CRITICAL APPRAISAL OF THE CONCEPT OF INSIDER TRADING UNDER NIGERIAN COMPANY LAW

ABSTRACT
Insider trading has been understood to the act of dealing in unpublished price sensitive information and it is seen to go against the principle of equal access to information. This work made an unfair appraisal of the concept of insider trading in Nigeria in the course of the work. The origin of inside trading regulation was examined and a cursory literature review of the concept of insider trading was made. In the courses of examine the overview of this concept, the argument both for and against the prohibition of insider trading was made. This study paid primary attention to the prohibition of regulation of this concept in Nigeria from its conception to date. A look was taken at the regulation of the concept in some other jurisdiction and finally some recommendations were made. 

TABLE OF CONTENT
Tittle Page
Certification
Approval Page
Dedication
Acknowledgements
Abstract
Table Of Content
Table Of Cases
Table Of Statutes

CHAPTER ONE
1.0       Introduction
1.1       Background
1.2       Statement Of The Problem
1.3       Research Question
1.4       Aims And Objectives Of The Study
1.5       Research Method
1.6       Significant Of The Study
1.7       Limitation And Scope Of The Study
1.8       Definition Of Terms 
1.9       Literature Review

CHAPTER TWO
AN OVERVIEW OF INSIDER TRADING
2.0       `Introduction
2.1       Fairness And Equality Of Information
2.2       Insider Trading As A Means Of Compensation
2.3       Optimal Or Timely Disclosure
2.4       `Market Efficiency
2.5       Protection Of Investor Confidence
2.6       Fiduciary Relationship
2.7       Misappropriation Theory

CHAPTER THREE
THE REGULATION OF INSIDER TRADING IN NIGERIA
3.1       Other Institutions Regulating Insider Trading
3.2       Companies And Allied Matters Act
3.3       The Investiment And Security Act 2007

CHAPTER FOUR
A COMPARATIVE ANALYSIS OF THE CONCEPT OF INSIDER TRADING IN NIGERIA WITH SOME OTHER JURISDICTIONS
4.1       United States Insider Trading Law
4.2       United Kingdom Insider Trading Law[1]
4.3 A   Comparison Of Insider Trading Regulation In Us, Uk And Nigeria

CHAPTER FIVE
CONCLUSION AND RECOMMENDATION
5.1       Conclusion
5.2       Recommendation
References


