A s the financial markets in the Caribbean continue to deepen, there is concern that the rules and regulations aren’t evolving fast enough to keep up with the dynamic nature of dealings by insiders in a company.

As per Investopedia, insider trading involves trading in a public company’s stock by someone who has non-public, material information about that stock for any reason. Insider trading can be either illegal or legal depending on when the insider makes the trade.

This practice has led to the prosecution of TV personality Martha Stewart in July 2004 and most recently partner at McKinsey and Company Puneet Dikshit for his use of insider details. The former sold her shares to avoid a US$45,673 loss on Imclone Systems stock while Dikshit turned US$26,000 into US$450,000 by buying out of the money call options days before the announcement of Greensky’s takeover by Goldman Sachs Group Inc. The US Securities and Exchange Commission (SEC) charged Stewart who was penalised and served jail time while Dikshit is facing criminal charges by the US Attorney’s Office for the Southern District of New York.

The detection of these events was largely due to the confessions by some people involved in these scenarios and trading analysis tools which captured the anomaly. Though there are clear definitions surrounding section 51 of the Jamaican Securities Act (1993) and Appendix 7 of the Jamaica Stock Exchange’s (JSE’s) Main Market rule book, the actual enforcement of this matter is another story.

Section 4 of the JSE’s rule book states that affected persons must not engage in dealings before and up to the announcement of price-sensitive information, 30 days before the due date of quarterly results and 60 days prior to the due date of the annual (audited) results. Affected persons include any director or officer of a company with exceptions for the exercise of share options, acceptance of a takeover offer or scheme of arrangement or other specific reason.

Though the JSE publishes a monthly regulatory report through the Regulatory Market Oversight Division (RMOD), the identity of the affected persons in breach of any JSE rule is kept private. This wasn’t the same case a decade ago when the trades of insiders at companies were publicly disclosed in normal market disclosures. As a result, any case being investigated doesn’t have a known public response depending on the outcome of the case.

The last major case that was investigated for possible insider trading was with the former managing director of Red Stripe Cedric Blair in October 2015. Blair purchased shares in Red Stripe between September 29 and October 6 before Heineken NV made its takeover offer to remaining shareholders public on October 7. The transactions were done between $6.60 to $7 which was well below the US $0.259 per share ($31) being offered to the public. Thus, the volume of 108,891 would have seen an increase in value from $762k to $3.27 million at $30. Blair has however consistently denied doing anything wrong.

Then JSE RMOD head Wentworth Graham (now deceased) investigated the dealing and queried the company and broker on the timeline of events. Subsequent regulatory reports never mentioned the outcome of the case as Red Stripe was delisted on March 31, 2016. Red Stripe ended 2015 as the third largest publicly traded company by market capitalisation, which was the same year the JSE was declared to be the best-performing stock exchange in the world.

The Financial Services Commission of Jamaica (FSC) has been guided by the Jamaican Securities Act which has had some amendments and is complemented by their updated guidelines. The FSC puts out a consultation paper on the guidelines for issuers of securities in December which gave new principles for how companies and brokers should handle public offerings. Though the FSC executive director stated in January that the market regulator would be tightening regulations on trading of securities around issuance, there has been no update since then. Queries to the Senior Director for Securities Karene Blair went unanswered up to press time.

Former FSC Executive Director and Governor of the Bank of Jamaica Brian Wynter, at a conference in June 2005, said that the regulator would be clamping down on market manipulation and insider trading. In the Jamaica Information Service article, Wynter said, “There is usually no physical connection to the act and unless the insider confesses his knowledge, evidence is almost entirely circumstantial. It involves the analysis of stock prices and the sizes of trades, along with an analysis of relationships between the insiders of the companies and the persons trading, the dates, the times and otherwise inocuous events, which may or may not prove useful in establishing that some trading has been done on wrongfully obtained information.” The buying and selling of securities is a legal activity which makes the nature of any investigation based on circumstances.

The Trinidad and Tobago SEC executed an investigation for possible insider trading in February 2005 based on a complaint by Trinidad Cement Limited. Even with the use of external counsel from Barbados and Canada, plus evidence that the behaviours went against the intent of the law and the principle of fair and transparent markets, it was not enough to meet the test of the Securities Act in that market. Thus, no further action was taken in that instance.

Most cases where companies are fined for director actions on the JSE is related to the delay in notifications to the JSE around trading in securities. An example of this is when NCB Financial Group was fined in March 2017 for the delay in notifying the JSE by March 8, 2016 of a transaction done on February 2, 2016 by a senior manager. This penalty only applies to main market companies and not to Junior Market companies at the moment.

Transactions done during blackout or closed periods have usually resulted in the company being warned by the JSE once the case is completed. A transaction by a junior market company director in March 2017 was noted to have been an error. Another blackout trade by a well-known financial services firm saw the director state that the joint account was not in their control. A JSE director provided an apology and an explanation for a February 2017 trade done in the blackout period.

Though the JSE has upgraded itself with the Nasdaq platform which allows for greater market surveillance, the JSE and RMOD are still not detecting errors in market disclosures before they are made public on its website. One clear example of this is when a disclosure said that a connected party of Elite Diagnostic Limited sold its entire issued share capital. Another time, a disclosure stated that a director bought more shares than the entire volume for the trading day only for it to be amended later to say it was part of an option plan.

Companies and insiders in the USA are required to fill out particular forms for every trade with the price details, who are the beneficial owners and other critical details which allow for the trade to be tracked. Also, insiders of companies which go public tend to be put into a lockout period which prevents them from buying or selling more shares of the company. Along with market education and the requirements for trading policies, US markets have numerous mechanisms to catch and penalise individuals for insider trading events.

Apart from some regulated companies, other firms choose to institute a trading policy to prevent insider trading. Though this is up to each company, it matters from a governance standpoint to maintain integrity. One broker in Jamaica currently follows the global standard which requires you to invest where you work and hold securities for at least a month after purchase. The policy also limits staff from investing in public offerings until after they’re listed. This approach ensures there is fair market participation and ease of compliance with relevant guidelines.