SINGAPORE'S top appeals court has, for the first time, given a detailed outline of what constitutes insider trading here.
Corporate lawyers say the 95-page Court of Appeal document provides crucial guidance to market participants on what is acceptable market behaviour.
The document also shows that the Court of Appeal 'wants to punish insider trading but without creating a disincentive for people to trade on the Singapore stock market', said one corporate lawyer.
Insider trading is where company insiders use material information not generally available to the investing public to get an edge in trading shares.
One key implication seems to be that even if the information used by an insider to trade did not affect the share price greatly, it could still be deemed material and thus amount to unlawful trading.
The grounds of decision set out the reasons why the Court of Appeal last year upheld a High Court ruling against former WBL Corp chief financial officer Kevin Lew. In the case, Mr Lew was ordered to pay a civil penalty of $67,500 for selling WBL shares based on inside information available to him as a senior executive.
Senior Counsel Cavinder Bull from Drew & Napier represented the Monetary Authority of Singapore, while Senior Counsel Thio Shen Yi from TSMP Law acted for Mr Lew.
The case was Singapore's first civil insider trading lawsuit, in which the burden of proof is lower than in criminal cases.
The grounds, by Chief Justice Chan Sek Keong and Judges of Appeal Andrew Phang and V.K. Rajah, analyse what is meant by the terms 'material' and 'not generally available'.
Mr Lew sold the shares in the action found to be insider trading in July 2007, after he had attended a key management meeting where he learnt WBL was forecast to incur a net loss during the third quarter of the 2007 financial year, and was also expected to see a significant impairment for its Thai unit, Wearnes Precision (Thailand).
In his defence, Mr Lew argued that investors could have deduced such information from publicly available material on WBL, such as its press releases and statements made to the Singapore Exchange.
But the appeals court disagreed, saying the generally available information on WBL was 'too weak for the common investor to draw the deductions, conclusions and inferences that would enable him or her to arrive at the same content' as that contained in the information obtained by Mr Lew at the meeting.
The court said information could qualify as being 'generally available' only if the common investor could make deductions, conclusions or inferences from the information of the same quality as the information the insider possessed.
The court also noted that 'generally available' information should not be too narrowly defined and a balance should be struck so that the law would not be too onerous on market participants.
Information gained fortuitously or through diligence and a keen analysis of public information should be considered as 'generally available' too, it said.
Mr Lew had also argued that when WBL disclosed its third-quarter results to the public, news of its loss and the impairment charge it had to take on its Thai unit did not greatly affect its share price.
Thus, the information he had received as an insider was not material, he said.
The grounds noted that some courts overseas have stated that if a firm's disclosure of information has no effect on its share price, then that information is immaterial as a matter of law. But the Singapore appeals court disagreed, stating that this approach of using market impact evidence is 'relevant but not conclusive'.
The relevant test was whether a reasonable person would expect the information to affect a common investor, and not to examine in detail what actually happened to the share price later.
The court said the elements of insider trading, as set out in the grounds, applied equally to civil and criminal cases.
Why the appeal was dismissed
THE apex court dismissed Mr Lew's appeal after studying four main issues:
- What information Mr Lew possessed when making his trade
The court held that Mr Lew knew of WBL's loss forecast for the third quarter, the sizeable impairment charge it would have to take on its unit, Wearnes Precision (Thailand), and the significant overall loss forecast for the group.
- Whether this info was 'generally available'
Mr Lew argued investors could have deduced this info from publicly available material on WBL and so the info he had was 'generally available'. But the court said information could qualify as being 'generally available' only if the common investor could reach conclusions from the info of the same quality as the info the insider possessed.
- Whether the information was material
The court held that the info which Mr Lew possessed was material as there was a substantial likelihood it would have influenced the common investor to buy or sell WBL shares.
- Whether he knew the info he possessed was not generally available and material
The court noted Mr Lew admitted he knew the info was not generally available. He had also had a conversation with a WBL executive about the price sensitivity of the info he held, before executing the trade.