CHAPTER ONE
1.0       INTRODUCTION
As the business world continues to expand in global markets, trading of shares, bonds, derivatives and other instruments continue to increase. One corm of trading that has received considerable interest in recent years is insider trading.[1] Insider trading occurs when individuals with potential access to non-public information about a corporation buy or sell stock of that corporation. When the information is material and non-public, such trading is illegal. In these cases, individuals are aware non-public information gained through the performance of their duties and thereby are in breach of a fiduciary or other position of trust.[2] However, if the trading is done in a manner that does not take advantage of non-public information, it is often permissible. For example, if a director of a company knows that the company is crashing due to some unsuccessful business risks, and then sells his shares knowing that the board has decided to cut the dividend and that this will be announced in a few days, he is guilty of insider trading.[3] In a similar vein, where a director knowing that diamond or has been discovered on the company’s land, without the fat being known to the public, buys more shares in anticipation of a considerably high rise in the value of shares, he is also guilty of insider trading. It is clear that the use of such “insider” information by an insider to benefit himself at the expense of others, not so well places, is unfair.[4]  The director, as we have seen earlier, owes a fiduciary duty to the company, and so if he is allowed to use his inside knowledge of the affairs of his company for his personal benefit then a conflict of interest is inevitable. This is apart from the unfairness to the individual shareholders.
Regulation and enforcement of insider trading laws is important to investors for a number of reasons.[5] The first reason is that investors are likely to be more confident in the financial statements of companies that operate in countries with strong insider trading laws if such laws are enforced consistently. In addition, investments within such countries may be viewed as less risky as the informant is considered to be more reliable. Finally, as risk and the return investors require on an investment are positively correlated investments may have a lower required rate of return.[6]
1.1       BACKGROUND
Insider trading is one of the corporate ills that have existed since the emergence of the abstract entity known as company.[7] Incidentally, this corporate evil has existed unchecked for over a century of the development of company law. As noted by Orojo[8], at common law no clear prohibition was imposed on the use of insider information except only in the case of industrial and trade secrets.[9] In other respects, the directors or other officers were free to hold and deal in the shares of the companies.[10] The lack of legislative check on the ills of insider trading was feature of company law in most jurisdictions including Nigeria until recently.[11]
In the United Kingdom it was not until the mid-80, whens Ivan Boesky, an American admitted to large scale dealings on the basis of insider information, and handed over some 100 million USW Dollars of alleged profit to the security and Exchange Commission and other instances of the practice involving ring of bankers, lawyers and others that issues of insider trading came to the Iront burner of company legislation in England, ultimately resulting in the passing of the Company Securities (Insider Dealing) Act 1985.
The United States of America has historically been the world leader in insider trading law. In 1909, the US. Supreme Court ruled in Strong v Repids[12] that because a company director could affect the value of his company’s shares, keeping buyers ignorant of his expected actions while selling his own shares would be deceitful and therefore fraudulent. This case was the first major step in the foundation for insider trading in which an insider was obliged to disgorge his ill-gotten gains to the company or to the persons with whom he dealt.[13]
Insider trading was not treated as a statutory offence in Nigeria until 1990.  The move towards a prohibition and the regulation of insider trading in Nigeria was orchestrated by the Nigerian Law Reform Commission. The acknowledge that insider trading was a serious malpractice.[14] The recommendation of eh commission led to the enactment of provisions on insider trading prohibition in Section 614 – 620 cof the companies and Allied Matters Act 1990.[15] The provisions were copied from the English Company Securities (Insider Dealing) Act 1985. However, the above provisions of CAMA turned out to be inadequate and ineffective for purpose of combating insider trading, because for almost ten years after its inception, no person was successfully prosecuted under the sections. Consequently, the provisions under CAMA were repealed and replaced by the Investment and securities Act 1999The 1999 Act has been repealed and replaced by the Investment and Securities Act 2007.[16] The new provisions like its predecessors have its own flaws as not person is also yet to be reported to have been convicted of insider trading.
1.2       STATEMENT OF THE PROBLEM
One of the major challenges which various jurisdictions across the globe is facing in respect of companies is the control of insider trading. There are some countries that are at eh forefronts in the fight against insider trading and they include the United States of America, the Greek, British, etc.
Insider trading being a global issue is also being tackled in Nigeria. Nigeria woke up to the fact that insider trading is a serious malpractice in 1988 following the report of the Nigerian Law Reform Commission. In accordance with the recommendation of the commission several laws have been made to control this corporate. Regrettably, unlike what the position is in the United State, British and some other jurisdictions, no successful conviction has been recorded for insider trading in Nigeria in spite of the metamorphosis we have had in the laws regulating insider trading in Nigeria that has made it difficult for the law to successfully catch at least one person.

1.3       RESEARCH QUESTION
Against the background of the research objectives, the following are the research question for investigation.
i.                    What is insider trading?
ii.                  What is an insider?
iii.                Who is a connected person?
iv.                What is unpublished price sensitive information?
v.                  To what extent has the Investment and Securities Act 2007 assisted in the light against trading in Nigeria?
vi.                 Is there the need for amendment?

1.4       AIMS AND OBJECTIVES OF THE STUDY
The broad aim of this work is to do a critical appraisal of the concept of insider trading under Nigerian company law. To this end, the specific objectives of the work include:
i.                    To give a general overviews of the concept of insider trading
ii.                  To assess the effect of insider trading on the development of Nigeria.
iii.                To analyze the approaches to insider trading
iv.                To appraise the role of the Security and Exchange Commission in the Securities Act relating to insider trading have succeeded or failed in its quest to control insider trading in Nigeria. 
  
1.5             RESEARCH METHOD
In the course of doing a critical appraisal of the concept of insider trading under Nigerian company law, the researcher adopted hermeneutical of the various materials studied.

1.6       SIGNIFICANT OF THE STUDY
            The important of this work stems from the huge benefit it will bring to everyone that may develop an interest in the elimination of insider trading in Nigeria. A remarkable and interesting contribution of the study is the boost that the findings from the investigation will give to everyone interested in the fight against the menace called insider trading.
            In addition to the aforementioned significance of the study is the fact that it will add to the studies previously carried out in respect of insider trading which will at the same time reinforce the prevailing opinion among scholars.

1.7       LIMITATION AND SCOPE OF THE STUDY
            To complete this work without an expression of the imitation encountered may amount to an unhealthy presumption. To this end, the work set out to critically appraise the concept of insider trading under Nigerian company law. Though this work may appear to be comprehensive, it cannot be said to be an exclusive appraised of the concept of insider trading under Nigeria company law.
Another limitation encountered in the course of this study is scarcity of local material dealing on insider trading despite the fact that insider trading is not a new concept. There is also a limitation in respect of time. Since this study has to be concluded within a few months, the line needed to thoroughly investigate is short.

