this area of the federal securities laws would be unsettling. In today's international securities markets, however, such ambiguities are inexcusable”: Pitt and Hardison “Games without frontiers”, above at note 53 at 223.

60 See generally Capec, MG “SEC rule 10B5-2: A call for revitalizing the commission's efforts in the war on insider trading” (2008–09) 37 Hofstra Law Review 805.