1.8       DEFINITION OF TERMS 
1.8.1    INSIDER
The black’s law dictionary[17] simply defined insider thus:
1. A person who has knowledge of fails not available to the general public; 2. One who takes part in the controls of a corporation, such as an officer or director is one who owns 10% of more of the corporation stock .
The term insider is, however, comprehensively defined under Section 315 of the investment and securities Act thus
“Insider” means:
(a)    Any person who is connected with the company in one or more of the following capacities
                                i.            A director of the company or a related company;
                              ii.            An officer of the company or a related company;
                            iii.            An employer of the company or a related company;
                            iv.            An employee of the company involved in a professional or business relationship to the company.
                              v.            Any shareholder of the company who owes 5 percent or more of any class of securities or any person who is or can be deemed to have any relationship with the company or member;
                            vi.            Member of audit committee of a company; and
(b)   Any of the person listed in paragraph (a), who by virtue of having been connected with any other way, possesses unpublished price sensitive information in relation to the securities of the company is reference to information which:
                                i.            Relates to specific matters relating or of concern (directly or indirectly) to that company that is, is not of a general nature relating or of concern to that company; and 
                              ii.            Is not generally known to those who are accustomed to or would be likely to deal in those securities but which would, if were generally known to them be likely material to affect the price of those securities.
1.8.2    TRADING
            The Black’s Law Dictionary[18] simply defined the term “trading’ thus
The business of buying and selling, especially, of commodities and securities.
1.8.3    INSIDER TRADING
It has been explained that insider trading occurs where an individual or organization buys or sells securities while knowingly in possession if some piece of confidential information which is not generally available and which is likely if made available to the general public, to materially affect the price of these securities.
Under the Investment and securities Act 2007 insider trading was termed “insider dealing” and defined thus
            Insider dealing includes insider trading and occurs when a group of persons who being in possession of some confidential and price sensitive information not generally available to the public, utilizes such information to buy or sell securities for the benefit of himself, itself or any person.
The Black’s Law Dictionary define trading as the use of material, nonpublic information in trading the share of a  company by corporate insider or other person who owes fiduciary duty to the company. This is the classic definition. The Supreme Court has also approved a broader definition known as the “misappropriation theory” the deceitful acquisition and misuse of information that properly belongs to persons to whom one owes a duty. 
1.8.4    SECURITIES
            The Black’s Law Dictionary[19] defines security as collateral given or pledged to guarantee the fulfillment of an obligation; especially the assurance that a creditor will be repaid (usually with interest) any money or credit entered to a debtor. An instrument that evidences the holder’s ownership rights in a firm (e.g a stock), the holder’s creditor relationship with a firm or government (e.g; a bond), or the holder’s other rights (e.g. an option)
Under the Act the term securities was elaborately defined thus
Securities means
(a)    Debentures, stocks or bonds issued or proposed to be issued by a government;
(b)   Debentures, stocks, share, bonds or notes issued or proposed to be issued by a body corporate;
(c)    Any right or option in respect of any such debentures, stocks, shares, bonds or notes; or
(d)   Commodities futures, contracts, options and other derivatives and the term securities in this Act includes those securities in the category of securities listed in (a) – (d0 above which may be transferred by means of any electronic modes approved by the commission and which may be deposited, kept or stored with any licensed depository or custodian company as provided under this Act. 
1.8.5    TIPPEE
According to the Black’s Law Dictionary a tippee is a person who acquires material nonpublic information from someone in a fiduciary relationship with the company to which the information pertains[20].
1.8.6    TIPPER
            The Black’s Law Dictionary defines a tipper as a person who is a fiduciary relationship with a company that the person possess material inside information about, and who selectively discloses that information for trading or other personal purposes[21].

1.9       LITERATURE REVIEW
Insider trading literature review will focus on issues with its regulation from the view point of law and economics. Law and economic literature categorize insider trading studies into two categories – the agency theory and the market theory of insider trading[22]. The agency theory of insider trading deals with the impact of insider trading on firm-level efficiency and corporate value (Jensen and Mecking, 1976). On the other hand, the market theory of insider trading analyzes the implication of insider trading on market performance, (Bhattacharya and Daouk (2000) for instance, the cost of capital, this liquidity and the market efficiency etc. For example, Manna (1966) suggests that insider trading allows stock markets to be more efficient. Surprisingly, most of the debates on insider trading are concentrated on the U.S stock markets. Whereas, La Posta et al claim that laws and their level of enforcement vary according to countries infrastructures. Moreover, differences in laws and their enforcement may explain variations in market structures and stock market practices among different countries. Maug present a mathematical model in which a dominant owner has information advantage over small shareholders where insider trading regulations are properly enclosed. Besides, Leland argues that if insider trading is allowed, stock prices reflect information at the cost of loss liquidity and the magnitude of liquidity decreased varies with the economic environment of a country.
            Baiman and Verrocchio (1996) argue that the level of insider trading varies with level of financial disclosures, the culture, and the economics of difficult countries. Therefore, it can be expected that the impact of insider trading archives on the on the stock market varies country to country. Bhattacharya and Daouk (2002) address the effect of insider trading regulation and its enforcement on the cost of capital in 51 countries over more than 20 yours. They hind that insiders trading regulation and its enforcement help in reducing the cost of capital of the firm. However, the magnitude of effect varies with the level of enforcement of a country. Moreover, Beny (2005) does attempt to find whether insider trading law matters his the ownership dispersion, the stock price informativeness and the stock liquidity. In empirical results, he finds that ownership dispersion, stock price informativeness and stock liquidity are greater where insider trading law and its enforcement are strict. Moreover, most important aspects of the formal law are penalties and criminal sanctions that are imposed on who violate insider trading law.
Fernandez and Ferreira (2009) argue that insider trading regulation and its enforcement improve the informativeness of stock prices, but this improvement is concentrated in developed markets. For these results, they suggest that borrowing insider trading regulation from a developed market may not be effective if an emerging market’s infrastructure is not complementary to a developed markets infrastructure. In addition, Kerner and Kucik (2010) argue that not only a country’s specific factors influence the tightness if insider trading regulation and its enforcement but also the investment factors of international competitiveness, explained by pressures to attract more foreign investors. Because in order to attract more foreign investors, a country has to establish an investor-friendly regulations and its enforcement. Recently, Chauhan et al. (2012) examine the effectiveness of insider trading regulation while the production of private information via insider trading. They also interact this natural experiment with product market imperfection. For this they argue that in the absence of effective coordination between product market and stock market to frame regulation, the outcome of regulation intervention will not be homogeneous among heterogeneous firms. In the empirical findings, they find that regulation interventions improve the information content of insider trading. However, the magnitude if improvement varies along with the category of insiders, the position of a firm in product market competition, firm officers’ trades and insider trades in lows product market firms produce higher information content compared to other group of firms.
Ebrahim and Black (2013) investigate the impact of corporate governance mechanisms, particularly board independence, on profitability of insider trades before and after the 2002 enactment of Sarbanes- Olney (SOX).  They show that corporate governance mechanisms can be used to reduce the shortcomings of existing regulations or their enforcement mechanisms in reducing the incidents of information-driven trades.



[1] J. H. Thompson, ‘A Global Comparison of Insider Trading Regulations’ (2014=30 IJAFR. V 311 1
[2] Ibid
[3] J. O. Orojo, Company Law and practice in Nigeria (5th Edu, Durban: Lexis Nexis, 2008) P. 390
[4]  Ibid
[5] J. H> Thompson, ‘A Global Comparison of Insider Trading Regulations’ (2013) IJAFR. V3:1 1
[6] Ibid
[7] A Garba, ‘Impediments to Effective Enforcement of Insider Trading Regulations in Nigeria’ (2013) IJM 13
[8] J. O. Orojo, Company Law and Practice in Nigeria (3rd edn, Lagos: Mbeyi and Associate,      ) p.447
[9] See British Industrial Phastic v Ferguson 9(1938)4 ALL ER. 504
[10] Percial v Wright (1902)2 Ch. 421
[11] I. J. Essien, ‘A Gritical Examination of the statutory Bottleneck Against Insider Dealing’ (2007) NSLJ vol 2 145.
[12] 213 US 419 (1909
[13] See Security Exchange Act 1934 (USA) S. 166 and Rules 106 -5 made by US SEC.
[14] See report on the reform of Nigerian Company Law (1988/vol. 1 p.30
[15] Hereinafter referred to as the CAMA, the regulation of insider trading dates back to the enactment of CAMA. Section 614 – 620 was the pioneering provision which contained a prohibition on insider trading in Nigeria
[16] Regrettably even under Investment and Securities Act 2007 Hereinafter referred as the 2007 ISA no successful conviction has been recorded for insider trading, the reason could be that most of eh flaws of the CAMA and ISA 1999 were simply carried over to the 2007. ISA.
[17] Black’s Law Dictionary 9th edn p. 866
[18] Ibid p.1634
[19] Ibid p.1476
[20] Ibid p. 1621
[21] Ibid
[22] See generally V Chauhen et al ‘Insider Trading, market Efficiency, and Regulation. A Literature Review’ RFB vol 06 Issue 1 2014.



[1] See generally Regulation of Insider Trading/Law Teacher http://www.lawteacher.net/free-law-essays/trading-law/regulation-of-insider-trading-law-essays.php accessed on 10 April, 2010

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